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2019 Decision Time: ARC vs PLC

Frontier Farm Credit and Farm Credit Services of America (FCSAmerica) are co-sponsoring a five-part webinar series, Two Economists and a Lender. The third webinar, featuring Agriculture Economic Insights (AEI) co-founders David Widmar and Brent Gloy and Melissa Elstermeier, a financial officer with FCSAmerica, focused on ARC vs. PLC ahead of Farm Program signup. Register for our next free webinar, Working Capital, on September 26 at 12:30 p.m. CDT.

Below are highlights from their discussion, as well as a link to the full webinar.


Farm Program signup for the 2019 and 2020 crop years begins September 3. But producers have until March 15, 2020, to choose between ARC (revenue coverage) and PLC (price coverage). The experts advised taking time to fully understand how each impacts your operation before making a final decision.

“There is no rush,” David Widmar said. “By the time we get into 2020, you will know a lot more about your 2019 yields and price prospects.”

Current economic conditions are important to understanding how the features of ARC and PLC will impact your operation. The economists shared a map of counties where ARC payments over the life of the 2014 farm bill were higher or lower than PLC payments. In most of Nebraska, corn ARC performed better than PLC by more than $50 to $100 an acre, Widmar pointed out. “In southern Iowa, however, it performed about $50/acre worse than PLC.” In general, PLC worked better for wheat, he added.

arc-co payments less estimated plc payments

Based on several factors, including tweaks in the 2018 farm bill and several years of poor returns, the Congressional Budget Office believes the pendulum generally has swung from favoring ARC to favoring PLC. USDA’s August projection that 2019 corn will average $3.60 implies a PLC payment of 10 cents per bushel.

However, Widmar cautioned, two bad strategies are repeating your 2014 decision and automatically picking PLC. One reason for this: The change in ARC benchmark yields. Many counties saw corn yields improve by 21 to 40 bu./acre and a substantial number saw their averages rise by more than 40 bu./acre under the current Farm Program.

“That will be a big benefit for some counties that had outstanding yields the past few years,” Brent Gloy said. (See map.) The same is true for soybeans.

“So, particularly if your yield in 2019 is really bad, ARC may be a better choice because of its higher yield guarantee,“ Gloy said.

estimated change in corn arc-co benchmark yields

“Given tight margins, it’s critical we all make good decisions and not leave dollars on the table,” Gloy said. “Use all the risk management options you have and view these government programs as a supplement.”

Watch the full half-hour webinar below.

ARC Payments Again for 2015; Less Likely in 2016

With 2014 prices and county yields both now known, it is possible to run some math/numbers and get an idea which way Agriculture Revenue Coverage-County (ARC-CO) payments may go for 2015, which will be received in 2016, and for 2016, received in 2017. Such government support may be difficult to predict due to its moving parts, but it can become a noticeable help to your cash flow, balance sheet other financial measures.

Nationally, more than 90 percent of corn and soybean farms and base acres enrolled in the program. Some 800,000 farms received 2014 ARC-CO payments totaling $3.9 billion, with $3.3 billion of that being paid on corn base.

Based on prices, it would appear similar payments will materialize for 2015. ARC-CO guarantees are based on a five-year Olympic average, dropping the high and low years. USDA’s actual national average prices for 2014 were $3.70 and $10.10. The $3.70 corn price and $10.10 soybean price will replace 2009’s $3.70 and $9.59 as the low prices that will be dropped from the five-year average – so they won’t affect the guarantee. Alejandro Plastina, Iowa State University Extension economist, calculated payments will be triggered at national average prices for the 2015 crop below $3.92 for corn and $10.32 for soybeans.

The wheat price guarantee will improve slightly because 2009’s $5.50 will drop off and the lowest in the new five years will be 2010’s $5.70. The $5.99 seen in 2014 will increase the Olympic average.

The yield factor could increase revenue guarantee

Keep in mind, however, that payments are based not just on prices but on county yields, again using Olympic averages. USDA has released 2014 county yields, allowing estimates for the 2015 crop year. As shown in the table, Iowa State’s calculations indicate the revenue guarantee will increase in more than half of all counties nationally for corn and beans and in 80% of counties for wheat.

Corn Soybeans Wheat
Average increase/acre $13.95 $8.94 $11.47
% Counties with increase 55 52 80
% Counties no change 22 33 0 (3 counties)
% Counties with decline 23 16 20

 

Shown are average changes, but about 20percent of counties will see a corn revenue increase of more than $41/acre, though soybeans and wheat changes are smaller. Notice in the map that parts of Iowa and Nebraska and Kansas will have steady or lower corn revenue guarantees. For soybeans, more counties will see no change.

Lower 2016 guarantees are very likely

Brent Gloy at Purdue University figures it will take a 2015 corn price of at least $5.18 or more and soybeans $11.30 or more in order to avoid a dropping price guarantee in 2016. “Market-year average prices at those levels seem quite unlikely at this point,” he says. USDA’s projected price ranges for corn and soybeans in its December supply/demand report top out at $3.95 and $9.65. For wheat, it will take a 2015 marketing year price of above $5.99 (which will be the previous low price that is dropped) to avoid a dip in the guarantee. If USDA’s December estimate – with a high end of $5.20 – is correct, wheat’s price guarantee also will be lower in 2016.

ARC isn’t a huge safety net – it added less than 10 percent to the gross revenue for the 2014 crop – but for some it may still help income with some 2015 crop payments in the fall of 2016, Steven Johnson told attendees at this year’s Farm Credit Services of America-sponsored Growing On meetings. “Crop insurance is still the important piece of risk management; it guarantees up to 85 percent of revenue,” he said. “That, combined with structured marketing and fixed-cost reductions, are where to focus heading into 2016 and beyond, especially since ARC is unlikely to play much role after 2015.”

Corn2015ARC change soybeans 2015 ARC

Map source: http://ageconomists.com/2015/12/07/how-did-your-county-do-changes-in-the-arc-co-revenue-guarantees/#more-153494