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The Farm Bill's Commodity Program

A new safety net

Remember this price: $3.70 a bushel. Its importance to you depends on how bearish or bullish you are about the price of corn – not just this year, but through 2018. 

If you think the national average price of corn will be below $3.70 – not just touching below it at harvest but for an entire marketing year starting next September – then maybe you’ll want to sign up for the new Price Loss Coverage (PLC) program offered by the new farm bill. Or maybe you think soybeans will sell for less than $8.40 a bushel. Both of those numbers are the new reference prices, the latest jargon for a target price. Prices averaging below that would trigger payments to you from USDA.

Maybe you’re not that bearish. I certainly hope you won’t have to plan for $3.70 corn. If you’re a bit more bullish, you’ll probably want to sign up for Agriculture Risk Coverage (ARC). That’s a revenue-protection program based on a five-year rolling average of national prices and either county or individual yields (tossing out the high and the low years). ARC could let you down into the new normal of tighter margins a little more easily than PLC.

Of course, it’s not quite that good. Payments will be made when revenue falls below 86% of that revenue benchmark (and only down to 76%). If you have county-level coverage, this shallow-loss program pays on just 85% of your base acres (as does PLC). Sign up your farm, and it pays on just 65%.

As soon as the 2014 Agriculture Act was made public in late January, Ohio State University ag economist Carl Zulauf pored over it and started crunching numbers. He calculated recent national average prices and came up with the ARC Implied 2014 Guarantees that are shown at right.

For soybeans, the ARC guarantee is 124% of the PLC reference price of $8.40 a bushel. It’s almost as high for corn – 122% of that magic $3.70 number. This suggests that ARC, at least for 2014, is a better deal. It’s not an iron-clad rule. Price is only half of the equation for revenue. The other half – yields – will vary by each county and farm. If yields were really terrible in your area for the past few years and they bounce back in 2014, the higher prices of the past few years carry less weight.

You can’t be in both PLC and ARC. You get only one chance to decide for all five years. If you dither or if everyone in an operation can’t agree, you’re out for 2014, and USDA puts you in PLC for 2015-2018.

John Mages, who farms  near Belgrade, Minnesota, has worked for a new farm bill as a board member of the Minnesota Corn Growers Association. Mages believes ARC will prove popular.

“In most of the Midwest, ARC is going to look a little better,” he says. That’s not the case everywhere. In northern Minnesota, for example, shorter growing seasons make premiums for crop insurance more expensive. Mages believes PLC could have appeal there.

That’s because enrolling in PLC will allow you to buy a shallow-loss crop insurance product, the Supplemental Coverage Option (SCO), annually. If you’re enrolled in ARC, you can’t buy the SCO, which is similar (although ARC is free). The SCO, sold by crop insurers, will have 65% of its premium subsidized.  Mages says in areas where premiums are high for 85% coverage levels of revenue crop insurance, farmers could buy the subsidized SCO and buy less-costly 75% coverage levels of crop insurance.

This is just a sampling of decisions you must make. You’ll have a chance to reallocate crops in your base acres. You can update yields to 90% of your recent five-year average (which affects only PLC)

“We’ve managed to make this farm bill more complex than before,” says University of Nebraska ag economist and policy specialist Brad Lubben. Sign-up is likely to begin this spring and run through late summer, he says. Meanwhile, Texas A&M University will make decision tools available online, as will other land-grant universities, and some Extension meetings are starting.

Here’s one example of the complexity. ARC at the county level is similar to crop insurance. It’s available for each commodity. At the farm level, however, ARC covers all of the crops combined. “That changes farm-level ARC substantially and probably affects the attractiveness of it,” Lubben says.

Zulauf agrees this is complex. He thinks the first step is to decide if you’ll reallocate your base, even before picking PLC or ARC. “It’s not clear to me from a risk-management perspective that you want to update your base,” he says. If your old base is a third corn, a third soybeans, and a third wheat and you’ve been planting more corn recently, keeping that old split is a form of diversification, he says. This also relates to your future rotations.

All this reminds me of the decisions made in 2008 over signing up for ACRE, the Average Crop Revenue Election. At the time, it seemed like innovative risk management and a couple of my coworkers signed up, partly on my advice. They never collected and they enjoy reminding me of that.

ACRE was based on state-level revenue. Today’s ARC , at the county level, improves your odds. But don’t take my advice alone. Go online. Go to Extension meetings. Push a pencil.

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