Grasping Farm Program Changes

KANSAS CITY, Mo. (DTN) -- Winter wheat farmers face a Sept. 30 deadline to sign up for Supplemental Coverage Option insurance, a policy they should consider buying just to keep their options open for commodity programs.

Supplemental Coverage Option policies are new in the farm bill as an add-on to individual crop insurance. SCO is a countywide policy for yield or revenue that will raise a farmer's insurance coverage level up to 86% of a revenue benchmark.

SCO plays into the commodity program wheat farmers will choose later in the year. However, SCO is tied to the Price Loss Coverage commodity program. Producers can use SCO if they sign up for Price Loss Coverage, a program that would pay producers if the national average marketing year price for wheat comes in below $5.50 a bushel.

Producers who opt to sign up for the Agricultural Risk Coverage program, or ARC, on their winter wheat would have to then drop their SCO insurance later this year. Producers who sign up for ARC would not be eligible to buy SCO coverage on winter wheat in future years. That's because ARC and SCO function in similar ways.

Producers who are not enrolled in either ARC or PLC for base acres can still choose to buy SCO coverage.

These are just a few of the farm bill nuances agricultural economists are going over at meetings Wednesday and Thursday in Kansas City. University Extension economists are gathering to discuss how the various farm programs mesh together and the factors farmers must consider.

Right now, landowners are facing decisions to update yields on base acres and consider whether to reallocate base acres to other planted crops over the last five years. The sign-up and rules for ARC and PLC are not expected to be rolled out until later this year.

Jody Campiche, an Extension economist at Oklahoma State University, noted that winter wheat growers have until Sept. 30 to sign up for Supplemental Coverage Option insurance. Producers are being told to go ahead and sign up for SCO even if they do not know what they want to do for commodity programs.

"They don't know if they want ARC, and they don't know if they want PLC," Campiche said.

Winter wheat growers who sign up for SCO generally have until Dec. 15 to drop the policy if they decide ARC is a better commodity option for them. Some growers, however, do have earlier acreage reporting dates that would require them to drop SCO earlier if they choose so. Right now, SCO looks like a good add-on to individual insurance. Winter wheat growers are seeing premiums at about $3 an acre for SCO that would boost individual coverage from 70% of revenue up to 86%.

The decision to choose between PLC and ARC may come down to how much weight producers place in long-term price projections for commodities, said Pat Westhoff, director of the Food and Agricultural Policy Research Institute at the University of Missouri.

"Price projections matter dramatically in how these programs might affect you," Westhoff said.

FAPRI happens to put out its own baseline price projections similar to USDA. As Westhoff noted, various forecasts or indicators suggest prices would fall to a level that Price Loss Coverage would generate payments for crops while other models suggest prices would stay above those PLC reference prices.

It may then matter which price projections a farmer considers. FAPRI's baseline price for the 2014-15 wheat crop is $6.27 per bushel, which is 77 cents higher than the $5.50 PLC reference price. USDA's World Agricultural Supply and Demand Estimates for August forecasts a price range from $5.80 to $6.80 per bushel.

For corn, the CME 2014 December and March 2015 prices are both below the $3.70 reference price under PLC. The FAPRI baseline released last week projects a $3.89 average crop price for the 2014 corn marketing year.

Westhoff and other Extension educators said ARC could more likely pay producers on commodities such as corn earlier in the five-year stretch while PLC would more likely pay out in later years. All of that depends on whether the long-term price average for commodities trends down over the next five years.

"This is not the easy call some people pretend it is," Westhoff said.

Campiche pointed out that PLC might not project payments, but the PLC-SCO combination may still prove to be better long term for producers than signing up for ARC on the county level. Over the life of the farm bill, PLC with SCO may offer better revenue protection.

"Every time ARC pays, SCO pays twice that," Campiche said.

For spring crop producers, Carl Zulauf of Ohio State University said the best option for ARC and PLC is to wait and see. The longer producers wait, the more likely they will see price trends to forecast possible payments for 2014 and potentially 2015 crops.

"Economics are very clear," Zulauf said. "You want to wait to make a decision. You wait to sign up to the last day."

Zulauf also said producers should weigh the options on ARC. There is the countywide ARC, which covers up to 86% of a farm's income, and there is individual ARC that covers up to 65% of the whole farm income. Zulauf said he initially dismissed individual ARC, but he said producers should run the numbers on it. Individual ARC may make sense for producers with highly variable yields. Individual ARC also covers fruit and vegetable production as well, Zulauf said.

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Editor's Note: For more detailed information, listen to DTN's pre-recorded webinar, "ARC or PLC Choices: Which Farm Bill Contingency Plan is Right for You," at http://tinyurl.com/…. You must register but the hour-long webinar is free.

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

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