Farm Bill: Initial assessment on commodity programs
The "Agricultural Act of 2014," commonly called the farm bill, changes many programs and rules for farmers. Farmers need to make a crucial one-time, irrevocable election under the crop commodity programs. Farmers also have an opportunity to update their base acres and their base yields.
In the sections below, I summarize the new programs and the impending decisions for Minnesota farmers based on my reading of the bill in February. However, please note that the final rules and interpretations will come from the USDA, and these may differ from my current interpretation.
Several previous programs are dropped in the new farm bill. Direct payments are gone (except for a declining amount for cotton growers). The ACRE and DCP programs are repealed. While the new programs may look similar to these, the rules are different: simpler in some ways, more complicated in other ways.
Choices for crop commodity programs
Under the new farm bill, crop farmers need to make a one-time, irrevocable decision to elect either the Price Loss Coverage (PLC) program or the Agricultural Risk Coverage (ARC) program. If farmers elects the ARC program, they will need to choose between county coverage and individual farm coverage. Farmers can make the PLC and ARC-county decision crop by crop. For the ARC individual farm coverage, however, all covered commodities on all the farmer's farms need to be enrolled.
And here's a warning. If all the producers on a farm fail to make a unanimous election of which program to enroll in, the bill says the secretary of agriculture may not make any payments to that farm for the 2014 crop year, and the farm will be deemed to have elected PLC for the 2015 through 2018 crop years.
Price Loss Coverage (PLC)
The Price Loss Coverage (PLC) program will make payments to farmers if a covered commodity's national average marketing year price is below its reference price (the new term instead of target price). Payments will be made on a crop by crop basis. For corn the reference price is $3.70 per bushel; for soybeans, $8.40; for wheat, $5.50.
Marketing years are: October through September for corn; September through August for soybeans; and July through June for wheat.
Under PLC, payments to farmers are made on the basis of the difference between the national average marketing year price and the reference price, the farmer's payment yield, and the farmer's payment acres. Farmers have a one-time opportunity to update payment yields from 93.5% of their 1998-2001 average yields to 90% of their 2009-2012 yields. Payment acres will be 85% of either their current base acres (typically the average of their 1998-2001 acreages) or a reallocation of the current total base acres based on their mix of crops in 2009-2012.
Agriculture Risk Coverage (ARC) - county coverage
In the Agriculture Risk Coverage (ARC) program, farmers can choose between county coverage and individual farm coverage. If either ARC option is chosen, the farm is not eligible for the Supplemental Coverage Option (SCO) under the crop insurance options in the farm bill.
In the county coverage option, crop revenue is estimated using average county yields. A payment is made if the ARC-county actual crop revenue is less than the ARC-county revenue guarantee. The ARC-county actual crop revenue is the actual county yield times the maximum of the national marketing year price or the loan rate specified in the farm bill.
The loan rate is $1.95 per bushel for corn, $5 for soybeans, and $2.94 for wheat.
The guarantee under the ARC-county coverage is 86 percent of the ARC-county benchmark revenue. The ARC-county benchmark revenue is the product of the most recent 5-year Olympic-average county yield and the most recent 5-year Olympic-average marketing year price.
The Olympic average is calculated by dropping the highest and lowest yield or price from the most recent 5-years and calculating the average based on the remaining 3 yields or prices.
Under the ARC-county choice, the payment rate per acre is the difference between the ARC-county guarantee and the actual revenue, but the payment rate cannot exceed 10 percent of the benchmark revenue. The ARC-county payment for a covered commodity is the ARC-county payment rate for that commodity times 85 percent of the farm's base acres for that commodity.
Agriculture Risk Coverage (ARC) - individual farm coverage
Within the ARC program, a farmer can choose individual farm coverage instead of county coverage (as described above). The ARC-farm coverage is based on all the covered commodities on the farm, not crop by crop.
