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Agricultural Risk Coverage and Price Loss Coverage in the 2018 Farm Bill

This presentation provides an overview of the Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC) programs in the 2018 Farm Bill. It covers eligibility criteria, payment limits, payment rates, and changes from the 2014 Farm Bill. Resources and tools for farm management are also included.

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Agricultural Risk Coverage and Price Loss Coverage in the 2018 Farm Bill

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  1. Agricultural Risk Coverage and Price Loss Coverage in the 2018 Farm Bill Ben Brown, Mary Griffith, and Chris Zoller Department of Agricultural, Environmental, and Development Economics

  2. Logistics This presentation and materials will be available shortly at http://go.osu.edu/FarmManagement Ohio State has several resources to assist producers with farm management related topic at https://farmoffice.osu.edu/home

  3. This presentation and tools are available at http://go.osu.edu/FarmBill2019

  4. 2018 Market Facilitation Payments Reminder: 2019MFP Applications are due December 6, 2019 2019 Ohio Market Facilitation Payments Effective Rate is 50% of Value Below Market Facilitation Program Payments 2018 Round Rounded to Million Dollars

  5. Change in MFP Payments 2019 2018 • Paid on a per Acre Basis • County Level Rates based on National Commodity Level Impacts • 3- year production record • Higher Payment Limits $250,000 • Exemption of the Adjusted Gross Income of $900,000 if 75% of income comes from farming operation. • Possibility of Three Segments • Paid on a per Bushel Basis • National Commodity Impact Rates • 1-year production record • $125,000 payment limit • Producers can retroactively ask for money they would have received from the Adjusted Gross Income Limit • Made in Two Segments

  6. 2019 Planting Season: Frustrating 2018 Planting Season June 15, 2018 2019 Planting Season June 15, 2019 Image Source: Wall Street Journal

  7. USDA Acreage: Resurvey Data Source: USDA-NASS

  8. Acreage: Makes Sense • We planted 40 mil. acres of corn in June. • Were we going to plant 101 mil. Acres of corn? • For what ever reason, people kept planting. • Yield Penalty? Data Sources: USDA-NASS Aug. Crop Production Report, August 12 and USDA-FSA Acreage Report, August 22, 2019

  9. Acreage: Corn as a Cover Crop • Farm Service Agency • Clearly Does Include Prevent Plant aces • All cover crops are grouped together under the name “Cover Crop” • Can be counted as both a prevent plant acre and a Cover Crop Acre- Double Counting National Ag Statistics Service Does not include Prevent Plant acres If corn is planted as a cover crop it is included in corn planted acres Since cover crops are not for grain they are omitted in harvest acres- similar to silage Data Source: USDA-FSA

  10. Corn Acreage: Harvest Acre Potential Harvested We normally see around 8 million acres difference in the two Data Source: USDA-NASS

  11. Corn Yield: The Uncertain Variable USDA August: 169.5 bu./acre Avg. Trade Guess: 164.9 bu./acre Linear Trend- Comes out to 170.1 bu./acre Data Source: USDA-NASS

  12. Corn Yield: Yields softening,but still variable 2019 Corn yield by State- September 1, 2019 (Change from Previous Forecast) Data Source: USDA-NASS Aug. Crop Production Report

  13. Soybeans: Greater Uncertainty than Corn 2019 Soybean yield by State- September 1, 2019 (Change from Previous Forecast) Data Source: USDA-NASS Aug. Crop Production Report

  14. Farm Bill: Thing that make the decision hard now • Yields and Acreage- national and local • Trade Deals and Resolutions • South American Production Starting 2019/20 • Demand Structure

  15. 2018 Farm Bill: Decisions to be Made Title 1 of the 2018 Farm Bill allows each Farm Service Agency farm to re-enroll in a commodity program • March 15 is an important day! If a producer does not enroll in a farm bill program for crop year 2019 by March 15, 2020: • NO payment will be made for 2019 • The 2020 decision defaults to the decision made during the 2014 Farm Bill A yield update each FSA farm is available for the 2020 Program Year and starts October, 2019 • This decision is to be made by the property owner(s)

  16. 2018 Farm Bill: Timeline

  17. 2018 Farm Bill: Decisions to be Made Elect a Federal Commodity Program Price Loss Coverage Agricultural Risk Coverage- County Agricultural Risk Coverage- Individual Paid on 85% of Base Acres Paid on 85% of Base Acres Paid on 65% of Base Acres Supplemental Coverage Option Paid on COMBO Purchased Planted Acres Data Source: USDA-FSA, ARC and PLC Landing Page

