A R C vs P L C | #farmbill18

The farmdocDaily team has written an article projecting future farm safety-net payments. Unless the conference committee members change ARC-Co (ark-county) dramatically, most corn farmers will choose P-L-C this time around.

excepts from the farmdocDaily article
by Gary Schnitkey, Jonathan Coppess, Nick Paulson, & Carl Zulauf

The House and Senate have respectively passed their versions of a 2018 Farm Bill. Now a conference committee will attempt to work out the differences. Both include the Agricultural Risk Coverage at the County Level (ARC-CO) and Price Loss Coverage (PLC) farm safety net programs first made available in the 2014 bill. The House version eliminates a third program— ARC at the individual farm level (ARC-IC) — while the Senate leaves it in.

ARC-CO pays when county revenue (county yield x marketing year average price) is below a revenue guarantee. The revenue guarantee equals .86 times a benchmark yield times a benchmark price. Benchmark yields and benchmark prices are Olympic averages of the five previous prices (eliminate the high and low equals). When county revenue is below the ARC guarantee, a shortfall is calculated that equals the guarantee minus harvest revenue. The shortfall cannot exceed 10% of the benchmark price times the benchmark yield. The ARC payment equals 85% times the shortfall. In each year since the 2014 Farm Bill has been implemented, payments have been reduced by a 6.8% sequester amount. Prices since 2014 have been below $4.00, and the benchmark price has declined. The benchmark price will be $3.70 in 2018, compared with a high of $5.29 in 2014. The benchmark price cannot go below $3.70 since the $3.70 reference price is a floor on the benchmark price.

Price Loss Coverage (PLC) is a price program. It makes payments when prices are below the reference price ($3.70 for corn). Each FSA farm has a PLC yield. The yield used in calculating payments is the average county yield, as reported by the Farm Service Agency. A per bushel shortfall is calculated when the MYA price is below the reference price equal to the reference price minus the higher of the MYA price or loan rate ($1.95 for corn). For example, the MYA price was $3.36 in 2016. Per bushel shortfall was $.34 ($3.70 reference price – $3.36 MYA Price), which is multiplied by the PLC yield and the payment acre factor of 0.85 and the sequester factor of (1 – 0.068).

The Senate ARC-CO version modifies the 2014 ARC-CO version in two ways; the benchmark yield will be trend adjusted; and an actual yield below 75% of the t-yield will be replaced by 75% of the t-yield. Both of these modifications have potential to raise benchmark yields, benchmark guarantees, and ARC payments.

The Senate PLC program is exactly the same as the 2014 PLC program.

The House PLC version uses an effective reference price in calculating per bushel shortfalls. The effective reference price equals .85 times the Olympic, five-year average of MYA prices as long as that average is between the current reference price ($3.70 for corn) up to 1.15 times the reference price ($4.26 for corn). If the average is below the $3.70 reference price, the $3.70 reference price is used. If the average is above $4.26, the $4.26 price is used. The House PLC program always has an effective price that is at least as great as the Senate PLC program.

The projection made in its April 2018 baseline allows calculation of CBO’s projections of per acre ARC-CO and PLC payments. On a national per base acre basis, ARC-CO is expected to make payments of $11 per acre for corn produced in the 2019 marketing year (see Table 2). For the 2019 marketing year, PLC is projected to pay $38 per corn base acre. In each year of the projected life of the 2018 Farm Bill, PLC is projected to pay more than ARC-CO. Over the 2019 to 2023 period, PLC is projected to pay an average of $29 per corn base acre compared to $9 per corn base acre for ARC-CO.

The Senate version of ARC-CO would result in higher payments for ARC-CO than those shown in Table 2 because the use of trend-adjusted yields and floors of 75% of t-yields will result in higher yield benchmarks and ARC guarantees. CBO’s estimate of program outlay changes for the Senate version suggests modest increases in spending of an average $20.5 million per year for marketing years from 2019 to 2023 (see Congressional Budget Office, Cost Estimates of S. 3042). The $20.5 million is applicable to all program crops. However, even if all the $20.5 million were applied to corn, expected payments would increase by $1.35 per corn base acre. This increase would leave expected payments for ARC-CO near $12 per base acre, still well below those for PLC. It is unlikely this increase would change any decisions by farmers as to which program to elect.

Turning to PLC, the House alternative will have at least as high of payments as shown in Table 2 for the Senate version because the House version has the potential escalator provision for reference prices. CBO estimates the impacts of the effective reference price mechanism to be minor for corn, with PLC payments for corn increasing $5 million for the ten fiscal years from 2019 to 2028 (CBO, https://www.cbo.gov/system/files/115th-congress–2017–2018/costestimate/hr2.pdf). This $5 million total increase would work out to be less than an increase of $1 per corn base acre. The reason for this low estimate is that MYA prices are not expected to get high enough to cause the effective reference price to exceed the reference price.

Given the choices in the House and Senate versions, most farmers and land owners would choose PLC over ARC-CO for use on corn base acre. This assumes that prices remain at levels currently forecast. It also assumes that farmers and land owners make choices based on highest expected payments from the program.