The Agricultural Act of 2014, commonly referred to as the 2014 Farm Bill is now in full force. The Farm Bill authorizes billions of dollars for various farm programs through 2018. For crop producers, it is imperative that you understand the changes. Among the significant changes, the direct payments have been eliminated. Producers must now choose between Price Loss Coverage (“PLC”) or Agricultural Risk Coverage (“ARC”). In addition, a supplemental coverage option (“SCO”) may be added to the PLC.
Price Loss Coverage (PLC)
Farmers will receive payments if a covered commodity’s national average marketing year price is below the “reference price” (a new term for target price). Payments will be made on a crop-by-crop basis and only cover from the reference price down to the market loan rate price. This is commonly referred to as “price-only protection”.
Agricultural Risk Coverage (ARC)
ARC covers “revenue protection”. Farmers who elect ARC, must choose one of the following:
- ARC-County option: Crop revenue will be estimated using average county yields. Farmers will receive payments if the ARC-County actual crop revenue is less than the ARC-County revenue guarantee.
- ARC- Individual option: Farmers will receive payments if the actual revenue from all covered commodities is less than the ARC Individual guarantee.
In my opinion, one of the best resources that will aid in your decision making process is the Farm Service Agency calculator. I have provided a link to the calculator below. You are able to run multiple scenarios to gain more insight into the complex formulas and hypothecate what benefits would be available in the various new programs.
PLC vs. ARC
Admittedly, my initial assessment was that the PLC program would be the better option to select for most crop producers. This option provides for market price based protection under the bill. As most farmers would agree, the market price fluctuation is the greatest risk that is beyond the control of any of us. Additionally, the fluctuation in market price is one of the hardest factors to plan for and protect against. In general, effective management of the farm operation and crop insurance can protect the other major variables, such as yield and weather. However, after running various hypothetical scenarios that varied the yield and price, the ARC program projected the higher and more consistent payments.
Although the ARC option appears to offer a higher and more consistent payment, the one exception that I found was when the yield was the same and the market price dropped significantly (such as 2014). In that scenario, the increase of PLC benefits over ARC was negligible (approximately $1.00/acre increase). However, there was much greater consistency of benefits electing ARC over PLC where price and yield varied. In some scenarios I generated, PLC benefits were double what ARC could provide (up to $20 / acre more). I also factored in the PLC with the new insurance SCO, which did not offset anything with any significance.
ARC County Option vs. ARC Individual Option
The bottom line is that the ARC option appears to be the best option. If this option is selected, then the crop producer should give serious consideration to selecting the ARC Individual Option. The ARC Individual option uses the farm level yields instead of a county level yield for calculating the five-year Olympic average yield as the benchmark. To determine the total farm level revenue, a weighted average of the per acre revenues is calculated where the weights are the relative percentages of total acres of covered crops allocated to the crop.
Selecting a commodity program is a difficult decision. Crop producers should analyze their own unique situation in selecting the coverage. I strongly urge to you conduct a comprehensive analysis of your unique situation utilizing the historical and projected yield and market scenarios. There are several sources of information that I have found helpful and rather than repeat what is already out there, I would like to provide the following links:
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