  18. 2018 Farm Bill: What Changed from 2014? Really Not a Lot on Programmatic Side • Annual Enrollment in 2021 • Yields are now based first off of crop insurance instead of NASS Surveys • Trend Adjusted Historical Yields and Higher Plug Yields • Payments will now be on location of the crop not administrative county. • Increases to Marketing Loan Rates • Irrigation and No-Irrigation Rates

  19. Things that you probably aren’t as happy about • No Base Acre Update • Ifyou didn’t have base before- you still don’t have base. • If your Acres have been planted to grass, pasture, idled, or fallowed from Jan. 1 2009-Dec. 31, 2017 then no ARC or PLC • But can enroll in the Grassland Conservation Initiative program and receive $18/acre. • Still the Government Sequester at 6.2%

  20. 2018 Farm Bill: Agricultural Risk Coverage Revenue Protection Program • Makes payments if per acre revenue falls below 86% of a moving benchmark • No required to plant the crop as payments are made on base acres. Agricultural Risk Coverage – County • 5 year Olympic average of County Yields and Marketing Year Average Prices • Can be elected commodity by commodity Agricultural Risk Coverage- Individual • 5- year Olympic avg. of weighted per-acre revenues • Individual Yields • Elected for all commodities at the farm level Payments are maxed at 10% of benchmark revenue

  21. 2018 Farm Bill: Agricultural Risk Coverage Benchmark Revenue Guaranteed County Revenue County Pmt. Rate: Revenue Guarantee minus Actual Revenue 5 yr. Olympic Average Marketing Price or Reference Price Actual County Revenue 86% of the Benchmark Revenue National Marketing Average Price Farm Payment: Payment Rate X base acres X 85% Reduced by Sequester X 5 yr. Olympic Average County yields X County yields

  22. 2018 Farm Bill: Agricultural Risk Coverage Example for 2019: Current Year Yield 150 bu. and current price= $3.30/ bu. One Year Lag Disclaimer- Historical Prices are not correct for illustration purposes

  23. 2018 Farm Bill- Price Loss Coverage Program Still protects against price drops under an effective reference price. When the market price falls below the reference price a payment is triggered If average prices fall below the Marketing Loan Rate- then MLR is used instead

  24. 2018 Farm Bill: Marketing Loan Rates Loan rates are still below expected market prices, but improves ability to use program as a marketing tool by providing more cash at harvest. However, higher loan rates also lower the maximum payments under the PLC program. Perfect scenario is not needing PLC max and utilizing higher loan rates

  25. 2018 Farm Bill: Reference Price Escalator The 2018 Farm Bill created a reference price escalator provision that allows the reference price to increase to 115%. The price between the reference price and the max is called the effective price. • The effective price is set on 85% of a 5-year Olympic moving average of previous prices • Need high prices relative to reference price to get a higher effective price • Higher effective price = higher payments

  26. 2018 Farm Bill: Yield Updates The Owner or Owners Decision not the Producers • They do not have to update program yields even though it would be to their advantage to do so. • When payments are triggered and if elected into PLC- higher PLC payments • Rental rates and values could increase with higher payments • This decision last through the remainder of the 2019 Farm Bill and will be available for future farm bills if applicable • Producers can sign for Owner if they have Power of Attorney • All owners must agree to make the yield update Producers can update their yields no matter want commodity program they elect.

  27. 2018 Farm Bill: Yield Update Producers will have the option to update PLC yields in 2020. • Based on a formula using historical yields from 2013-2017 and 2008-2012. (Some producers might see an increase in yields and therefore payments) Formula: 90% of the FSA Farm Yieldsimple average from 2013-2017 excluding any years that the crop year was zero or not planted. reduced By a ratio of the corresponding 2008- 2012 National Yields Ratio: Average of 2013-2017 National Yield divided by 2008- 2012 National Yield The Ratio can not be below 0.9 or above 1

  28. Simplified Version! 5 Year Simple Average of Verifiable Farm Yields (2013-17) X 0.90 X Update Factor Updated Yields > Current PLC Yield= Update

  29. 2018 Farm Bill: Yield Update Ratios Here is the Math Calculation for you- per commodity!

