September 9, 2019
Biggest Change for the 2018 Farm Bill: The Farm Economy
By David Widmar
Over the next 6 months, producers will need to, again, decide between the ARC and PLC programs. These programs were first introduced in the 2014 Farm Bill and have been reauthorized – with a few changes– by the 2018 Farm Bill. Back in 2014, ARC-CO was favored for corn (93% of program acres), soybeans (97% of program acres), and wheat (56% of program acres).
Throughout the Fall we plan to share a few thoughts and insights into the upcoming Farm Bill election. This week’s post sets the stage by framing one of the biggest changes since 2014 – the farm economy.
A few details
Keep in mind the 2014 Farm Bill went into effect for the 2014/15 crop. That crop – harvested in 2014 – didn’t receive potential payments until the Fall of 2015, or the end of the 2014/15 marketing year.
For ARC-CO, the process of setting the annual benchmark revenue required a 5-year moving olympic average for establishing benchmark MYA prices and county yields. This meant the benchmark revenue for the 2014/15 ARC-CO program were based on prices and county yields from 2009/10 – 2013/14. Of course, this was a time of historically high prices. As a result, heading into the 2014 program ARC-CO had a built-in advantage of offering very high price benchmarks.
As you will see shortly, this time around the situation is different as the olympic average price guarantees are now very close to the PLC reference prices. The data for the 2018/19 and 2019/20 marketing years are preliminary and estimates. Specifically, these data were based on the USDA’s August WASDE price forecasts.
Figure 1 plots three pieces of data that capture how the farm economy has dramatically changed over the last five years. First, annual MYA prices for corn are shown in blue. Again, this is the average price producers received for the corn sold during the marketing year. More on MYA prices here.
When the 2014 Farm Bill decision was made, corn prices had been well above $4 per bushel for the previous four years. This set the stage for high ARC Benchmark prices during the first few years of the ARC-CO program. In fact, in 2014 there was a lot of confidence that ARC-CO would have an annual ARC Benchmark Price above $5 per bushel for the first few years. This turned out to be the case (shown in green).
It was the wide gap between low MYA prices (blue) and higher ARC Benchmark Prices (green) that made the ARC-CO program so attractive in 2014. In many ways, if prices declined (which they did) ARC-CO had large potential payments built into the early years.
The other data point from Figure 1 is the PLC reference price (shown by the orange line) for corn, $3.70. Annual MYA prices must fall below this level to trigger PLC payments. The PLC program has made payments for corn since 2015/16.
Figure 1. Annual Corn MYA Price (in blue), PLC Reference Price (in orange), and ARC Benchmark Prices (in green), 2009/10 – 2019/20 est.
Table 1 provides a slightly different way to think about the ARC-CO program. First, the annual ARC Benchmark Price and MYA Final Price from Figure 1 are shown in the top two rows. The next two rows show how high county yields could climb and still trigger payments. In other words, the higher this number the easier it was to trigger an ARC-CO payment. Take 2014/15 for example, given the actual MYA price and the benchmark ARC-CO price, a payment would be triggered if county yields fell below 123% of the county olympic average yield. The maximum payment would be achieved if yields were below 111% of average.
Looking at the bottom two rows of the table you could see that in the first three years of the program, counties would receive payments unless they achieved yields well in excess of 100% of their olympic averages. Again, the large gap between ARC Benchmark Price and MYA Final Price made this yield threshold quite high in the first few program years.
Looking over the six years of data, consider how far these yield triggers have fallen. In 2018/19 it took a yield below 88% of the county benchmark to receive a payment. As a result, payments under ARC-CO dropped off rapidly. Thinking about the current crop – which producers have to make an election- it will almost certainly take a low yield, 88% of the county olympic average, to trigger a payment given current price estimates.
Table 1. Annual Corn ARC Benchmark Price, MYA Final Price, Maximum County Yield to Trigger Payment, Yield Level to Hit Payment Cap. 2014/15 – 2019/20 Est.
