Minding Ag's Business

The Great ARC or PLC Debate

Your irrevocable 2014 farm bill decisions are getting complicated by this spring's surprise price rally. While it was widely assumed commodity prices were headed for a multi-year crash when the farm bill was being drafted, few experts considered what your best risk management options would be if markets stayed near levels achieved over the last two months.

After all, 2014 harvest futures prices were running $5 corn, $12 soybeans and $7.50 wheat this week, too high to trigger farm payments under any of these farm program options this year, based on most forecasts. Who knows what happens for 2015 and beyond and whether any of these revenue or target-price type safety nets ever trigger?

"At the moment, there's little chance that Price Loss Coverage (PLC) will pay on wheat in the first year [of the five-year program] and it's unlikely PLC will ever pay on soybeans and corn even in later years," Kansas State University economist Art Barnaby told webinar attendees Friday. He's maintains that if we stay in the realm of these recent prices, "crop insurance will be what carries you and it will be very much like marketing grain. You'll only know what you should have done after the fact."

To recap, farm operators and their landowners will need to make an irrevocable, five-year commitment to one of several Farm Bill program options for the 2015 crop. Agriculture Risk Coverage (ARC) provides protection when crop revenue falls 14% below a five-year rolling Olympic average revenue benchmark. The producer chooses whether the benchmark is based on 85% county yield x the crop's season-average cash price or 65% of his or her individual crop yield x season-average price. (If this sounds a lot like the old ACRE program, or the more familiar county-based GRIP insurance policies, you're getting the picture).

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With Price Loss Coverage (PLC), farmers will receive payments if the crop price falls below fixed reference prices--effectively $3.70 corn, $5.50 wheat and $8.40 soybeans. Barnaby calls this the familiar option--effectively Counter Cyclical payments with updated target prices.

Until recently, conventional wisdom from most Midwest land grant economists ran something like this: If you were a corn or soybean grower, take county-ARC, because prices aren't likely to go much lower than its expected $5.31 corn guarantee on 2014 or 2015 crops in the near-term. Buy up to 80% to 85% revenue policies to protect the market value of your crops, just like Midwesterners do now. If you're a wheat grower, elect PLC [which has much lower price supports, but you can supplement it with a high-end Supplemental Coverage Option (SCO) policy sold by private companies.]

"If the experts are wrong and prices don’t fall, then neither PLC nor ARC will offer much protection," Barnaby says. "Crop insurance guarantees will be based on higher prices, assuming farmers purchased Revenue Protection policies, caused by either planting time prices or harvest prices being higher. The USA is not the only place in the world where farmers produce corn, wheat and soybeans and they can have crop failures too, and that will affect grain prices!"

He admits it's hard to gauge which plan will pay five years into the future and many program details have yet to be revealed. The program that will pay the most will be determined by price and yield, with higher yields eliminating or reducing ARC and SCO payments. The accuracy of your APH yields and whether they mirror the county index, whether your base acres are updated and what SCO policies actually cost will also sway your decision.

"By sign-up, we will know the wheat yield and half of the MYA wheat price on the 2014 crop," Barnaby notes. "We will have a good estimate of the yields for the spring-planted crops, so all of this could change."

There are so many moving parts to these decisions, you'll want to watch for the upcoming release of Texas A&M's farm bill decision simulator. Land grant universities are also developing spread sheets.

In the meantime, to read Barnaby's Q+As on the farm bill, go to http://www.agmanager.info/…

To watch Barnaby's pre-recorded 1.5 hour webinar on SCO, go to http://www.agmanager.info/…. Cost is $25.

Follow me on Twitter@MarciaZTaylor

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