Ag Policy Blog
Chris Clayton DTN Ag Policy Editor

Friday 11/22/13

The Poltical Fight Over PLC and ARC

I was nuanced in a blog item earlier this week in which I pointed out that farmers in some parts of the country are now seeing cash corn prices below the potential target price under the House version of the farm bill.

"Nuanced" is my way of saying I was wrong. I wasn't wrong to say that those cash prices are below $3.70 per bushel in part of the country. But those folks wouldn't be getting a target-price payment -- yet.

For most of the week in Washington, it was obvious that this battle over target prices and shallow-loss programs is far from being resolved. Senators such as Mike Johanns of Nebraska and Charles Grassley of Iowa continue to take strong positions against target prices while supporters such as House Agriculture Committee members and staff are just as entrenched on the other side in defending the program they created.

The Price Loss Coverage program -- the target price plan -- would pay farmers on corn if the national average price stays below $3.70 a bushel for the first five months of the marketing year for the crop. Currently, the DTN National Corn Index is at $4.07 a bushel. It has actually rallied in recent days, bouncing up from $3.95 a bushel on Monday.

But the battle among farm bill negotiators is over the long-term effects of the Price Loss Coverage versus the Senate's main commodity program, the Agricultural Risk Coverage program, which is classified as a shallow-loss program. If American agriculture is moving into a downturn --- coming off a "Golden Era" as speakers at the American Bankers Association called it last week --- then what's the appropriate safety net moving forward? Do farmers want a safety net that phases out and places more emphasis on shifting acres to what the market dictates or a safety net that creates a consistent floor price, but one that could lead back to heavy reliance on those target-price payments?

Johanns, who served as Agriculture Secretary from 2005-07, argues much the same case as groups such as the National Corn Growers. The ARC program would provide a revenue payment in a declining market, but would not continue paying annually. House members and backers of the PLC argue the safety net should provide a more permanent payment support if agriculture is moving into a lower price cycle.

Johanns wrote this week in a letter to Senate conferees, "The effect of the PLC program is to shield farmers from market incentives. Like all businesses, farms respond to incentives, and if Congress sets an artificially high price, farmers will respond to it and it will lead to overproduction — especially if farmers can get that higher price by planting more acres to a specific crop — increasing supply and driving prices down further.

"The basic function of a market is to efficiently allocate resources. Target prices above equilibrium prices cripple market incentives. Unless this Congress decides it knows how to manage supply and demand better than the millions of participants in the agricultural economy, we should avoid these kinds of rigid market-distorting programs.

Johanns added, "Now some have argued that the Agricultural Risk Coverage (ARC) program in the Senate bill has some of the same flaws, but the advantage of this program is that the payments run out—if prices stay low farmers are not guaranteed a payment forever. Under PLC, those payments could continue indefinitely with no incentive for the farmer to switch crops or reduce production. Farmers—wherever they live and whatever they grow—should make those decisions in response to demand."

Yet, as POLITICO reported on Wednesday, ARC would have the potential to pay as much as $53 an acre in 2014 if corn were at $4 a bushel as an average market price for the 2013-14 crop. Because corn is seeing a bigger dip in prices, it's the crop most likely to generate an earlier payment under ARC. NCGA argues those ARC payments would decline over time and farmer would have to rely more on the market than the commodity program. PLC, on the other hand, would have that constant $3.70 floor that would generate payments --- if prices averaged under $3.70 nationally for the first five months of the market year.

Keep in mind in either ARC or PLC, right now both versions of the farm bill have a $50,000 payment cap.

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Posted at 7:52AM CST 11/22/13 by Chris Clayton
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