Declining ARC Protection

Safety Net Needs Changes in Next Farm Bill to Remain Viable Option for Farmers

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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Economists at the University of Illinois and Ohio State University released maps last week on ARC payments for major crops from the 2016-17 crop year.

WASHINGTON (DTN) -- One of the questions facing lawmakers as they write a new farm bill is what to do about declining support from the Agricultural Risk Coverage program that so many farmers enrolled in after the 2014 farm bill.

ARC-County has been on a sliding scale since it went into effect for major parts of corn- and wheat-growing regions as farm-gate prices have declined. A Congressional Budget Office analysis last summer projected that, if given a chance, farmers would switch more than 90% of corn base acres from ARC to Price Loss Coverage.

"I think there's a consensus that it's not going to work as a viable safety net in the next bill unless we make some changes," said Mary Kay Thatcher, a lobbyist for the American Farm Bureau Federation. "So I think lots of folks are engaged about what kind of changes we can make."

While ARC pays on a complicated Olympic formula of yield and prices, PLC simply pays when market-year average price falls below the reference price in the farm bill.

After USDA released its data on county yields and ARC payments last week, Iowa State University showed the average payment for corn for the 2016-17 crop is $12.60 an acre, just 26% of the payment level from two years earlier. Farmers in more than one-third of Iowa counties will not receive a payment because yield for the 2016-17 crop pushed the county above the ARC-County benchmark guarantee.

Analysis done by the University of Illinois and Ohio State University economists showed farmers across much of Ohio and Michigan, as well as parts of Arkansas, Georgia and Louisiana, would receive corn ARC payments of $70 or more this year. Fewer farmers would receive corn payments in Iowa, Illinois, Missouri, Minnesota and Wisconsin. Meanwhile, payments were more prevalent in Nebraska, while counties that border the lower Mississippi River and Ohio River basins would receive larger payments.

"ARC was drafted, constructed and conceived in the 2014 farm bill with a given price environment in mind," said Carl Zulauf, an agricultural economist at Ohio State University. "There was an expectation prices would decline, but I don't think anyone expected them to decline as long as they did."

Zulauf added, "We are in a very different environment and we would construct a very different program for that environment. You need to adjust it or reconfigure ARC for the different environment."

Farm Bureau has proposed raising reference prices 5% for farmers in the ARC program, not PLC. Another proposal to deal with county-to-county yield discrepancies is to give farmers the option of using the current ARC Olympic five-year formula or switch to a simple 10-year yield average.

"We think that would take care of a lot of the problems that are out there now," Thatcher said.

Zulauf noted other options being proposed would adjust the 14% deductible for ARC based on changes in price. If prices fell below the crop's reference price ($3.70 a bushel for corn, $5.50 for wheat and $8.40 for soybeans), then the coverage level would be increased. Yet another option would be to not just expand the window for yield factored into ARC, but also broaden the window for market-year prices. The downside of that approach, however, is if prices rally, then it would also take a longer time for the benchmark revenue to increase.

Mark Recker, president of the Iowa Corn Growers Association, notes that farmers went into ARC understanding that the payment would decline over time. "We're kind of leveling out down at this price, and it's reflective in the ARC payments we are seeing now," Recker said.

Recker said corn growers have considered tweaking the Olympic average used for ARC to reflect more long-term trends of corn yields in a county. "If you go over a longer-term average of yields, that would make the ARC program a little more sound and attractive for producers to get into," he said.

But corn growers have not proposed raising the reference price for ARC. Instead, farm groups are focused more on protecting crop insurance as the main safety net for their operations rather than commodity programs. "Guys recognize the value of crop insurance, and year in and year out, that's what guys are relying on, is crop insurance," Recker said. "That's good because farmers have skin in the game."

Along with that, major commodity groups representing corn, soybeans and wheat have focused their attention on increasing funding for the trade promotion programs in the farm bill -- the Market Access Program and Foreign Market Development Program. "We are so reliant on trade with soybeans," noted Bev Paul, a lobbyist for the American Soybean Association.

Commodity groups see trade as a driver to boost prices. "Let's build the export market so we have the opportunity to get $4 corn by growing our markets," Recker said.

One change already expected in farm-bill talks is shifting ARC yield data away from what farmers report to the National Agricultural Statistics Service in crop surveys as the first go-to data when calculating ARC. Instead, the first yield data would be yields reported by farmers to crop-insurance companies, then collected by the Risk Management Agency. Policymakers think that might reduce some inequity of payments from county to county, but in reality, ARC remains a county-based program regardless of which data is used.

"As a whole, switching to RMA first, we would argue is budget neutral," said Brad Karmen, an acting senior adviser on commodity programs at the Farm Service Agency. The change, Karmen said, is that RMA does have more data points because fewer farmers are filling out NASS surveys. "To the extent NASS doesn't have the yield data, RMA has the data."

Switching to RMA data also wouldn't necessarily translate into larger commodity payments. In fact, even though farmers are responsible for both RMA and NASS yield reporting, RMA yields tend to be a little higher because they lead to Actual Production History farmers use for crop-insurance protection levels in future years. Farmers and commodity groups largely back switching ARC to the crop-insurance data.

"Producers, right or wrong, have a lot more faith in the RMA data than the NASS data, even though producers are the source of both sets of data," Karmen said.

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Chris Clayton