FARM BILL CHOICES: WHAT SHOULD CROP FARMERS DO?

Paul D. MitchellAssociate Professor, Ag and Applied Economics

Farm Bill Update for Crop Producers

November 11, 2014 Elmwood and Alma, WIEmail pdmitchell@wisc.edu Office: 608-265-6514

http://www.aae.wisc.edu/pdmitchell/extension.htm

Follow me on Twitter: @mitchelluw

Goal Today

• Overview how PLC (+SCO) and ARC work• General rules of thumb to guide your decisions• Decision aids you can use to work through your specific farms

Farm Safety

Net$15 B

Risk Management(field & specialty crops)

$8.4 Billion

Commodity Programs(field crops)

$5.9 Billion

Disaster Assistance

(crops & livestock)

$0.8 Billion

Supplemental Revenue Assistance Payments

Program (SURE)

Ad hoc disaster payments

Emergency Assistance for Livestock, Honey Bees, and Farm-Raised Fish Program

Emergency Disaster Loans

Tree Assistance Program

Livestock Forage Disaster Program

Livestock Indemnity Program

Crop Insurance$8.3 Billion

Non-insured Disaster Assistance (NAP)

$0.1 Billion

Direct Payments (DP) $4.9 Billion

Counter-Cyclical Payments (CCP) $0.559 Billion

Average Crop Revenue Election (ACRE) $0.311 B

Marketing Assistance Loans $0.225 B

Loan Deficiency Payments (LDP) $0.225 B

OR

Average Annual Outlays Under 2008 Farm Bill

Source: http://ncseonline.org/NLE/CRSreports/10Oct/R41317.pdf

Farm Safety

Net$15 bil

Risk Management(field & specialty crops)

$8.4 bil

Commodity Programs(field crops)

$5.9 bil

Disaster Assistance

(crops & livestock)

$0.75B

Supplemental Revenue Assistance Payments

Program (SURE)

Ad hoc disaster payments

Emergency Assistance for Livestock, Honey Bees, and Farm-Raised Fish Program

Emergency Disaster Loans

Tree Assistance Program

Livestock Forage Disaster Program

Livestock Indemnity Program

Crop Insurance$8.3B

Non-insured Disaster Assistance (NAP)

$0.1B

Direct Payments (DP) $4.9B

Counter-Cyclical Payments (CCP) $0.559B

Average Crop Revenue Election (ACRE) $0.311B

Marketing Assistance Loans $0.225B

Loan Deficiency Payments (LDP) $0.225B

OR

Average Annual Outlays Under 2008 Farm Bill

Source: http://ncseonline.org/NLE/CRSreports/10Oct/R41317.pdf

$9.0B (+ 6%)

$4.4B(-25%)

$13.4B(- 10%)

2014

No Change

No ChangeNo

Change

New Commodity Support Programs• Price Loss Coverage (PLC)

• Establishes a price floor based on national marketing year average price

• Essentially Counter-cyclical payments, but higher prices• Can buy Supplemental Coverage Option (SCO) crop

insurance as an add-on option [later]• Agriculture Risk Coverage (ARC)

• Establishes a revenue floor• Essentially a new and improved ACRE program• 1) County revenue by Crop (County ARC or ARC-CO)• 2) Individual revenue for Whole Farm (ARC-IC)

Multi-Step Process with Different Deadlines

• Step 1: Keep or Update Yields• Step 2: Maintain or Reallocate Base Acres• Step 3: Elect PLC/ARC-CO/ARC-IC By 3/31/2015• Step 4: Consider SCO By 3/15/2015• Step 5: Enroll in PLC/ARC By Summer 2015• Farmers and land owners will have to choose PLC,

County ARC by Crop or Individual ARC for Whole Farm• Irrevocable choice for 2014 – 2018 crop years

• Plenty of time to make decisions

By 2/27/15

Updating Yields and Base Acres• Land owners and renters should have received a letter

this summer• Reported current base acres and yields by crop for each

FSA farm• Had 60 days to report errors

“If you determine that any of the data is incorrect, incomplete or missing, you must contact the county office where the farm is administratively located to provide documentation of your acreage as soon as possible, but no later than 60 days after receipt of this letter.”

If correct data, do nothing!

Updating Base Acres• Base acres haven’t been updated since 2002 Farm Bill,

based on 1998-2001 plantings• 2 Options

• 1. Keep current base acres• 2. Keep same total base acres, but update shares to

match 2009-2012 average shares• Recommendation: Choose option that puts more acres

into Corn: crop with the highest expected payments• Pierce and Buffalo Corn > Soy > Oats

• Farm cannot increase total base acres, only reallocate total based on acreage shares planted during 2009-2012

• Existing base acres: 57.0 soybean and 85.8 corn• 2009-2012 Average Planted Acres: 81.45 corn, 67.15

soybeans, and 4.75 oats• Farm shift: less corn, more soybeans, added oats• Farm Payment Yields are quite low for Iowa: 32 bu/ac for

soybeans and 109 bu/ac for corn• Should this farm update Base Acres? (Yields?)