Under ARC-farm coverage, a payment is made if the actual revenue from all covered commodities is less than the ARC-farm guarantee. The actual revenue for each year is determined by the farm's yield multiplied by the maximum of the national marketing year price and the crop's reference price, summed over all covered commodities and divided by the farm's planted acreage that year.
The ARC-farm guarantee is 86 percent of the ARC-farm benchmark revenue. The ARC-farm benchmark revenue is the most recent 5-year Olympic-average of the revenue from all covered commodities weighted by the ratio of the acreage planted to a covered commodity and the total acreage of all covered commodities. The revenue for each year is determined by the farm's yield multiplied by the maximum of the national marketing year price and the crop's reference price. The ARC-farm payment rate per acre is the difference between the ARC-farm guarantee and the ARC-farm actual revenue, but the payment rate cannot exceed 10 percent of the ARC-farm benchmark revenue. Under the ARC individual farm coverage program, the payment for a farm is the ARC-farm payment rate for that farm times 65 percent of the farm's total base acres (compared to 85 percent for the county based coverage).
Payment and adjusted gross income (AGI) limits
The total amount of payments received, directly or indirectly, by a person or legal entity (except a joint venture or general partnership) for any crop year under the PLC and ARC programs and as marketing loan gains of loan deficiency payments (other than for peanuts) may not exceed $125,000.
A person or legal entity with a 3-year average adjusted gross income (AGI) over $900,000 is not eligible to receive any benefit from PLC and ARC programs, supplemental agricultural disaster assistance programs (for livestock and trees), marketing loan gains, loan deficiency payments, conservation programs (starting in 2015), and some other payments (from previous bills). AGI includes both farm and nonfarm income.
An initial assessment
The requirement to make a one-time, irrevocable election between PLC and ARC is a 5-year decision full of many uncertainties. An initial analysis for a few example farms in Minnesota shows that the ARC county coverage option is the best option for the 2014 crop year given current information. This quick analysis does not include the option of adding SCO and other new crop insurance options starting in 2015.
The reference prices under PLC ($3.70 for corn, $8.40 for soybeans, and $5.50 for wheat) are low compared to recent prices especially prices received in 2011 and 2012. For 2014, the markets seem to indicate a very low chance of a PLC payment for corn, a bit higher chance for soybeans, and perhaps a higher chance for wheat (but, in early February, less than 40 percent). The marketing years for 2015-2018 are full of more uncertainty. Unless market developments show an increase in worldwide production and thus decay in prices in the future in the weeks leading up to the as yet unannounced election deadline, the PLC option does not look like a viable option for Minnesota farmers.
The ARC individual coverage option appears less desirable due to the revenue loss being determined over all covered commodities and the payment calculated using 65% of base acres (versus 85% for the county option). A farmer will need to consider how variability in weather affects each of his or her crops differently. If the yields for different crops move together and are more variable than the county, then individual coverage may be the best choice. If crop yields do not move together and the farm's yield pattern seem to match the county yield variation pattern, then the county based ARC may be the best choice.
With so much uncertainty regarding the next 5 years (which is normal for any 5 years into the future), let's take a general view on the choice. PLC covers price drops and not yield losses. ARC covers revenue losses, that is, both price and yield changes. So, ARC is a more comprehensive program. If prices drop in a future year, the chances are due to higher total production so revenue will probably not drop as much as prices. If yields drop across a wide swath of the production area, prices will likely rise, so revenue won't drop as much as overall yields drop. If my farm and my county were to suffer a yield loss but most of the country does not suffer a yield loss, prices would likely not drop as much as my yield drops so my revenue will drop. In this case, PLC would not make a payment, but ARC likely would make a payment. So for Minnesota, should a farmer bet on price changes or aim to protect revenue?
As the USDA finalizes the rules and with more time to fine tune these estimates and include more years as well as the SCO option starting in 2015, this initial assessment may need to be altered. But this is my view at this early date.
Kent Olson is an economist with the University of Minnesota Extension.