October 5, 2020

PLC and Too Few Bushels

By David Widmar

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This Fall, producers will receive ARC/PLC payments under the 2018 Farm Bill for 2019 production. PLC was the popular choice for corn producers, with 76% of base acres electing the program. Furthermore, we now know a 14 cent corn PLC payment is on the way. This week’s post steps back and considers a troubling feature with the PLC program: too few bushels.

A Few Details

To illustrate the challenge with bushels (and production) paid under PLC, we will use a hypothetical Nebraskan farm. In figure 1, corn yields are shown since 2005.

The first thing to note is PLC yields are based on FSA farm-level data. As such, each FSA-defined farm has a different set of yield data. You can read more about PLC yields and review the K-State decision tool here.

2018 Farm Bill allowed producers the option to update their PLC yields. The idea here was that some producers had poor crops during the first timeframe (2008 – 2012), so a second yield window was allowed (2013 – 2017). Of course, yields trend higher over time, so a detrend factor (0.9 for corn) was used the make the two timeframes roughly equal terms. There was quite a bit of math involved (see tool linked above), but the producer’s decision was easy: elect to update if the new calculated PLC yield is higher.

In the shuffle of updating PLC yields, the more significant issue, at least in our minds, was overlooked: PLC yields are, by design, held at low levels. The update process removed some of the “bad luck” associated yield timeframes, but the process kept yields at 2008-2012 levels.

The Example

Consider the example Nebraska farm (Table 1). The average yield for the 2008-2012 period was 154.5. The PLC yield was 90% of this, or 139.1.

In reviewing the optional PLC yield update, producers would consider the second timeframe of 2013-2017. The average harvested yield was 181.0. That yield is adjusted by the detrend factor (0.9 for corn) to rollback to 2008-2012 levels. The corn yield would then be multiplied by another 90% (per the 2014 Farm Bill PLC adjustment) for a PLC yield of 146.6. With that, the example farm would elect to update the PLC yield.

While 146.6 is an improvement for this farm, it is a long shot from current yields. In this example, the most recent three years (2017-2019) had a yield of 191.6. A large gap!

The PLC math gets even more diluted as only 85% of base acres are paid. Taking this simplified example even further, let’s assume the farm has 1,000 acres of corn planted each year and 1,000 base acres of corn. In 2020, they expect a farm yield of 191.6 (the three-year average), for a total of 191,600 bushels produced. For a potential PLC payment, they only are paid on 85% of acres (850 acres) and have a farm PLC yield of 146.6. With this, any potential PLC payment will be for only 124,632 bushels or 63% of actual production.

If you prefer to think about the dilution in the other direction, the 14-cent payment for 2020 production would be effectively 8.8 cents across all bushels.

Table 1. PLC Yields for Example Farm
PLC 2020

 ARC PLC Farm Policy Ag Economic Insights
Figure 1. Hypothetical Farm Corn Yields (Data Source: USDA NASS Corn Yields for Saunders County, NE)

Implications

While the magnitude will vary for each farm, PLC payments are diluted in three ways: 1) yields are being “rolled back” to 2008-2012 levels 2) for corn, the PLC yields are 90% of observed levels, and 3) payments are made on only 85% of base acres. Yield rollback has unfolded in an inflationary-like manner. At the outset of the 2014 Farm Bill, this wasn’t quite as noticeable. Now, however, the rollbacks are approaching a decade’s worth. A simple linear trend of corn yields reveals the national yields increase by 2.2 bushels per acre per year.

Wrapping it Up

In recent months, we have sensed a disconnect in understanding how the PLC program works. Comments along the lines of, “Well, farmers will be getting a 14-cent PLC payment…” indirectly imply the program works like LDP payments of the past. This isn’t the case. PLC payments are decoupled from actual annual production. Furthermore, PLC covered is less than what most producers might expect, even under average yields. In the simple example, we found the program would pay on around 63% of expected bushels.

With each year that passes, the PLC program provides less effective coverage. This post has focused on corn, but the challenges exist for all PLC crop. One has to wonder how this might be addressed in the next Farm Bill, assuming the ARC and PLC programs continue.

Finally, a big thanks to John K. in Nebraska for challenging our thinking on this.

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