By Marcia Zarley Taylor
DTN Executive Editor
DTN Ag Policy Editor
OMAHA (DTN) -- University of Illinois economist Jonathan Coppess gave some consolation that county-based Agricultural Risk Coverage (ARC) might provide more cushion to Midwest corn and soybean growers than at first expected. What's more, those projected payments would come on top of any crop insurance indemnities, although unlike insurance, farmers can't count on payment before October 2015.
In a webinar on Wednesday breaking down the new commodity programs, Coppess said that presuming trend yields on corn and soybeans, the initial conclusions show most Midwest corn and soybean farmers would reach the 10% bandwidth of payment protection on the county-based ARC revenue guarantees. Yet, prices would remain above the reference prices needed to trigger payments under the Price Loss Coverage (PLC) program.
Using McLean County, Ill., trend-line yields and an expected corn price of $3.90, Coppess estimates a 2014 county ARC payment rate per corn base acre of $68.52 (the actual payment rate is $81/acre, but farmers are paid on 85% of base). Likewise, a $9.65 season-average soybean marketing price for 2014 would generate a payment of $29.82/acre in McLean County (that's a $35 payment rate times 85% of base acres).
ARC payments will be capped two ways. Payments are limited to 10% of a farmer's total benchmark revenue, which is determined using five-year Olympic averages of county yields multiplied by the five-year Olympic averages of market-year average prices. Traditional payment caps also apply. At a $68.52 payment, that McLean County farmer would hit the $125,000 payment limit on a commodity with 2,145 total base acres of corn.
In contrast, under Coppess' example, the Price Loss Coverage program would pay nothing for either corn or soybeans unless prices averaged below $3.70 for corn and $8.40 for soybeans for the 2014 marketing year.
However, if prices over the next two to three marketing years continue to trend downward, the PLC could provide more assistance to farmers in 2017 and beyond because of the five-year rolling Olympic average used for price calculations in ARC that would offer smaller guarantees over time in an environment of falling prices. The PLC reference prices will remain the same throughout the life of the farm bill.
"So it's possible that if prices go to $3 or less and stay down there that you might see more assistance out of the PLC program," Coppess said.
Growers and their landlords will have a one-time irrevocable choice to pick PLC or ARC for the life of the farm bill, sometime later this coming summer or fall. That will require them to choose whether they are bearish or just slightly bearish about prices over the next five years.
"The big issue for this decision is what farmers think prices are going to do and more importantly, what do things look like on their farm (i.e., their input costs and expectations)," Coppess said in an email to DTN. "Because prices have been strong for the last few years, the five-year Olympic average calculations in county ARC are going to be more effective with price declines that do not fall below the reference price ($3.70 corn, $8.40 soybeans). Most forecasts seem to have corn and soybeans above the reference prices in coming years, so that makes county ARC more effective. But if you are very bearish on prices, PLC looks a little different -- especially in years four and five.
"What's most interesting about ARC is that five-year-Olympic average price and how it readjusts to the new market situation if it is longer term than just a year or two," he added. Like crop insurance, its protection could erode over time. If you estimate prices to stay low for the next five years, the last two years county ARC may not make payments, he said. A key question, Coppess added, is will input costs have adjusted to the new market?
Regulations by USDA will add new details on the programs later this year. Agriculture Secretary Tom Vilsack said last week that program enrollment for the 2014 crop year will not occur until the last few months of the calendar year.
Webinars and news articles on the new commodity programs seek to stress -- repeatedly -- that farmers and landlords will make one-time irrevocable decisions on which commodity program to choose throughout the life of the farm bill. They can choose to enroll different commodities in PLC or county-based ARC.
Any commodities a farmer enrolls in county-based ARC instead of PLC also would be prevented from buying SCO for those crops.
Before choosing the actual commodity program, farmers also will have a one-time choice to reallocate base acres, but farmers will not be allowed to increase the number of base acres beyond their historic base. A farmer with 100 base acres, such as 60 base acres of corn and 40 acres of soybeans, will get the chance to shift those acres to a 50-50 split or make another change in the percentage.
The law allows farmers enrolling in Price Loss Coverage to update their yields to 90% of the average yield from 2008-2012. The farm bill is silent on whether farmers would be allowed the same option on ARC. Groups such as the American Soybean Association have asked USDA to allow such a yield update for individual ARC as well as PLC.
Farmers also can enroll their whole farm in the individual version of ARC. However, in the individual ARC program, the payment is calculated on 65% of the base acres for all of the commodities on the farm. This creates a lot of issues such as when corn prices are low but bean prices aren't, said Steve Johnson, a farm management specialist who spoke to DTN last week at Commodity Classic.
Citing some perspective from Ohio State University Carl Zulauf, Johnson said farmers most likely to sign up for individual ARC will be those relatively small, contiguous farm acres. Overall, Johnson said, there are inherent advantages for most farmers to enroll in county-based ARC. Not only is there a 20% higher guarantee on base acres, but the different triggers for corn and soybeans provide separate options for possible payments. Johnson said there could be examples of farmers who have 100% corn base acres to enroll in the individual plan.
Like Coppess and others, Johnson said farmers are going to be signing up for their 2014 commodity programs with knowledge of their 2014 yields and pretty good knowledge of expected price trend for the full 2014-15 market-year prices.
"We're going to know with that sign-up next winter potentially what my ARC payment is going to be before I ever sign up," Johnson said.
For more PLC and ARC analysis from the University of Illinois go to http://farmdocdaily.illinois.edu/…
Coppess' presentation on commodity programs can be viewed at http://farmdoc.illinois.edu/…
Chris Clayton can be reached at email@example.com
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