Corn ARC-Co and PLC Forecast Payments: Look Carefully Before Choosing!

Jim Pease, Professor, Department of Agricultural and Applied Economics, Virginia Tech
*this post has been updated since its original posting on Friday, February 27

I received a question yesterday about choosing PLC vs ARC for the corn commodity program (for explanation of these programs, see http://www.fsa.usda.gov/FSA/webapp?area=home&subject=arpl&topic=landing). Farmers want a straight answer to the question, “Which program should I choose?’ It’s a good question, but doesn’t have an easy answer, since some critical data is as yet unknown. Recently available information may alter the decision for some producers. The message conveyed below is, “Don’t base your ARC/PLC choice only on expected 2014 payments.” I’ll show estimated corn ARC/PLC payments for King William, Northampton and City of Suffolk to demonstrate the message.

Price loss coverage (PLC) payments are triggered by market year average (MYA) national prices below a fixed reference price throughout 2014-2018, which for corn is $3.70 per bushel of PLC payment yield (CC yield). The 2014 MYA corn price is not fully known until September 2014, but the January & February 2015 Congressional Budget Office (CBO), Food and Agricultural Policy Research Institute (FAPRI) and USDA forecasts are, respectively, $3.50, $3.61 and $3.65 per bushel (see figure below).

corn

Each 2014 price would trigger a PLC payment, but they would in general be small, depending upon the farmer’s payment yield. The table below indicates the PLC payment per payment acre (85% of a corn base acre) with the USDA 2014 MYA price forecast ($3.65) and the county average PLC payment yield (before updates). Note that despite a wide range of payment yields, the 2014 expected PLC payments are very similar. As prices move lower in 2015 under the USDA forecast, payments increase to an average of $14-$17 annually per payment acre over 2014-2018.

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The calculation of Agricultural Risk Coverage-County (ARC-CO) payments is more complex. The ARC-CO Benchmark Yield is the average of the past 5 years of county yield per planted acre, discarding the lowest and highest yield. The ARC-CO Benchmark Price is the average of the previous 5 MYA prices, replacing any lower price with the Reference Price, and discarding the lowest and highest price. The Benchmark Yield times the Benchmark Price time 86% is the ARC-CO guaranteed revenue. The county yield per planted acre times the MYA price equals the actual county revenue. If the actual revenue is less than the guaranteed revenue, ARC-CO pays on 85% of base acres times the maximum of either the difference between actual and guaranteed revenue or 10% of the guaranteed revenue.

NASS recently released 2014 county corn data, which provides new information to estimate 2014 ARC-CO payments. The figure below, using the University of Illinois “ARC-CO PLC Comparison Tool” spreadsheet indicates both the expected 2014 PLC and Ahelp

The ivory-colored cells indicate user input. Besides the Suffolk average PLC payment yield (86 bushels/acre), I’ve entered the 2014 county yield per planted acre, and the USDA estimated MYA prices for 2014-2018. For the 2015-2018 county yields, I’ve simply duplicated the Benchmark Yield for that year.

Suffolk achieved a county yield per planted acre of 110 bushels, significantly above the 2014 Benchmark Yield of 89 bushels, which would tend to make ARC-CO payments smaller. However, the 2014 forecast MYA price of $3.65 is far below the Benchmark Price of $5.29, so an ARC-CO payment results. The 2014 expected ARC payment for Suffolk is only $3 per payment acre, because the ARC-CO guarantee ($405) is greater than the actual county revenue ($402). Since expected PLC payment is $4/payment acre, should the producer choose PLC over ARC-CO? Not necessarily. In 2015 and 2016, if county yields are equal to the expected Benchmark yields, the high earlier MYA prices would generate significant ARC-CO payments. Over 2014-2018, expected ARC-CO payments would average $17 per payment acre, while PLC payments would average $14 per payment acre. The important issue here is to look at the average payments over 2014-2018 rather than focusing only on 2014 when making your ARC-CO vs. PLC choice.

The table below indicates expected 2014-2018 PLC and ARC-CO payments for King William, Northampton and City of Suffolk, using current USDA price forecasts, 2014 county yields, average PLC payment yields and 2015-2018 county yields at the Benchmark Yield level. Note that these comparisons are not true for any particular farm, but do provide a good picture of relative expected payments.

 

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Remember that the 2014 MYA price is still uncertain. The February USDA forecast for 2014 is not exactly $3.65, it is a forecast range from $3.40-3.90. Over the 5 year period, ARC payments are less likely as the high prices of 2010-2012 roll out of the calculation of county guarantee. And PLC payments are $0 if the MYA prices are above $3.70 (which USDA predicts for 2015-2018). All in all, the producer with high payment yields and concerns about plummeting market prices may want to choose PLC and buy yield protection with crop insurance. The producer with low payment yields and concerns that there will be 1 or 2 county yield failures over 2014-2018 may want to go for ARC.

1 http://www.farmdoc.illinois.edu/pubs/FASTtool.asp?section=FAST , under “Risk Management”

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