Dr. Jim Pease, Professor and Extension Economist
February 27, 2015 is the last day that landowners or producers with landowner proxy can choose to re-allocate 2014-2018 farm program acres or update program payment yields. The deadline is fixed and will not be extended, and the choices made are irrevocable until after 2018. It is very important for both parties to evaluate options and take action now on desired options.If you are a landowner but cash rent your farmland, then it’s important to understand that your renter cannot make the program acre re-allocation or payment yield update decisions. If no action is taken, then existing program acres and payment yields will be continued through 2018. Since producers, not landowners, receive any commodity program payments, why should you care about these choices? First, the commodity program acres and yields form part of the market value of a farm. A farm with expected large commodity program payments is worth more on the market than a similar farm without program benefits. It is in the interest of the landowner to maintain or enhance the value of his/her farmland. Second, after several years of booming crop prices, producers are now facing low prices for the foreseeable future. According to 2014 Virginia Cooperative Extension enterprise budgets (http://pubs.ext.vt.edu/category/enterprise-budgets.html), cash rent costs for corn and soybeans can be 15-25% of total variable costs, and will be increasingly unaffordable to cash renting producers. Landowners must choose between reducing crop rents or taking joint owner/producer action that promises potentially higher farm program payments. The figure below shows the most recent USDA forecasts of national crop year prices.
I’ll illustrate the potential impact of inaction with a simplified example. Suppose that a King William County farm has 100 cropland acres, all of which are currently soybean base acres. However, the producer has chosen to plant corn grain on the farm for the years 2009-2012 (the relevant years for base reallocation). So the landowner (hopefully in collaboration with the producer) has the choice either to keep 100 soybean base acres or reallocate the farm to 100 corn base acres. This choice should not be made without considering existing soybean payment yields and potential new corn payment yields. The existing soybean payment yield was established prior to 2002 and is 28 bushels/acre, about 90% of the average soybean payment yields in King William County. However, corn yields over 2008-2012 (the relevant years for payment yield update) have averaged 137 bushels/acre, and the corn payment yield update option would be 123.3 bushels/acre (16% higher than the average King William County corn payment yield). So here are the program acres and yield choices:
So which option should the landowner choose? His/her decision will directly affect any farm program payments received by the renter, so let’s look at the consequences of the landowner’s choice. After the base reallocation and yield update decisions are made on or before February 27, the producer must choose whether to elect the Agriculture Risk Coverage (ARC) or Price Loss Coverage (PLC) program options. ARC provides payments in years of “shallow” revenue losses, and comes in two flavors: county-based and farm-based revenue protection. In this case, we’ll only compare ARC-CO (county) and PLC, which generally promise higher payments than ARC-IC (individual coverage). Given USDA historical prices and county yields plus forecasts of corn and soybean crop year prices and expected county yields, the following figure illustrates the alternative possible payments from the King William farm.
In this simplified example, the landowner’s choice to not update yields and reallocate base acres limits the producer’s choice to soybeans ARC-CO (expected 2014 payments $2,000) or PLC (expected 2014 payments $0). If instead the landowner cooperated with the producer to choose the reallocated corn base acres and updated corn payment yields, then the producer could select corn ARC-CO (expected 2014 payments $5,800) or PLC (expected 2014 payments $3,400). The payments are not very large, but ARC-CO payments pay for most of the cropland rent and could help a cash-strapped producer in a lean crop year 2015. It is very important for the landowner and producer to work together so as to provide the greatest flexibility for these farm program choices.
This example is VERY simplified to illustrate the effects of landowner and producer choices. The payments are not certain and depend on currently unknowable crop year prices and county yields. Nevertheless, it is strongly recommended that landowners and producers communicate and make choices together during these last few days of base acre reallocation and yield update choices.