New farm program brings new choices
The 2014 Farm Bill is now law, and USDA Farm Service Agency officials are working through the fine print, writing rules to carry out new programs. The five-year farm bill eliminates direct payments, as well as the ACRE, SURE and countercyclical payment programs for corn and soybeans. Replacing them are new risk management options farmers must choose from.
The backbone of the farm financial safety net in the new farm bill is in maintaining the strength of the crop insurance program. Farmers can invest in their own risk management by buying crop revenue insurance so they are protected should yield or prices decline annually.
Also, as protection against multiyear downturns in grain prices, farmers can choose between two new programs. One is a revenue program that covers price and yield losses called Agricultural Risk Coverage, or ARC. The other is a price-only program called Price Loss Coverage, or PLC.
If choosing ARC, another decision to make is signing up for the “ARC farm” or “ARC county” option. It will take several months before the new USDA farm program sign-up begins, probably in late summer or fall. Meanwhile, farmers need to start thinking about provisions spelled out in the 2014 Farm Bill.
“You will have to make some decisions and make them for a five-year time frame,” says Steve Johnson, an Iowa State University Extension farm management specialist. “It’s no longer a year-to-year enrollment decision. Farmers may have to review historical planted acres and yield information about their farms.
“In addition, farmers should start thinking about their farm yields compared to their county yields. These ideas will lead to different options to help you decide which program choices will likely work best. Then you enroll by FSA farm number for the five-year period.”
PLC is a target price program that makes payments when national average cash crop prices drop below a “reference price” set in the farm bill. The reference price for corn is $3.70 per bushel and $8.40 per bushel for soybeans. Beginning in 2015, PLC enrollment also allows the purchase of Supplemental Coverage Option insurance to reduce the traditional crop insurance deductible levels. Only farmers enrolled in the PLC program may buy SCO insurance, and county yields will be used.
ARC is a revenue-based program designed to make payments to farmers when the actual annual revenue falls far enough below a revenue trigger. This trigger uses county or farm yields multiplied by the national average cash prices.
Farmers who choose ARC will have to make another decision — whether to enroll in county ARC coverage on a commodity-by-commodity basis, or enroll in farm ARC coverage, which combines all commodity crops together on that farm to determine the revenue shortfall.
Payments for the county option occur when actual county revenue for a commodity is below the ARC revenue guarantee for the crop year. Individual farm ARC would issue payments depending on whole-farm revenue rather than commodity by commodity like the county ARC. The program covers losses on 85% of the base acres for the county option and 65% of base acres for individual farm coverage.
The ARC guarantee effectively provides a range of revenue protection in a 76% to 86% band of historical revenue, with farmer-purchased crop insurance expected to cover deeper losses. Farmers who enroll in ARC may not buy SCO insurance that begins in 2015 because they are both similar in function.
It’s a one-time decision
Payment triggers for the ARC and PLC programs are based on marketing-year price averages, so any payments for yield or price losses won’t be made until the year following a loss.
“Farmers have to make a one-time, irrevocable decision to enroll in ARC or PLC for the life of the five-year farm bill,” says Johnson. “If a farmer doesn’t make a decision, farms are automatically enrolled in PLC for subsequent years beginning in 2015. It is too early to know for sure which program will be best for Iowa farmers, since not all the rules and details are known. But once USDA releases final rules and regulations, you’ll have time to figure it out.”
A preliminary analysis of the two programs suggests, that for 2014, ARC’s price coverage level is more favorable for corn and soybeans, while PLC’s reference price is more favorable for other crops, such as peanuts, rice and barley. However, farmers will need to consider how the two programs will likely play out over the life of the five-year farm program.
ISU Extension will develop spreadsheets on its Ag Decision Maker website, along with other educational materials, to help farmers with these decisions after USDA writes the final rules.
“Keep in mind if you don’t make a decision in 2014 and don’t enroll in either ARC or PLC, you’ll default to PLC in 2015 through 2018,” says Johnson.
The 2014 Farm Bill encourages farmers to think strategically about their farms through at least 2018, he adds. An important risk management question is the ability of a farming operation to withstand multiple years of low farm prices and revenue shortfall. Managing multiyear risk involves interrelated considerations, including expected national average cash prices and total crop revenue.
This article published in the March, 2014 edition of WALLACES FARMER.
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