Minding Ag's Business

More than 700 attendees registered for DTN's free webinar yesterday, "ARC or PLC Choices: Which Farm Bill Contingency Plan is Right for You?" with economists Carl Zulauf of Ohio State University and Gary Schnitkey of the University of Illinois. But if you missed the live event, or need motivation to register your landowners or yourself for the rebroadcast, let me summarize highlights from the two of the nation's top risk management and crop insurance gurus.

These two academics have teamed up with University of Illinois collaborators to activate an online farm bill calculator September 1; in the process they have spent six months analyzing programs and their interaction with crop insurance. They've posted nearly three dozen papers explaining strategies and rationale in depth at http://farmdocdaily.illinois.edu/…

In their online comments and off-line explanations to me and DTN Ag Policy Editor Chris Clayton, I found revelations and reminders that might help growers make better 2014 farm bill choices:

BASE REALLOCATIONS

1. Your future farm program payments will be paid on historic base, not current plantings, so consider which crops might have the most value if you reallocate your planting history. You can't increase your base acres, but you can trade less valuable acres for ones with higher payment prospects.

High reference prices make peanut and long-grain rice the most valuable base acres. In the core Corn Belt, value corn, soybeans and wheat base in that order, says Schnitkey. In other words, if you have sorghum base you haven't planted for 15 years, consider reallocating that to a higher value base crop. (See their nifty examples that show how to make base reallocations based on your 2009-2012 planting history).

2. ARC could help manage the risk of this year's low corn prices. Based on the range of current prices and yield forecasts from USDA's August crop report, 2014-crop corn could pay $41/base acre to $79/ base acre under the county Agriculture Risk Coverage (ARC-CO) . Long-grain rice also stands to register payments of $90/base acre to $120/base acre under Production Loss Coverage (PLC) option, with sorghum and barley in line for much more modest payouts.

3. ARC pays on yield declines, PLC does not. That provision could trigger payouts more often than you think.

4. ARC and PLC pay on price declines, but especially for PLC to pay for corn, it must decline below the unrealistically low nationwide season-average price of $3.70. Most land grant economists think that's highly improbable over multiple years.

5. PLC is an effective option if you think commodity prices will stay below fixed reference prices --$3.70 for corn, $8.40 for soybeans, or $5.50 for wheat--for several years. (Again, most land grant economists hesitate to commit to 5-year outlooks, but they have a hard time envisioning that scenario for corn.)

CROP INSURANCE VS. SCO

6. The new insurance rider, Supplemental Coverage Option (SCO) was designed as a bonus for those who elect PLC, but may not be as valuable as supporters thought. Texas and other southwest farmers lobbied for this provision because repeat disasters have whittled their yield guarantees, and risk ratings make insuring crops above 65% revenue levels unaffordable.

In effect, SCO riders allow revenues up to the equivalent of an 86% combo policy, but premiums may be expensive in high-risk counties, the economists warn. What's more Midwesterners can already insure corn and soybeans up to 85% coverage levels.

"If an 85% combo product is available, there's very little additional risk protection under SCO," Schnitkey says. Plus, combo policies protect your revenue at the farm level, whereas SCO payments are based on your county's averages.

PENALTIES FOR SPATS

7. Landowners and operators must agree on program choices for FSA farms, otherwise potentially severe penalties apply. You stand to lose all 2014 payments and you automatically will be enrolled in PLC for the 2015-2018 crop years as a default.

Attendees posed nearly 100 questions for our speakers, so we'll try to address many of those topics in upcoming DTN blogs. Stay tuned.

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