  30. 2018 Farm Bill: Yield Update Example 5-Year Average of Farm Yields x 90% x Commodity Ratio Corn RMA Yields for Farmer Smith 2013- 160 bu. 2014- 170 bu. 2015- 165 bu. 2016- 45 bu. 2017- 160 bu. Simple Average= 160 bu./ Acre Corn Ratio= 0.90 • If one of these years the Farmer Smith did not plant corn- it would be a simple average of the remaining years • Low Year can be replaced with a substitute yield 160 bu./Acre x 90% x 0.90= 130 Bushels If Farmer Smiths previous PLC yield was less than 130- he or she should update to a yield of 130

  31. 2018 Farm Bill: Yield Update Tool

  32. Decision Time Payments will be made based on the county where the base acres are physically located

  33. Decision Time • Projection- 15% Yield Reduction in 2019 • Is that reasonable? • If Yields in Champaign aren’t that low or the national price increases- it would move above guarantee. Projection*

  34. If we get a big enough price rally- It could knock 2019 out of PLC • However, the 2020 price is concerning to me. Decision Time If looking to maximize government payments- then right now PLC looks to be the program.

  35. Decision Time • Projection- 15% Yield Reduction in 2019 • Is that reasonable? • The Lag year in 2019 keeps the benchmark from dropping one more year. Projection*

  36. What if yields come in low and price goes up? • What if we get a trade deal that substantially increase soybean trade and prices? Decision Time

  37. Decision Time- Soybeans 15% Yield Drop in 2019 30% Yield Drop in 2019 5% Yield Drop in 2019

  38. 2018 Farm Bill: Timeline

  39. The Decision Tools Website Go.osu.edu/farmbill2019 Username: extensiondemo Password: extensiondem0 Credit to University of Illinois *Tool is still in beta phase

  40. The Decision Tools Located at go.osu.edu/farmbill2019

  41. Supplemental Crop Insurance Program (SCO) What is it? • First rolled out in the 2014 Farm Bill to increase crop insurance protection at a cheaper rate. • Covered under the Federal Crop Insurance Program with a premium- similar to COMBO and Yield Insurance products • Separate Administration Fee • Based on typically county revenue or yield benchmark • (Not an individual benchmark like the underlying policy) • Only available on individual policies not area • Enrollment Period- Ends March 15 • (Similar to spring planted crop insurance products)

  42. Eligibility for Supplemental Coverage Option Elect a Federal Commodity Program Price Loss Coverage Agricultural Risk Coverage- County Agricultural Risk Coverage- Individual Paid on 85% of Base Acres Paid on 85% of Base Acres Paid on 65% of Base Acres Supplemental Coverage Option Paid on COMBO Purchased Planted Acres Data Source: USDA-FSA, ARC and PLC Landing Page

  43. Purpose of Supplemental Coverage Option • Provides additional coverage on top of an already existing individual policy • But not area or index policies • Allows coverage to equal 86% • Uses the same coverage as your underlying policy (i.e. yield or revenue) • Designed to make PLC comparable to ARC-CO. • ARC-CO coverage range is 76%-86% • Only available on PLC elections

  44. SCO and Federal Crop Insurance

  45. Supplemental Coverage Option- Premiums Example: Union County Ohio, Corn, APH- 166, 160 Acres, $4.00 Projected Price, Revenue Protection, Non-Irrigated Source: FAST Tools University of Illinois Make sure to consult with your crop insurance agent as premiums change based on multiple indicators

  46. Supplemental Coverage Option- Premiums Why is 70% RP with SCO less than 85% RP? • Chance of a payment AreaYields are traditionally less variable than farm-level yields and so have a lower risk and premium. • Premium assistance rates provided by the federal government also differ (SCO premium assistance is 65%) Source: USDA Risk Management Agency Summary of Business

  47. SCO Nuts and Bolts Possibilities • RP and SCO both make payments • (drought years like 2012) • RP makes a payment and SCO does not • Farm has worse yield comparable to history than the area historical comparison • SCO makes a payment and RP does not • Price declines, but not low enough to trigger RP payment. (Low coverage levels) • Neither trigger a payment • Ohio crop insurance policies the last few years

  48. Pros and Cons of SCO Producer Currently with 70% or 75% (Less than max) Pro: Get county-level coverage up to 86% at a lower cost. Con: Adds additional costs to premium for more coverage than usually bought Producer Currently with 80% RP Coverage Pro: Reduces the Premium to get 86% coverage Con: Gives up the top end of farm-level coverage and replaces it with typically less volatile county-coverage

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