Ag Policy Blog

Program Options for Commodity Crops in the Farm Bill

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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The Senate is expected to have a cloture vote late this afternoon on the farm bill. Once completed, a wave of information flows about possible impacts on commodity producers as a result of changes in farm programs. Far more analysis is necessary because producers are going to have to run some numbers when examining how to choose farm programs and insurance.

Under the Agricultural Act of 2014, farmers have to make a decision early this year regarding which commodity program they are going to stick with until at least 2018. Farmers are going to have to choose whether they want to try to protect their revenue with a commodity program or place a bet that commodity prices will fall lower in the coming year and back up that position by buying supplemental insurance coverage each year.

Farmers are going to have to make a series of decisions to make crop insurance and farm programs connect. Potentially, these decisions could protect farm income up to at least 86% of farm revenue. Yet, the payout triggers in different programs and insurance options will be tied to the individual farm, county revenue or national prices.

Direct Payments: They are repealed for the 2014 crop year with the exception of cotton producers. Upland cotton producers will collect a "transitional" Direct Payment equaling 60% of their past payments for the 2014 crop year and 36.5% for the 2015 crop year. Cotton producers will be eligible for those transitional payments in counties where the insurance program STAX is not available.

Farmers are going to have to get acquainted quickly with the ins and outs of the Agriculture Rick Coverage (ARC), Price Loss Coverage (PLC) and Supplemental Coverage Option (SCO) and the way SCO will interact with PLC.

ARC or PLC? Farmers have to make a one-time, irrevocable decision to enroll a particular commodity in ARC or PLC. If a farmer doesn't make a decision, USDA would consider that farm enrolled in the PLC program. If a farmer chooses ARC for individual coverage, then all commodities are enrolled in that program. Cotton acres will not be enrolled in either program.

Base Acres: Payments for Agriculture Risk Coverage and Price Loss Coverage will be paid on base acres for that covered commodity. For multiple commodities on base acres, the base will be prorated to reflect the ratio of planted acres to the total acres of all covered commodities on the farm. Farmers will be allowed to retain base acres, including generic base acres, or reallocate all base acres. Base acres will be reallocated to the four-year average of the acreage planted on the farm to each covered commodity from 2009 through 2012 as well as any acreage that farmers were prevented from planting during that time frame.

Agriculture Risk Coverage: For farmers who choose ARC, another decision has to be made. Farmers must decide whether to enroll in countywide coverage on a commodity-by-commodity basis or choose individual coverage that applies to all of the commodities on the farm. Under ARC, 85% of base acres are covered for the county option, but payment acres are set at 65% for the individual coverage.

Payments on the county option occur when actual county revenue for a covered commodity in a crop year is less than the county-revenue trigger a particular commodity. The payment will be lesser of 10% of the benchmark county revenue for a commodity or the difference between the country trigger and the actual county revenue.

The ARC guarantee for a covered commodity in a crop year is 86% of the benchmark revenue and historical yield. In other words, the Olympic average for price and yield are used for benchmarks over the last five years. The high and low years are not used. Effectively, ARC provides a band of revenue protection from 76% to 86% of revenue. Insurance is expected to cover deeper losses.

Farmers who sign up for ARC are excluded from buying Supplemental Coverage Option insurance because they are similar in effect.

Price Loss Coverage: For 2014 and beyond, producers enrolled in PCL would receive a payment when effective price of a crop is less than the reference price (think target price here). The effective price for a commodity is "the higher of the national average market price during the 12-month marketing year or the national average loan rate." In other words, the average price for corn for a marketing year would have to be below $3.70 per bushel to kick in. PLC payment yields could be paid on as much as 90% of the farm's commodity crops based on 2009-2012 crop years.

Reference prices under PLC are set at the following: Corn, $3.70 per bushel; soybeans, $8.40 per bushel; wheat, $5.50 per bushel; grain sorghum, $3.95 per bushel; barley, $4.95 per bushel; rice, (long and medium), $14.00 per cwt; other oilseeds, $20.15 per cwt.

Small Farm Limitation: ARC and PLC are prohibited on farms with 10 acres or less of base acres, except in the case of farmers or ranchers considered socially disadvantaged or having limited resources.

Payment Limits: Unlike previous farm bills, there are no payment caps on individual programs. Instead, farmers will have a $125,000 cap on all commodity programs together whether that is ARC, PLC, marketing-loan gains or loan-deficiency payments. The payment cap doubles to $250,000 for married couples.

Actively Engaged: The farm bill leaves it up to USDA to develop standards for defining who is eligible for farm-program payments as a farmer.

Income limits: Adjusted gross income eligibility in the commodity program is limited to those making under $900,000.

Annual Signup: Despite that one-time decision to enroll in ARC and PLC, the Farm Service Agency will still be expected to have annual signup for programs so farmers can notify the agency about changes in ownership, adjusted gross income and other necessary information.

Supplemental Coverage Option: SCO is an added insurance policy that farmers can buy if they enroll in Price Loss Coverage. It will cover losses exceeding 14%, meaning it will cover losses below 86% of revenue. SCO will cover that gap between 86% of revenue and when individual insurance coverage kicks in. Farmers will get to choose whether the additional coverage is based on individual yield and losses or county yield and loss.

SCO will be available in 2015 for farmers who enroll in Price Loss Coverage. Farmers who enroll in ARC are not eligible to buy SCO. Farmers who buy SCO would pay 35% of the actual premium cost and USDA would subsidize the other 65%. SCO is an insurance policy so it does not have a payment cap.

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Jeff Opsahl
2/4/2014 | 11:38 AM CST
Are you sure that the decision has to be made for the 2014 crop year? I heard it might be for 2015?
W Kuster
2/4/2014 | 11:05 AM CST
Another government disaster that is comparable to obamacare. Largest government farm benefits to those with the greatest wealth. Pathetic crony capitalism. Government guaranteeing the wealthiest the largest profits and largest investment guarantees with some of the welfare kings getting l million plus annually in government insurance subsidies..
Pedro Sanchez
2/4/2014 | 10:55 AM CST
Yeah, the whole thing is a disaster! What a joke that this is the best they can do. Shallow losses are now covered. What a joke. This will just make the bigger, bigger and more aggressive. Oh well. I don't expect much from politicians anyways. So long little farmers. It was nice knowing you!
2/4/2014 | 6:47 AM CST
Is there a disaster program in the bill?