Base Acre Updating Tool• http:/www.fsa.usda.gov/Internet/FSA_File/evaluate_arc_plc.pdf • Scroll down, hit link, zip file to get Excel spreadsheet

• Alternative enter data into an online tool: http://fsa.usapas.com/

• Alternative enter data into an online tool: http://fsa.usapas.com/

Updating Payment Yields• Payment yields haven’t been updated since 2002 Farm

Bill, based on 1997-2001 yields• 3 Options• 1. Keep current yields• 2. Update yields • 3. Take FSA option if no yield data or don’t want to report• Recommendation: Choose option that gives you the

highest Program Yields • Need production data to document yields, if insufficient

records, get substitute yield = 75% county average

Yield Updating• 1. Keep current yields• 2. Update yields to 90% of your 2008-2012 average, with

75% county average as “substitute yield” if your actual yield lower

• 3. Take FSA offered option if no yield data = 75% of 90% of county average

• http://www.fsa.usda.gov/Internet/FSA_File/plc_subyields_web.xls

Substitute Yields by CropCounty Corn Wheat Soybeans OatsWaupaca 97.0 41.0 30.0 38.0Waushara 103.0 39.0 28.0 39.0Winnebago 97.0 50.0 32.0 49.0

• Alternative enter data into an online tool: http://fsa.usapas.com/

• Alternative enter data into an online tool: http://fsa.usapas.com/

• Automatically uses substitute yields for your county

Multi-Step Process with Different Deadlines

• Step 1: Keep or Update Yields• Step 2: Maintain or Reallocate Base Acres• Step 3: Elect PLC/ARC-CO/ARC-IC By 3/31/2015• Step 4: Consider SCO By 3/15/2015• Step 5: Enroll in PLC/ARC By Summer 2015• Recommendations • Choose option that puts most Base Acres into Corn• Choose option that gives you the highest Program Yields

Questions?

By 2/27/15

New Commodity Support Programs• 3 Options

1) Price Loss Coverage (PLC)• Agriculture Risk Coverage (ARC)

2) County ARC (ARC-CO) by crop

3) Individual ARC (ARC-IC) for whole farm

• General Rule: Most farmers will find County ARC the best option

• Are you an exception?

Price Loss Coverage (PLC)

• Same as Counter-Cyclical Payments, but with higher “Reference Prices”• Corn $3.70, Soybeans $8.40, Wheat $5.50, and Oats $2.40

• If National Marketing Year Average Price is less than the Reference Price, PLC payments made• PLC PaymentRate = ReferencePrice – MYAPrice • PLC Payment = 85% x BaseAcres x PaymentYield x PLC PaymentRate

• Option to buy Supplemental Coverage Option (SCO), a new type of crop insurance [later]

Simple PLC Example• Suppose National Marketing Year Average Price of corn is

$3.50• The corn Reference Price is $3.70, so PLC Payment Rate

= $3.70 – $3.50 = $0.20/bu• If have 100 corn Base Acres with a Payment Yield of 110

bu/ac, then your PLC payment would be• 85% x 100 ac x 110 bu/ac x $0.20/bu = $1,870

Supplemental Coverage Option (SCO)

• If you sign up for PLC, you have the option to buy SCO: allows you to insure part of your RP/YP deductible with a county policy (ARP/AYP)• Layer individual & county coverage• Can’t exceed 86% total coverage

• Add SCO to an RP policy to increase coverage up to the 86% maximum• SCO will not pay until county loss exceeds 14%• 65% SCO premium subsidy (farmer pays 35%)

• SCO available in 2015, only if choose PLC

Possible outcomes with RP plus SCO1. SCO pays, but not RP

2. RP pays, but not SCO

3. Both SCO and RP pay

4. Neither SCO nor RP pays

Agriculture Risk Coverage (ARC)• County ARC payments made if Actual County Revenue is

less than County Guarantee• County Benchmark = 5-Year Olympic Average County

Yield x 5-Year Olympic Average MYA Price• Use PLC Reference Price if higher than MYA Price• Use 70% County T Yield if higher than County Yield

• County Guarantee = 86% of County Benchmark • Actual Revenue = County Average Yield x MYA Price• ARC Payment Rate = County Guarantee – Actual County

Revenue, up to 10% of County Benchmark • ARC Payment = 85% x Base Acres x ARC Payment Rate

Unofficial 2014 Corn Example St. Croix County

Year Yield Price2013 85.4 4.462012 165.6 6.892011 164.6 6.222010 172 5.182009 167 3.55

• Olympic Average Yield = 165.7• Olympic Average Price = 5.29• ARC County Benchmark = 5.29 x 165.7 = $876.55• ARC Guarantee = 86% x $876.55 = $753.83• Maximum ARC Payment = 10% x $753.83= $75.38

Unofficial 2014 Corn Example St. Croix County

• Hypothetical Example: Suppose 2014 County ARC Guarantee is $753.83 for corn in St. Croix County

• Suppose 2014 actual USDA yield in St. Croix County is 160 bu/ac and 2014 MYA corn price is $3.50

