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Building an ARC

When the Agricultural Act of 2014 became law last February, the Farm Bill’s new Agricultural Risk Coverage (ARC) program seemed best in the Corn Belt. ARC is a revenue program tied to rolling averages of a county’s yields and yearly national cash prices. With prices in recent years higher than they are now, ARC payments looked good compared with the other main choice, Price Loss Coverage (PLC). Those PLC payments kick in when the national average price for the marketing year falls below a target, or reference price. The PLC reference price for corn is $3.70 per bushel; wheat is $5.50 per bushel; soybeans are $8.40 per bushel. Both ARC and PLC cover 2014 crops through 2018 crops, with any payments starting after October 2015. By next March 31, you must guess whether ARC or PLC is best for each program crop’s base on the farms you rent or own. 

In February, the national average corn price was $4.35 per bushel, well above the $3.70 trigger for PLC. Recently, cash corn has been under its reference price; soybeans and wheat haven’t. The corn and bean marketing years end in August. “Now it’s getting more complicated as prices fall, even for 2014,” says Pat Westhoff, head of the University of Missouri’s Food and Agricultural Policy Research Institute (FAPRI).

Back to the Basics of ARC

Let’s review how ARC works. We’re talking about county-level ARC, what USDA calls ARC-CO. We’re ignoring ARC-IC, which lumps all program crops on a farm together. “The individual ARC is complicated beyond belief,” says Kansas State University economist Art Barnaby. He knows one farm in Kansas it might help.

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Iowa State University economist Chad Hart provided the table above and another below, to show how ARC works in Howard County, Iowa. The county’s benchmark revenue is the Olympic average of actual yields multiplied by the Olympic average of marketing year average (MYA) prices. Olympic averages toss out high and low years (shown above in red). Notice that Hart doesn’t use all MYA prices in his ARC price column. That’s because ARC plugs in the reference price ($3.70) for a crop if the MYA is lower. (It also allows 70% of county T yields if the yield average is lower.) The benchmark of $853.28 an acre is used to determine if Howard County will have ARC payments. The 2014 revenue of county yields times the MYA price for 2014 corn must fall 14% below the benchmark to trigger payments. In other words, ARC covers county revenue losses below 86% of the benchmark. It’s limited to only 10% of the benchmark, or $85.33 an acre. Since it pays on just 85% of a farm’s corn base, Howard County’s maximum potential payment is $72.53 an acre.

The chart below shows the relationship of yield and price to payments. If the county’s yield is 200 bushels an acre in 2014, even a low MYA of $3.50 won’t trigger the maximum payment. With the unlikely price average of $5, yields have to be very low to trigger the top payment.

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ARC payments are based on the previous five-year Olympic average. So, for 2015, the 2009 year will be dropped and 2014 will be added. Barnaby says it’s possible that 2014 could have the same $3.70 plug price as 2009. “We know the 2014 yields probably will be the high and dropped off,” says Barnaby. So, two years of ARC payments are likely in many counties. For 2014, “a lot of counties are going to be at the maximum” of about $70 to $90 an acre, he says.

Pitfalls of Yield

In some parts of the country, 2014 yields will be so high that top ARC payments won’t be paid. On the flip side, some counties will be hurt by a low yield history for their Olympic average. 

“We’ve got some counties in Missouri that are going to be horrible for the Olympic average,” says Westhoff at FAPRI. Audrain County northeast of Columbia, Missouri, has had several dry years recently. Its Olympic corn yield average is 117 bushels an acre. This year, its yields will be much higher. If it’s 170 bushels an acre, “there, the season corn price (MYA) has to be less than $3.20 per bushel to generate a payout under ARC,” Westhoff says. In a county like that, PLC may look more attractive.

The point is, you must evaluate each crop with a base in each county where you farm. Some advisers have used marketing year prices as a rule of thumb since it’s the same nationally. “Rules of thumb are great when they work, but they don’t always work,” Westhoff says. 

Does ARC Match Your Risk Philosophy?

With a 10% payment window, ARC’s potential payout is smaller than that of PLC. Payments from PLC can go from the reference price ($3.70 for corn) down to the loan rate ($1.95 for corn). Barnaby says the price where PLC payments become bigger for corn than ARC is below about $3.15 a bushel. Barnaby, who helped create revenue crop insurance, sees it as good protection if prices rebound, say, to above $4 a bushel on corn. If prices fall to around $3, “PLC is actually a better hedge against crop insurance, which doesn’t protect against falling crop insurance guarantees,” he says. 

FAPRI and USDA have price projections that suggest ARC payments in the first year or two of the Farm Bill are likely to be bigger than PLC, however. “If I want to maximize government payments, I would just take the money (ARC) and run,” he says. In the out years – 2016, 2017, and 2018 – some projections, especially from USDA, hint at better payments from PLC.

Carl Zulauf, an Ohio State University economist who helped design ARC, has another view. “I really see both programs as risk management, but they’re managing different risks,“ he says. 

If corn prices stay between $3.70 and $4.25, “those are shallow losses,” he says. “They’re not disaster losses, but cumulatively, they add up to quite a bit.” ARC may offer protection.

“What I see PLC as,” Zulauf continues, “is what I would refer to as disaster price risk [protection]. If corn prices fall below $3, PLC may offer better protection. It doesn’t protect against yield declines, however.”

Key Odds and Ends

Zulauf and others say that if you operate several FSA farms or have more than one program crop base, you can mix and match. You can elect ARC for corn on one farm and PLC for corn on another. Or ARC for soybeans and PLC for corn on one farm.

Remember, you’re not choosing programs for crops, you’re choosing them for a farm’s crop base. Landowners have until February 27 to re-allocate base acres to reflect crops grown in 2009 through 2012. Work with landlords if possible, especially if more corn was planted in those years. Both ARC-CO and PLC will pay on 85% of base acres – not what you plant. 

In picking ARC or PLC, all of a farm’s producers (including crop-share landlords) must agree. If not, that farm is in neither program in 2014 (with no payments) and will be put in PLC for 2015-2018.

Homework

This is a primer on ARC and PLC. Keep learning.

• First, visit University of Illinois’ farmbilltoolbox.farmdoc.illinois.edu. Click on webinars. If you can’t watch all six on the farm bill, at least view the October 17 one on ARC-CO and PLC. 

• Next, visit fsa.usapas.com (USDA’s Agriculture Policy Analysis System). Click on “APAS Sample Farm.” It has scenarios for any farming county in the U.S. – for 2014 or 2014-2018. Try three price projections, CBO (Congressional Budget Office), USDA, and FAPRI. 

• Or visit Texas A&M’s decision aid at afpc.tamu.edu. It updates FAPRI prices monthly.

• Then, run your own guesses on spreadsheets. Farmdoc’s FAST tools page offers “2014 Farm Bill Decision Tool: ARC-COPLC.” Another one, from Oklahoma State and Kansas State, is at agmanager.info/fb.htm.

• Visit your state’s Extension site for information and nearby meetings.

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