New farm bill gives farmers new options for risk management

CHAMPAIGN, Ill. — The 2014 farm bill gives farm operators and landowners the choice among fixed price supports (PLC) and county- or farm-level revenue coverage (ARC). Although still early, some general conclusions about the programs can be reached.

Assuming trend yield levels in 2014 for corn and soybeans, County ARC payments in 2014 would reach their limits in most Midwest counties at price levels that are above the PLC reference price levels, but below the USDA’s projections for the 2014 marketing year.

In comparing the Individual and County ARC options, Individual ARC seems likely to trigger smaller payments than County ARC under most circumstances. This is because Individual ARC pays on 65 percent of base acres compared to 85 percent for County ARC.

Also, by averaging revenues across crops, Individual ARC will tend to reduce the likelihood and size of payments due to diversification effects.

Individual ARC also has higher reporting requirements than the other choices.

However, Individual ARC does provide revenue protection based on actual farm-level yields which could make it more desirable in areas where there is significant yield basis risk (i.e. the potential for significant difference between county and farm yields).

Second, the choice between ARC and PLC will be fundamentally related to price expectations relative to the reference price.

Example

Take corn as an example with a $3.70 reference price. If MYA prices are expected to be above $3.70 over the next five years, ARC will provide better protection since PLC will never trigger payments.

If prices are expected to be very low, averaging less than $3, PLC will arguably provide better support due to the adjustment in the ARC revenue guarantee to lower prices and the 10 percent cap on ARC payments.

Price expectations in the $3 to $3.70 range make the comparison and decision more difficult.

ARC will potentially make larger payments than PLC toward the higher end of that price range, particularly during early years of the farm bill. However, PLC could make larger payments at the lower end of the range, particularly in later years.

For corn and soybeans, price expectations offered by contracts on futures markets suggest that County ARC will make larger payments. This expectation of higher payments should be weighed against the higher payments offered by PLC at low, but unlikely, prices.

Supplemental off table

Finally, the choice of either ARC option will make the producer ineligible to purchase the supplemental coverage option (SCO) crop insurance program on that farm, which will be made available beginning in the 2015 crop year.

Related to this, in addition to price expectations, producers should also consider how the base acreage on their farms compares to what they expect to plant over the next five crop years.

The PLC and ARC commodity programs tie payments to base acreage while the SCO program covers planted acreage.
(Source: farmdocdaily.illinois.edu; issued by Jonathan Coppess and Nick Paulson, Department of Agricultural and Consumer Economics, University of Illinois.)