Minding Ag's Business
Marcia Zarley Taylor DTN Executive Editor

Friday 04/04/14

The Great ARC or PLC Debate

Your irrevocable 2014 farm bill decisions are getting complicated by this spring's surprise price rally. While it was widely assumed commodity prices were headed for a multi-year crash when the farm bill was being drafted, few experts considered what your best risk management options would be if markets stayed near levels achieved over the last two months.

After all, 2014 harvest futures prices were running $5 corn, $12 soybeans and $7.50 wheat this week, too high to trigger farm payments under any of these farm program options this year, based on most forecasts. Who knows what happens for 2015 and beyond and whether any of these revenue or target-price type safety nets ever trigger?

"At the moment, there's little chance that Price Loss Coverage (PLC) will pay on wheat in the first year [of the five-year program] and it's unlikely PLC will ever pay on soybeans and corn even in later years," Kansas State University economist Art Barnaby told webinar attendees Friday. He's maintains that if we stay in the realm of these recent prices, "crop insurance will be what carries you and it will be very much like marketing grain. You'll only know what you should have done after the fact."

To recap, farm operators and their landowners will need to make an irrevocable, five-year commitment to one of several Farm Bill program options for the 2015 crop. Agriculture Risk Coverage (ARC) provides protection when crop revenue falls 14% below a five-year rolling Olympic average revenue benchmark. The producer chooses whether the benchmark is based on 85% county yield x the crop's season-average cash price or 65% of his or her individual crop yield x season-average price. (If this sounds a lot like the old ACRE program, or the more familiar county-based GRIP insurance policies, you're getting the picture).

With Price Loss Coverage (PLC), farmers will receive payments if the crop price falls below fixed reference prices--effectively $3.70 corn, $5.50 wheat and $8.40 soybeans. Barnaby calls this the familiar option--effectively Counter Cyclical payments with updated target prices.

Until recently, conventional wisdom from most Midwest land grant economists ran something like this: If you were a corn or soybean grower, take county-ARC, because prices aren't likely to go much lower than its expected $5.31 corn guarantee on 2014 or 2015 crops in the near-term. Buy up to 80% to 85% revenue policies to protect the market value of your crops, just like Midwesterners do now. If you're a wheat grower, elect PLC [which has much lower price supports, but you can supplement it with a high-end Supplemental Coverage Option (SCO) policy sold by private companies.]

"If the experts are wrong and prices don’t fall, then neither PLC nor ARC will offer much protection," Barnaby says. "Crop insurance guarantees will be based on higher prices, assuming farmers purchased Revenue Protection policies, caused by either planting time prices or harvest prices being higher. The USA is not the only place in the world where farmers produce corn, wheat and soybeans and they can have crop failures too, and that will affect grain prices!"

He admits it's hard to gauge which plan will pay five years into the future and many program details have yet to be revealed. The program that will pay the most will be determined by price and yield, with higher yields eliminating or reducing ARC and SCO payments. The accuracy of your APH yields and whether they mirror the county index, whether your base acres are updated and what SCO policies actually cost will also sway your decision.

"By sign-up, we will know the wheat yield and half of the MYA wheat price on the 2014 crop," Barnaby notes. "We will have a good estimate of the yields for the spring-planted crops, so all of this could change."

There are so many moving parts to these decisions, you'll want to watch for the upcoming release of Texas A&M's farm bill decision simulator. Land grant universities are also developing spread sheets.

In the meantime, to read Barnaby's Q+As on the farm bill, go to http://www.agmanager.info/…

To watch Barnaby's pre-recorded 1.5 hour webinar on SCO, go to http://www.agmanager.info/…. Cost is $25.

Follow me on Twitter@MarciaZTaylor

Posted at 5:27PM CDT 04/04/14 by Marcia Zarley Taylor
Comments (14)
"When the people find that they can vote themselves money, that will herald the end of the republic. Ben Franklin" Amazing that Ben Franklin could foresee federal crop insurance investment/profit guarantees as well as the billions for milllionaires farm bill.
Posted by T Kuster at 7:02PM CDT 04/04/14
Is this Barnaby an idiot,I will be as happy as can be to farm without goverment help if grain prices stay up.Sounds like he is hoping the bottom falls out so we can use the new price protection.I would like to farm alone don't even sign up for farm program.KEEP THEM GUESSING.
Posted by Raymond Simpkins at 7:05AM CDT 04/07/14
See the expanded story in DTN Top News today. Ray, I think Barnaby's main message is to keep conventional crop insurance coverage as your mainstay, if you're not as bearish about prices as some of the experts.
Posted by Marcia Taylor at 11:48AM CDT 04/07/14
After reading your farm bill article it occurred to me that FAPRI had a lot of input to congressional members in tying the new farm program to their forecasts. The assumption that farmers will continue to grow corn at prices below cost of production seems odd. That assumption is built in to a program that farmers must choose for a five year period? No one can survive losing money for 5 years even with gov. assistance. Do they expect farmers to be totally dependent on subsidies with no chance for the free markets the US has touted around the world for decades to operate? What am I missing?? --Barry Mumby
Posted by Marcia Taylor at 1:04PM CDT 04/08/14
Good question, Barry. It's possible farmers will be in no-man's land--prices not high enough to trigger much aid but still below cost of production for many. Do you think rents, fertilizer, seed costs can come down again to rebalance for 2015?
Posted by Marcia Taylor at 1:08PM CDT 04/08/14
I'm with you Ray. Don't sign up. Don't report acres or bushels. Keep them guessing. With volatility comes opportunity.
Posted by KC at 11:14AM CDT 04/09/14
I wish you would have been concerned about skyrocketing crop production prices Marcia when government was busy awarding massive guarantees of profitability to the largest most profitable farm businesses and many other farmers as well. When government guarantees profitability, harvest time has arrived for everyone and their brother.
Posted by T Kuster at 1:38PM CDT 04/09/14
Hey Kuster, Did you ever listen to a broken record? Never gets to the next song.
Posted by Bonnie Dukowitz at 5:52AM CDT 04/10/14
Your energy (positive and negative) on crop insurance needs to directed towards development of a insurance product that is not dependent on government support. Crop insurance not supported by tax dollars and not run by the government is the answer to all your comments on both sides. Fighting among the farm community does nothing to forward progress.
Posted by John Finley at 8:52AM CDT 04/11/14
We had that in the health insurance industry and now we have the un- affordable care act. Nice thought though.
Posted by Bonnie Dukowitz at 6:35AM CDT 04/12/14
Affordable Health care for everyone should be an adopted into the Bill of Rights.
Posted by Unknown at 8:50PM CDT 04/14/14
Yeah, I wouldn't want to put my name to the statement directly above this one either. I don't even know where to start on the lunacy of that comment.
Posted by Brandon Butler at 9:24AM CDT 04/16/14
"It is difficult to free fools from the chains they revere." Voltaire
Posted by Brandon Butler at 10:22AM CDT 04/16/14
At this time I probably will not be signing up for the new farm bill. ARC ( the Association of Retarded Crop growers ) and PLC ( Please Lose Control ). Well if they do pay out things are not going to be good. The other benefit to not signing up is you just got rid of a whole pile of paperwork. The plus side is. You have lost no money and have gained a lot of free time to do something the no body ever does any more. NOTHING!!! Take that new found time and eat lunch with the guys and find out what is really going on. I am also sorry to say that crop insurance is a sad safety net this year. It was good last year but this year isn't .much better than the farm bill.
Posted by Crawford McFETRIDGE at 8:26AM CDT 04/28/14
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