April 3, 2017
ARC-CO Yield Guarantees Increase Across Much of the Country
By Brent Gloy
Direct farm program payments have again become a critical component of net farm income. In 2016 direct farm program payments are forecast to account for $13 billion of the sector’s $68 billion (19%) of net farm income. At $5.9 billion the ARC-CO program is by far the largest category of direct farm program payments.
As we have discussed before, the price guarantees of the ARC-CO program have already begun to decline and this decline will likely accelerate for the 2017 crop year. However, ARC-CO is a revenue based program, so guarantees are also dependent upon county level yield histories. Given that the U.S. has harvested three very large corn and soybean crops in a row, we thought it would be interesting to see how the county level yields have changed over the course of the program.
How Have Higher Yields Impacted County Level Yield Benchmarks?
The ARC-CO program make use of a 5-year Olympic averaging process to calculate benchmark yield levels for each county. The Olympic average yield is calculated by throwing out the high and low from the last five years and averaging the remaining three values. The Olympic average yields for each county were calculated for corn, soybeans, and wheat and are summarized in Table 1.
The data in table 1 show that, on average, benchmark yields have increased over time. Corn has seen the biggest increases. From 2014 to 2016, 71% of counties have seen their corn benchmarks increase. The average increase across all counties was 7.3 bushels per acre. At the current ARC-CO guarantee price of $4.79 per bushel this is worth an additional $35 per acre of revenue guarantee. A large proportion of counties also saw their Olympic average soybean yields increase from 2014 to 2016. Wheat had the smallest proportion of counties with increases, but 63% of counties saw an increase from 2014 versus 2016.
Where Did the Yield Increases Occur?
One interesting thing about the data in table 1 is that the standard deviations of the yield changes are rather large. Take corn for example. Here, the average increase was 7.3 bushels per acre, but the standard deviation was 12.9 bushels per acre. This means that many counties saw much larger increases than 7 and many also saw much smaller increases, and in some cases, decreases.
This can be seen more clearly in Figures 1, 2, and 3 which are maps of the change in county level corn (figure 1), soybean (figure 2), and wheat (figure 3) yields from 2014 to 2016. Because some counties have more than one yield due to split practices (i.e., irrigated and non-irrigated) the maps only show counties which have a combined practice.
Counties that experienced an increase are shown in yellow and greens. Those that experienced declines are in orange and red. In the case of corn, most of the counties with large increases were in the southern part of the U.S. More modest increases 1 to 15 bushels per acre were quite common Illinois, Southern Indiana, Nebraska, North Dakota, South Dakota, Central Iowa, and Missouri. Counties that saw no change to declines were very common in areas such as Minnesota, Wisconsin, Northern Iowa, Northern Indiana, and Ohio.
Changes in soybean yields were similar to corn, with Illinois showing nearly every county with an increase. Again, counties in southern states generally saw yield increases. Missouri was notable for containing many counties that experienced yield declines.
Turning to wheat production, many counties in Kansas, the nation’s largest wheat producer, saw Olympic average yields decline from 2016 to 2014. The situation is similar throughout much of the wheat producing areas of the Great Plains, where county averages showed declines to very modest increases.
Sometimes Timing is Everything
The Olympic averaging process can result in some rather large changes in yield benchmarks when very high or very low yields fall out of the five-year rotation. For example, consider two hypothetical counties which achieved the same yields, but in different succession. County A was unfortunate in that it had two bad years back to back in 2012 and 2013. County B had the exact same yields, but the yields were spaced out differently with a bad yield coming in 2009 instead of 2013. When it comes time to calculate their Olympic average yields for the ARC-CO program, we will see that County B is much more fortunate.
Both counties find themselves in an identical situation at the start of the program. Each with an Olympic average of 133 bushels per acre. However, the Olympic averages quickly begin to diverge. County B loses a bad yield from its yield history after the first year of the program and sees its Olympic average increase by 24 bushels per acre from 2014 to 2015.
On the other hand, County A does not see an increase until 2016 when its average increases 8 bushels per acre. County B sees another 8 bushel per acre increase in 2016 bringing its Olympic average to 165 bushels per acre. Heading into the 2016 season these two counties, which have exactly the same yields only distributed differently through time, find themselves with Olympic average yields that differ by 24 bushels per acre.
Keep in mind that these two counties have the exact same average yields over the entire time period. At the current ARC-CO benchmark price for corn, their county benchmark yield guarantees would differ by $114 per acre. No small difference for two counties with the exact same 7 year yield history.
Wrapping it Up
Most counties in the U.S. have seen their Olympic average yields increase for corn, soybeans, and wheat. In the case of corn, many of the largest increases occurred in the South and many of the largest declines occurred in the North. Not surprisingly, most of the large payments went to areas that saw poorer yields, while those in states with exceptional county yields saw much smaller to no payments.
The maps and example used in this post illustrate some of the challenges in creating a county level program like ARC-CO. While all farmers have experienced the pain of falling prices, their experiences with yields can differ dramatically from county to county (even within a county as well). As a result, farmers in neighboring counties can have very different impressions of the program based on their location and even the timing of good and bad yields in their yield histories.
One would venture a guess that you would find high levels of satisfaction with the program in areas of the country that have seen lower yields since they have also likely received very large ARC-CO payments. The opposite is likely true in areas that have seen yields well above their Olympic averages in recent years, and likely little to no payments from the ARC-CO program. As the farm bill debate heats up one can bet that issues like this will be on producers minds. Next week we will look at how the revenue guarantees have changed across the country.
Photo Source: USDA Flickr