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Farm Bill 101: Crop safety net

Jonathan Coppess (originally from Ohio but now with the University of Illinois) delved into the complexities of the Commodity Title Programs at last week’s meeting in Versailles. Here are some of the details.

“It is kind of a new set up this go around and there are decisions you will have to go through,” Coppess said. “We have some decisions about base acres, payment yields for the farm, and essentially three different programs — a price program and two versions of revenue programs, one at the county and one a the farm level. They key is to start figuring out what is in these programs. Later in the year we will hear from USDA exactly how these programs are going to operate. We are at step one just trying to understand what passed Congress and next we will try to do the calculations and getting a sense of where your farm needs are and how you are managing the risk for your operation.”

Direct payments, ACRE, Counter-cyclical payments and SURE have been eliminated. The program decision must be made in 2014 and it will lock a farm into the selected program for 5 crop years. Payments in the programs will be made on historical base acres, which can be updated but not increased.

The price program option in the farm bill is the Price Loss Coverage (PLC) program. This program is triggered when the market year average price for a commodity falls below the per bushel reference prices of $3.70 for corn, $8.40 for soybeans and $5.50 for wheat. The resulting payment from the program is the difference between the average price and the reference price multiplied by 85% of the crop’s base acres and the payment yield. Payment yields can be updated to 90% of the average yield on the farm from 2008 through 2012 or maintained at levels used for the Counter-cyclical program in the last farm bill. So, for 100 base acres of corn with a payment yield of 134.5 and an average price of $3.55, the payment would be $1,715 (a 15-cent price difference X 134.5 X 85% of 100 base acres).

A second Agricultural Risk Coverage (ARC) Program is similar to the ACRE program, with a few key changes. ACRE had no price floor and would decline as low as the market price declined. The ARC price component can never be less than the PLC reference price, but it can be higher, Coppess said. ACRE used state yields and ACR County uses county yields.

The County ARC uses five years of county yields and average prices and provides 86% of the benchmark revenue. There is a maximum payment of 10% of the benchmark. So if the 5-year Olympic average price is $5.30 and the Olympic average county yield is 153.2 bushels per acre, the benchmark is $812 of revenue and the 86% guarantee is $698 per acre. If the average corn price is $3.90 and the county yield is 160 bushels, the actual revenue is $624 and the revenue difference is $74 ($698 – $624). So, a payment for 100 base acres of corn would be $6,290 (the $74 revenue difference multiplied by 85% of 100 base acres).

A third option is the Individual ARC that includes all crops on the farm and uses the actual farm history and numbers instead of county numbers.

“In comparing the Individual and County ARC options, Individual ARC seems likely to trigger smaller payments than County ARC under most circumstances. This is because Individual ARC pays on 65% of base acres compared to 85% for County ARC,” Coppess said. “Also, by averaging revenues across crops, Individual ARC will tend to reduce the likelihood and size of payments due to diversification effects. Individual ARC also has higher reporting requirements than the other choices. However, Individual ARC does provide revenue protection based on actual farm-level yields, which could make it more desirable in areas where there is significant yield basis risk.”

When deciding between PLC and the ARC programs, it all comes down to the price outlook for the life of the program.

“The choice between ARC and PLC will be fundamentally related to price expectations relative to the reference price. Take corn as an example with a $3.70 reference price. If market year average prices are expected to be above $3.70 over the next five years, ARC will provide better protection since PLC will never trigger payments. If prices are expected to be very low, averaging less than $3, PLC will arguably provide better support due to the adjustment in the ARC revenue guarantee to lower prices and the 10% cap on ARC payments. Price expectations in the $3 to $3.70 range make the comparison and decision more difficult. ARC will potentially make larger payments than PLC towards the higher end of that price range, particularly during early years of the farm bill. However, PLC could make larger payments at the lower end of the range, particularly in later years,” Coppess said. “For corn and soybeans, price expectations offered by contracts on futures markets suggest that County ARC will make larger payments. This expectation of higher payments should be weighed against the higher payments offered by PLC at low, but unlikely, prices.”

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