By Brent Gloy and David Widmar
It’s hard to believe, but the ARC and PLC programs have now been around for nine years. Over that time the farm economy has shifted considerably. As another signup period looms, we’ll review key details and how the safety net has essentially disappeared.
Farm Economy Shifts
An important factor each year is the relative prices. Specifically, where are current commodity prices, where are the ARC benchmark prices, and how do they compare with the PLC reference prices?
Figure 1 shows these data points for corn. More specifically, the annual market year average (MYA) price that producers received for their crop is shown in blue. For 2022/23, the Kansas State University estimates were used. Keep in mind the annual MYA prices are also important for setting future Benchmark ARC prices (green diamond).
For 2022/23, an Olympic average of 2016/17 to 2020/21 is used. While corn prices in recent years have moved above the MYA minimum of $3.70 ($4.53 in 2020/21), the MYA Benchmark remains locked at the $3.70 level. This is due to the Olympic average method, but also the significant lag. Things won’t get much better next year, either. Current data and projections put the 2023 MYA Benchmark for corn at only $3.90.
While frustrating in 2022, it’s worth noting the same lag and Olympic averaging process is what made ARC payments so likely in the early years of the program (2014/15 – 2016/17).
Shown in orange is the PLC corn reference price, which is $3.70 for corn. With a low PLC reference price and slow-to-adjust ARC MYA benchmark, there isn’t a clear favorite for the 2022 decision. For 2022, Kansas State currently projects an MYA corn price of $5.20 per bushel, which is well above the PLC reference price and ARC Benchmark price. As we’ll show in the next section, it will take big losses to trigger payments for either program. With corn production costs approaching $5.00 per bushel, neither program provides much of a safety net.
While the graphs are not shown in this article, the trends are similar for soybeans and wheat. For soybeans, the 2022/23 MYA Benchmark price is $9.12, compared to a current MYA average projection of $12.62. Keep in mind a soybean PLC payment has never been made, even during the trade war lows.
With wheat, the estimated 2022/23 expected MYA price is at $8.23, the highest in more than a decade and well above the PLC reference prices and MYA Benchmark of $5.50. Even when considering the outlook for 2023, the MYA Benchmark price still isn’t expected to increase above the $5.50 minimum.
Potential ARC-CO Payments
Figure 2 illustrates how ARC-CO payment potentials have trailed lower over time – or fell off the proverbial government cliff. More specifically, the data show the highest yield that would trigger an ACO-CO payment. For 2022/23, the Kansas State prices estimates were used. Across all three crops, yields would have to be below 60% of the benchmark period to trigger a payment.
Even the USDA’s latest farm income projections reflect declining ARC and PLC payments. For 2022, combined program payments are estimated at $280 million (based on the elections and production of 2021 crops). For context, ARC and PLC programs paid out an annual average of $6.1 billion from 2015-2020, compared to an average of $5.7 billion annually from the fixed direct payments program (2010-2013).
Short of a production or price disaster – which is what it would take to trigger significant ARC and PLC payments in 2022 – the Title 1 commodity payments will likely remain near historic lows. While the payments were technically zero in 2014, this was largely driven by government accounting and the previously mentioned calendar problem.
Wrapping it Up
It’s an interesting time in farm policy. Although government payments broke all-time records in 2020, traditional Farm Bill programs have been paying out less. While some of this is good news in terms of higher commodity prices, these risk management programs are currently offering very little support, even as costs of production soar.
The point here isn’t to argue one way or another about ARC versus PLC or, more broadly, government payments. Instead, the goal is to encourage producers to think about the changes and potential implications for their operations. Furthermore, policymakers will also be reviewing these programs, as well as all the ad hoc programs, as efforts on the 2023 Farm Bill get underway.