• Actual revenue is 160 x 3.50 = $560/ac, triggers payment• ARC Payment Rate = 753.83 – 560.00 = $193.38/ac, but

exceeds max payment, so ARC Payment Rate = $75.38• ARC Payment = 85% x BaseAcres x ARC Payment Rate• ARC Payment = $75.38 per corn base acre• ARC pays well in times of long-term declining prices due

to 5-year Olympic averages

Main Point

• County ARC is complicated and varies by county• Main idea: like county-level revenue insurance with an 86% coverage level

• Difference• Uses 5-Year Olympic Average prices and yield to determine guarantee

• Uses national marketing year average price as the actual price

Decision Aids: U of IL with USDA Funding http://fsa.usapas.com/

ARC-CO

SCO

PLC

St Croix County

Buffalo County

ARC-CO

PLC + SCO

Pepin County

ARC-CO

PLC + SCO

Dunn County

ARC-CO

PLC + SCO

Eau Claire County

ARC-CO

PLC + SCO

Comparing Average ARC Payments ($/Ac) Across Counties (with CBO prices)

Buffalo Pepin Pierce Dunn Eau Claire

St Croix0

5

10

15

20

25

30

35

40

CornSoybean

Main Point• When choosing Base Acre Reallocation

• Corn > Soybean ≥ Wheat >Oats• Get as many Corn base acres as you can

• What about County ARC versus PLC?• Depends on prices use/assume, but generally ARC does better

• Tool has 3 options for average price• 1) CBO futures prices: higher• 2) USDA WASDE prices: lower• 3) FAPRI price estimates: just below CBO

CORN

SOYBEAN

ARC-CO

PLC + SCO

PLC + SCOARC-CO

PLC + SCO

ARC-CO

ARC versus PLC for Corn and Soybean• If your focus is on total payments, which is better depends on where you think crop prices are going over the next 5-6 years

• If you are optimistic on corn prices, ARC does better than PLC + SCO: (Pierce ~$15)

• If you are pessimistic on corn prices, PLC + SCO does a better than ARC: (Pierce ~$3)

• ARC on soybean always does better than PLC + SCO by $5-$10/ac

• Similar trends for corn and soybeans in different counties, but dollar amounts differ

ARC versus PLC• Corn & Soybean: ARC much higher than PLC if average to

high prices, only a little less than PLC if low prices• If PLC beats ARC, on average it will not be by a lot

• For most farms, ARC will do just fine and not be much less than PLC payments if PLC turns out to be better

• Note: PLC also requires buying SCO too: more money up front and more paperwork

• Wheat/Oats: PLC seems better: about same as ARC if average to high prices, much better than ARC if low prices• Reduce crop insurance coverage level and rely more on

SCO to increase payments and reduce insurance costs?• Can mix ARC and PLC across crops if you want

Individual ARC• Based on revenue from all program crops as a whole for

an FSA farm, not crop by crop• Create a whole farm revenue guarantee and receive

payment if actual revenue less than guarantee• 65% of the payment gap, up to 10% of County ARC

guarantee• Like 86% whole-farm revenue coverage • Acreage-weighted average of each crop’s revenue• Use farm historical yields and national prices, but use

Olympic averages• Complicated and detailed program: if interested, use the

tool and try your farm details and see what you get

Multi-Step Process with Different Deadlines

• Step 1: Keep or Update Yields• Step 2: Maintain or Reallocate Base Acres• Step 3: Elect PLC/ARC-CO/ARC-IC By 3/31/2015• Step 4: Consider SCO By 3/15/2015• Step 5: Enroll in 2014 PLC/ARC By Summer 2015

By 2/27/15

Quick Summary• Relax, plenty of time to make decisions

• 2/27/15 for base acre/yield updates• 3/31/15 for PLC/ARC election choice• 3/15/15 if want SCO crop insurance with PLC• Summer 2015 to signup

• Start playing with the tool: http://fsa.usapas.com/• For most farms

• 1) Updating yields will be worth it• 2) Updating base acres if you can get more corn or

soy/wheat base acres will be a good idea• 3) County ARC a fine selection for corn & soybeans,

but consider PLC + SCO for wheat/oats

Quick Summary• More presentations will be occurring around the state

• Expect/watch for announcements• We are doing training sessions with several county agents

so they can do presentations and answer questions• Focus will be on the decision tool http://fsa.usapas.com/

• Great outreach information• http://farmbilltoolbox.farmdoc.illinois.edu/

FarmDoc Webinars• http://farmbilltoolbox.farmdoc.illinois.edu/webinars.html

Thanks for Your Attention!

Questions?

Paul D. MitchellAgricultural and Applied EconomicsUniversity of Wisconsin, Madison, WIpdmitchell@wisc.edu 608-265-6514http://www.aae.wisc.edu/pdmitchell/extension.htmFollow me on Twitter: @mitchelluw

SCO sold for winter wheat earlier this fall

• Could sign up for wheat SCO this fall

• Problem: Can’t sign up for PLC to be eligible for SCO

• Have until Dec 15th to make final decision, which is still before PLC deadline

• Corn and soybeans next spring: can signup for SCO, then decide on PLC/ARC signup by March 31

Counties with SCO available for winter

wheat