Picking PLC or ARC?

Feb 28, 2014
by WLJ

—Farmers face decision on five-year farm program option

Which farm program option farmers choose under the Agricultural Act of 2014 will be a split decision, largely along commodity lines, land grant university economists are finding.

Growers and their landlords will have a one-time chance to commit to a farm program option, and that decision will be in force through the life of the fiveyear law. Fortunately, it will take USDA months to write regulations, so analysts believe farmers have until at least June to bone up on the alternatives and school their landlords on the specifics.

Preliminary analysis shows wheat country is likely to opt for Price Loss Coverage (PLC)—the version similar to the traditional Counter Cyclical Program with fixed price guarantees, said Kansas State University Economist Art Barnaby in a webinar Friday.

Because wheat growers generally buy only 70 percent coverage on their federal crop insurance, they would also benefit from eligibility to buy subsidized Supplemental Coverage Option (SCO) insurance, effectively filling the “gap” on some of their revenue losses. PLC should trigger with normal wheat yields and when prices hit $5.50, he said. ARC’s 2014 trigger is only 11 cents higher at $5.61.

In contrast, both Barnaby and economists at the University of Illinois conclude that Midwest corn growers will likely gravitate toward the Agriculture Risk Coverage (ARC) plan with county coverage. ARC kicks in at much higher price levels than PLC would and closer to levels land grant economists expect over the next few years.

By Barnaby’s count, ARC’s effective price trigger in 2014-15 will be $4.54 corn (after payment is reduced 14 percent on base acres) versus $3.70 on PLC. Both Kansas State and University of Illinois economists agree that county-level coverage ARC has more merits than tying coverage to individual farm results because it allows payments on 85 percent of base acres, versus only 65 percent with farmlevel ARC coverage. Plus the choice of county coverage allows farmers to select which programs fit their crop mix best. With ARC at the individual farm level, all of a farmer’s commodities must elect the same program, not an a la carte approach.

One theoretical downside is that ARC coverage is ineligible for SCO insurance, but since most Midwesterners already buy 80 percent or 85 percent crop insurance coverage at relatively reasonable premiums, that’s a moot point, Barnaby said. “If you’re buying crop insurance at 80 percent or greater, there’s no advantage to SCO.”

Barnaby contends that ARC works so well for corn that “only bears who believe season-average corn prices will dive to $3.30 or below” will favor PLC over ARC. The doom-and-gloom scenario got some credence at last week’s Outlook conference when USDA estimated season average prices for corn at $3.65 in 2014-15 and $3.30 to $3.60 between 2015-2018 crops. However, Barnaby said, “almost no one believes USDA’s numbers.” When prices drop that low, he argued, it stimulates additional corn demand and cures the problem, so he advised growers not be too pessimistic in assumptions about future prices.

Jonathan Coppess and Nick Paulson, University of Illinois economists writing on Farmdoc.com last week, also emphasized that the choice of ARC or PLC hinges on price expectations. “If multi-year average prices for corn are expected to be over $3.70 over the next five years, ARC will provide better protection since PLC will never trigger payments,” they wrote. “If prices are expected to be very low, averaging less than $3, PLC will provide better support.” Corn prices between $3 and $3.70 are more of a toss-up.

Coppess and Paulson used slightly different assumptions than Barnaby, concluding that 2014 corn payments would be made on a typical McLean County, IL, farm with 180-bushel corn yields starting at $4.35 per bushel. If the 2014 season average price tumbles to $4.25, the county ARC payment would be $18 per acre. At $3.90, the payment would be $81 per acre. Soybeans failed to trigger ARC payments under current 2014 price scenarios.

Some early “back-of-theenvelope” analysis for corn farms in Iowa or Indiana calculated new farm act payments running $75 to $90 per acre, but Barnaby strongly doubted it will be worth that much.

“PLC pays nothing until corn prices run under $3.70,” he noted. “With high yields, it may not pay either.” With ARC, growers must also factor in that 15 percent of base acres get nothing, and if you plant more than 100 percent of your base, those acres are unprotected, as well. “You’ll be disappointed if you go into the program expecting that kind of money,” Barnaby said.

So as is usual with farm program signups, growers will need to make educated guesses on what commodity prices will average in the future. This signup entails a five-year commitment, not the normal single-year approach.

An important note about landlords: Start getting them up to speed about their farm program options, Barnaby said. Tenants and landowners must agree on the farm program election for each farm, since the decision attaches to the land. If they disagree, the land will operate under PLC starting in 2015 and they will forfeit any 2014 payments.

What’s more, growers also have a chance to modernize their acreage base and yields for the first time since 2002. Total base acres on a farm can be reallocated among the farm’s covered crops, according to their share of total farm acres planted to those covered crops from 2009-20012 crop years. PLC payment yields can be updated to 90 percent of the farm’s average planted yield over the 2008- 2012 crop years.

“With the last farm bill’s ACRE program, you had five years to make the election, and each year you had another year to look at it,” said Wayne Myers, a farm program specialist with the consulting firm of Kennedy and Coe. “This program will give you a short window of time to make an irrevocable decision, so it’s in your interest to be getting your records together.”

To subscribe to Barnaby’s recorded webinar go to http://commerce.cashnet. com/.

For more PLC and ARC analysis from the University of Illinois and information on their Mar. 5 webinar, go to http://farmdocdaily.illinois.edu/ — Marcia Taylor, DTN