Farm Program Countdown - 2

By Marcia Zarley Taylor
DTN Executive Editor

DALLAS (DTN) -- Farmers from Minnesota, the Delta and the Texas Gulf Coast share little in common as far as geography, crops or farming methods. But three real producers from those regions will be tapping the new farm program's Price Loss Coverage (PLC) option for at least a portion of their base acres come the sign-up deadline March 31.

While most of the northern U.S. Corn Belt stands to collect significantly more from county-based Agricultural Risk Coverage (ARC) than PLC over the next five years, not all situations or crops are created equal. Reference prices for peanuts, long-grain rice and sorghum are set high enough to trigger potentially larger 2014 PLC payments, most farm bill calculators conclude.

Complicating the choice for other crops is that ARC-County will outgun PLC as long as: (1) Your county yields are not above average; and (2) USDA's marketing year average price for corn runs over $3.30/bu., soybeans over $7.80 and wheat over $5.50, advises University of Illinois economist Gary Schnitkey. Those thresholds favor ARC in 2014, but should prices nosedive further in 2015 and beyond, PLC could be favored in the out years.

With so many choices, three growers with three distinct strategies demonstrate why it's important to tailor farm program decisions based on individual circumstances and crops.

PAYMENT LIMIT HEADACHES

Minnesota farmers are supposed to win the ARC-County lottery this year, thanks to disastrous yields and an expected 2014 Marketing Year Average corn price that's fallen 48% since 2012. In some parts of Minnesota, that combination could translate into $73/base acre ARC-County corn payments for 2014 crops, University of Illinois calculators show, versus a mere $25/base acre for PLC. Soybeans might collect $3/base acre, versus zero for PLC.

The problem for a 10,000-acre Minnesota grain producer, who asked that his name not be used, is his business structure. This real operator, his wife, his son and several employee-owners are active managers in the business, but are eligible for only one joint $125,000 payment limit. That equates to the payment on slightly less than 2,000 base acres of corn.

"We're organized as a limited liability partnership because we wanted to keep the business simple for financing and operations," said the farmer, who also finishes hogs and cattle. Because he raises specialty crops like kidney beans, he never valued building a base and yield history in the past. Now "it just isn't worth reorganizing to collect government payments," so he plans to hedge his bets by enrolling some of his crops in ARC and the remainder in PLC.

The strategy here is that since PLC triggers on price only, it may pay in later years where high county yields could offset an ARC payment, as some Illinois counties will experience in 2014. Alternatively, ARC could pay when his county hits normal or below-average yields.

STUDY CROPS ON CASE-BY-CASE BASIS

In Belzoni, Miss., diversified farmer Jeremy Jack will split his ARC-PLC choices on a crop-by-crop basis. Almost 100% of the counties where peanuts, canola, barley, flax, sunflowers and grain sorghum are grown fare better with PLC than ARC-County, studies by the University of Illinois show. So it's no surprise Jack will choose PLC on rice (a potential $51 to $102/base acre payment) and peanut coverage ($68 to $182/base acre). In both instances, ARC isn't likely to pay anything. On cotton's generic base, Jack intends to plant peanuts this year.

On soybeans and corn, it's more of a toss-up, thanks to whopper Mississippi yields the past two years. In essence, bumper county yields whittle any potential ARC corn and soybean payments for 2014, although five-year calculations still favor ARC.

Another complicating factor for Delta farmers like Jack is that his production may not correlate well with each of the counties he farms. Jack's corn yields look exceptional compared to his county's average of 134 bpa. That means when PLC triggers, it could pay on more bushels than ARC, thanks to his personal farm program yields, potentially generating a higher payment.

This rule applies outside the Delta as well, anywhere where a county has diverse soils and someone farms the prime ground or has a superior production system, said Mississippi State University Economist Keith Coble.

"If you're well above average yields for your county, that feeds into PLC," said Coble. "You may get higher yield guarantees under PLC than ARC."

PLC FOR DOOMSDAY PRICES

Andrew Miller, a cotton and sorghum farmer from Odem, Texas, on the state's Gulf Coast, believes ARC-County will make bigger payments for most crops, based on current price projections. It's an unexpected Doomsday price scenario that worries him. PLC's reference prices are set by law and don't fluctuate, so a $3.95 sorghum price is fixed for PLC until 2018. Because ARC's trigger price is a moving average, its value wanes after multiple years of extremely low prices. Miller already buys the maximum enterprise unit, Revenue Protection crop insurance he can afford for price and yield disasters, but he's banking on PLC to protect him from a more severe and multi-year price collapse.

"There's probably not a huge difference in payment rates between ARC and PLC," Miller said. But the opportunity to update farm program yields -- as much as 40% on some properties -- also means his overall safety net coverage got a big boost when PLC triggers.

CHILL OUT

Coble emphasizes that while farm program choices are necessary, the truth is that any farm program assistance under this farm bill is going to be leaner than it was in the past, whether it's ARC or PLC. Revenue-based crop insurance is a grower's main risk management strategy, even though acre guarantees have slipped since 2012. To adapt, growers must concentrate on shaving production costs.

"There's also a lot of imprecision in economic models that forecast prices over five years," he said. "I tell growers to spend more time worrying about reducing costs and renegotiating cash rent than spending time worrying about this. If you're going to lose sleep at night, lose sleep about that."

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EDITOR'S NOTE: Join DTN for a free webinar March 12 for a last-minute analysis of your farm program options and to pose questions to the experts. Guest speakers Gary Schnitkey and Jonathan Coppess from the University of Illinois and Keith Coble from Mississippi State University will share strategies based on newly-released county average yields and USDA's latest 2014 crop price outlook. For details and registration go to http://tinyurl.com/…

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

(ES/CZ/AG)

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