By Brent Gloy and David Widmar
This winter marks the third time producers head to the local FSA office to make an ARC/PLC election. While we thought the decision would get easier with experience, the 2021 environment is perhaps the most challenging yet. We recently wrote three AEI Premium articles (here, here, and here) that dig into key details producers will face in navigating their decisions. Building off that work, this week’s post highlights six key considerations for the 2021 ARC vs. PLC decision.
Before diving into the specifics, this post and related articles are not a substitute for the various ARC/PLC decision-tools. Key trends and realities affect those model outputs, and our goal is to identify, frame, and discuss a few of those factors. With any model or forecast, we must think critically about what the results tell us.
1. ARC & PLC remains decoupled from 2021 planting decisions
We continue to observe confusion about producers’ ARC/PLC decisions and the potential effect on planting decisions (and vice versa). These programs – by design – are decoupled from the 2021 planting decision. This is to say producers have zero incentive to align their planting and ARC/PLC decisions.
2. We know very little going into this decision
This year’s decision is for the 2021 production year with potential payments to be received in the Fall of 2022. For corn and soybeans, the relevant marketing year will run from September 2021 through August 2022. It goes without saying, but lot that can happen over the next 18 months!
Furthermore, we know less than usual headed into this enrollment. For example, last year’s enrollment was for 2019 and 2020 production. While we knew very little about the 2020 production year, we had a good idea about the 2019 situation. For some, 2019 acted a bit like the “bird in the hand” and helped guide the decision making. The 2019 situation was similar to what happened in 2015 when producers signed up for the 2014-2018 production years.
3. PLC reference prices are skewed for soybeans and wheat
Even during the depths of the Trade War and +20% ending stocks, there has not been a PLC payment for soybeans. Overall, the soybean PLC reference price is set relatively low, and, as a result, the prospects of a PLC payment for soybeans are low.
On the other hand, a relatively high PLC price for wheat has resulted in numerous large wheat PLC payments.
This isn’t to say anything about the future, but to recognize what’s occurred over the past seven years (the base rates).
4. Large yield declines are likely necessary to trigger ARC-CO payments
MYA prices for the 2021/2022 marketing year are half of the equation for triggering potential ARC-CO payments. Without digging into the specifics too much, if we assume MYA prices, we can calculate where yields would have to be to trigger an ARC-CO payment. Using current price projections (K-State and AEI.ag), we found a very low county yield is required to trigger an ARC-CO payment. For example, an MYA corn price of $4.05 wouldn’t trigger an ARC-CO payment until yields were 79% or less of the county benchmark yields. Of course, the higher the MYA price the lower of county yield necessary to trigger the revenue-based payments.
5. Payment outlook is bleak given current realities
Overall, the current outlook for potential payments under both programs is not bright. Given the number of unknowns and long time horizons, a lot can happen. However, it is important to recognize current conditions are very different than in 2014 (when falling prices meant strong ARC-CO payments were possible) and in 2019 (when low commodity prices made PLC more likely to pay). While the mechanics of the programs haven’t changed much over the past seven years, each election period has taken place under very different farm economic conditions.
6. Programs offer strategically different options
In mapping out the pros and cons of each program, it reminded us that ARC and PLC have very different strategic advantages. ARC is based on revenue and offers some element of yield protection. PLC, however, is priced-based. For producers worried about yield risks, ARC might be, overall, a better program. Alternatively, PLC offers more protection with low price outcomes. Producers should ask themselves: “Which would provide more value to my operation?”
Building off this idea, recognize most of the ARC/PLC tools report an average expected payout under a range of various scenarios. In most cases, you’ll want to dig a little deeper into how these programs work under various conditions.
To illustrate how focusing solely on an average expected payment might lead our thinking astray, the table below shows an example. With both options, the average expected payout is $10, however, these programs are offer very different payout profiles.
Wrapping it Up
There are several considerations and unknowns headed into the 2021 ARC/PLC decision. As a starting point, producers should ask themselves: 1) What do I know? 2) What are my expectations? And 3) what are my primary concerns? While there isn’t an obvious solution, these questions will help producers zero-in on a decision (or a set of decisions across all their program acres) that works best for them.
Keep in mind that even with the exact same set of information, individuals will weigh the above factors differently based on personal preferences. This is to say producers should not focus on finding the mathematically “right” answers as much as finding a decision that is “right for them.”
For those really invested in making a good decision, we’d suggest capturing your thoughts and ideas as you sort through the 2021 decision. A year from now, when you’re facing the decision for 2022 production, you can review your thoughts, evaluate the quality of the 2021 decision, and learn from yourself. This won’t be easy, but you’ll thank yourself next year.
As a reminder, subscribers can read the three supporting AEI Premium articles (here, here, and here). Not a subscriber yet? You can access the articles via the free trial.
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Sneak Peek: During last week’s Ag Uncertainties recording, Brent and David dug into the ARC vs PLC decision in more detail. We’ve shared that for everyone below.