Farm Bill Forecasting

The Great ARC or PLC Debate

Season-average cash prices (and normal yields) would only trigger ARC payments in 2014-15 when corn hits $4.57, wheat $5.67 or soybeans $10.50, said Kansas State University economist Art Barnaby. Prices in outer years might be barely enough to trigger PLC payments if FAPRI's more dire price forecasts are accurate, but not for soybeans. (Chart by Art Barnaby, Kansas State University)

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."

ONE-TIME CHOICE

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.

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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.

If those prices are as dire as predicted, the odds for ARC payouts for corn and oilseed producers would be greatest in 2014 or 2015, but decline in later years. Odds of PLC payments, particularly for wheat, sorghum, barley and rice would escalate.

Jonathan Coppess and Nick Paulson, University of Illinois farm policy analysts writing on Farmdoc.com, also emphasized that the choice of ARC or PLC hinges on price expectations. "If multi-year average prices for corn are expected to be above $3.70 over the next five years, ARC will provide better protection since PLC will never trigger payments," they wrote. "If prices are expected to be very low, averaging less than $3, PLC will provide better support." Corn prices between $3 and $3.70 are more of a toss-up.

Coppess and Paulson used slightly different assumptions than Barnaby, concluding that 2014 corn payments would be made on a typical McLean County, Ill., farm with 180-bushel corn yields starting at $4.35 per bushel. If the 2014 season average price tumbles to $4.25, the county ARC payment would be $18 per acre. At $3.90, the payment would be $81 per acre. Soybeans failed to trigger ARC payments under current 2014 price scenarios.

WHAT HAPPENS IF PRICES BETTER?

"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."

To read FAPRI's long-term price and farm bill projections, go to http://www.fapri.missouri.edu/…

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

For University of Illinois analysis of farm bill options, go to

http://farmdocdaily.illinois.edu/…

Marcia Zarley Taylor can be reached at marcia.taylor@dtn.com

Follow Marcia Taylor on Twitter@MarciaZTaylor

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