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HADDONFIELD, N.J. (DTN) -- 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 stay near levels achieved over the last two months.
After all, 2014 harvest futures prices were running $5 corn, $12 soybeans and $7.50 wheat in the last few days, far above the gloomy long-term projections from the University of Missouri's Food and Agricultural Policy Research Institute (FAPRI) economists. 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 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 once USDA announces final rules later this year. 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% of county yield multiplied by the crop's season-average cash price or 65% of his or her individual crop yield multiplied by season-average price. (If this sounds a lot like the last farm bill's ACRE program, or the more familiar county-based group risk 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 many 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 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.
The problem is how to anticipate future prices in your decision when markets are so fickle. In March, FAPRI issued its long-term price projections, using 500 alternative scenarios of the next five to 10 years. Its best estimate was that prices for most crops would run far below recent highs: After peaking at $6.89 per bushel for the 2012 crop, projected corn prices for 2014-18 will average only $4.08 per bushel, FAPRI said. Soybean prices decline from $14.40 in 2012-13 to $9.76 for 2014-18. It pegged wheat prices at an average of $5.37 for 2014-2018, down from $7.77 a bushel in 2012-13.