Figure 2 and Table 2 present the same data for soybeans. The first few years of the soybean ARC-CO program had an ARC Benchmark Price above $12 per bushel. For the 2019/20 crop, this benchmark has fallen to $9.25.
The interesting thing about soybeans is that the PLC reference price is quite low. Note that soybean’s MYA prices have not fallen below the reference Price of $8.40 – even in the depths of the Trade War. This is to say that the PLC program has not made a payment for soybeans. That said, we are approaching that threshold as the USDA’s most recent soybean MYA price forecast for 2019/20 is at $8.40.
Figure 2. Annual Soybean MYA Price (in blue), PLC Reference Price (in orange), and ARC Benchmark Prices (in green), 2009/10 – 2019/20 est.
Notice initial payment thresholds for soybeans weren’t nearly as high as they were for corn (Table 2 & Table 1). For instance, in 2014/15 soybean yields below 104% were necessary to trigger a soybean ARC payment. Most recently, however, a county average soybean yields below 95% was necessary to trigger a payment for the 2019/20 crop – which is a large payment potential than for corn.
Table 2. Annual Soybean ARC Benchmark Price, MYA Final Price, Maximum County Yield to Trigger Payment, Yield Level to Hit Payment Cap. 2014/15 – 2019/20 Est.
Figure 3 and Table 3 show the data for wheat. Producers recognized the PLC program had some appeal given the $5.50 reference price; just under half opted for PLC. When the MYA price for wheat hit $3.89 during 2016/17 this triggered very large PLC payments.
Like corn, wheat has reached the point where the statuary minimums have taken effect and the ARC Benchmark price has reached the floor of $5.50.
Figure 3. Annual Wheat MYA Price (in blue), PLC Reference Price (in orange), and ARC Benchmark Prices (in green), 2009/10 – 2019/20 est.
Table 3 shows the yield story for wheat has been a bit different than for corn and soybeans. Specifically, the maximum county-level yield required to trigger an ARC-CO payment peaked at 148% in 2016/17. Again, this is when the MYA price was well below the PLC Reference Price. Furthermore, counties with a yield at or below 133% of the county benchmark yield hit the ARC-CO payment cap that year. For the 2019/20 crop, the current estimate is that ARC-CO payments will be made in counties with yields of less than 95% of the benchmark.
Table 3. Annual Wheat ARC Benchmark Price, MYA Final Price, Maximum County Yield to Trigger Payment, Yield Level to Hit Payment Cap. 2014/15 – 2019/20 Est.
Wrapping it Up
As producers make their 2018 Farm Bill elections over the next six months, a major difference to keep in mind is the shift in the farm economy since 2014. The 2014 Farm Bill elections were made in an era where recent high prices provided a lot of incentive to the ARC-CO program. The 2018 Farm Bill decisions – at least for the 2019/20 and 2020/21 production decision producers must make this fall and winter- the slug of poor commodity prices has removed a lot of that appeal ARC-CO had 5 years ago.
Producers considering the ARC-CO program must consider changes in revenue. In the early years of the program, many producers received payment even with strong county average yields. For corn, county yields less than 120% would still trigger an ARC-CO payment. Most recently, however, the yield threshold has fallen significantly. It is currently estimated that a yield of less than 88% of the county yield benchmark would be needed to trigger a payment for the 2019/20 produced corn crop.
Regular readers know we’ve had our concerns and frustrations about the ARC and PLC programs. As we’ve pointed out before, there are several ways these programs fall short in trying to help producer manage risks. That said, producers will need to carefully consider their upcoming election for the 2019/20 and 2020/21 crop. In our mind, there are two bad strategies: 1) selecting what you did last time because it worked well and 2) picking PLC because that’s what everyone is talking about.
In future posts, we’ll continue to review the 2014 Farm Bill and help producers thinking through the upcoming decision. Specifically, we’ll look at county-level data to see which program paid more and how ARC-CO benchmark yields have changed.