Caution: Homework required before farm program decisions begin
USDA Secretary Tom Vilsack recently unveiled new programs and online tools to help farmers in the complex decision-making process that growers will face in the coming year.
The new programs, Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC), along with the Supplemental Coverage Option (SCO) and for cotton growers, the Stacked Income Protection Program (STAX) are key farm safety net programs in the 2014 Farm Bill. These new options represent a dramatic shift from direct payments which were made to producers regardless of commodity prices and widely criticized during the farm bill debate.
But these new safety net programs are much more complicated and producers will not have the option of switching in an out of them as crop prices or conditions change. Instead, producers will have through March 31, 2015, to select which program works best for their each individual farm and that decision will apply to the 2014-2018 crop years. If no option is selected, producers will automatically be enrolled in the PLC program.
“With crop prices coming down, these prices may well determine producers’ profitability in the future,” Vilsack emphasized. Payments for the 2014 crop year will not be made until October 2015.
“Farming is one of the riskiest businesses in the world. These new programs help ensure that risk can be effectively managed so that families don’t lose farms that have been passed down through generations because of events beyond their control. But unlike the old direct payment program, which paid farmers in good years and bad, these new initiatives are based on market forces and include county – and individual – coverage options. These reforms provide a much more rational approach to helping farmers manage risk.”
To help farmers choose between ARC (at the county or individual farm level) and PLC, USDA helped create online tools that allow farmers to enter information about their operation and see projections about what each program will mean for them under possible future scenarios. The tools were developed from distinctly different regions of the country and represent a wealth of data that could be used in decision-making for each farm.
For example, the ARC county level program makes payments when county revenue falls between 76% and 86% of the county’s benchmark revenue. The benchmark revenue is based on a 5-year Olympic moving average (removes high and low values) of county yield and U.S. crop year price.
The PLC program makes payments when the U.S. crop year average price is less than the crop’s reference price. The reference price is specified by Congress in the 2014 farm bill and for example, is set at $8.40/bushel for soybeans, $5.50/bushel for wheat, and $3.70 per bushel for corn.
For example, the online tools enable a producer to look at a sample farm or enter data from his or her individual farming operation to see the options for ARC at the county level versus PLC coupled with SCO. Of course, producers will also want to consider how these options work in conjunction with crop insurance purchases.
The new tools, along with a lot of helpful background information, are now available at www.fsa.usda.gov/arc-plc.
To view the Texas A & M group model, visit: http://usda.afpc.tamu.edu/
To go directly to the University of Illinois group model, visit: farmbilltoolbox.farmdoc.illinois.edu or fsa.usapas.com
Vilsack pointed out that there can be significant differences under various scenarios.
“In some cases tens of thousands or hundreds of thousands of dollars,” could be in the balance, depending on commodity prices over the next few years,” the Secretary added.
USDA provided $3 million to the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri and the Agricultural and Food Policy Center (AFPC) at Texas A&M (co-leads for the National Association of Agricultural and Food Policy), along with the University of Illinois (lead for the National Coalition for Producer Education) to develop the new programs.
“We’re committed to giving farmers as much information as we can so they can make an informed decision between these programs,” said Vilsack. “These resources will help farm owners and producers boil the information down, understand what their options are, and ultimately make the best decision on which choice is right for them. We are very grateful to our partners for their phenomenal work in developing these new tools within a very short time frame.”
The first step starts with a decision regarding reallocating base and yields on each farm.
Earlier this summer, FSA sent farm owners and producers letters asking them to analyze their crop planting history in order to decide whether to keep their base acres or reallocate them according to recent plantings. Farm owners could begin visiting their local Farm Service Agency (FSA) offices if they want to update their yield history and/or reallocate base acres as early as Sept. 29, 2014 and running through February 27, 2015. But like all of these farm program decisions, it is best to do your “homework” first.
Nationally, growers will likely find more wheat and grain sorghum base than what has been planted and less corn and soybean base that what has been planted. This is the trend most producers will see, according to an article published by University of Illinois (http://www.farmdoc.illinois.edu/ ), points out Kansas State Extension Economist Art Barnaby, along with Extension Associate Robin Reid and Professor Mykel Taylor.
The K-State trio recently published their own paper on “Reallocating Base Acres,” which includes helpful information about making this decision.
In the FarmDoc report (http://bit.ly/1yxTe8j) the authors compared the number of farms with base acreage in a crop to the number of farms that reported harvested acreage of that crop according to the 2012 Census of Agriculture. They found wheat base to be 18 million acres more than planted acres, while corn and soybean base were 12 and 27 million acres less than planted
The decision to reallocate base acres will revolve around which of 2 likely perspectives the FSA farm owner brings to the decision, noted the FarmDoc authors including Ohio State Economist Carl Zulauf and University of Illinois Economists Nick Paulson, Jonathan Coppess and Gary Schnitkey:
1. “One perspective is to minimize the financial risk associated with production. Given this perspective, the owner will most likely elect the base acre allocation closest to the expected crop mix on the FSA farm during the 2015 through 2018 crop years. Because future plantings are usually more similar to more recent plantings, the 2009-2012 reallocated bases are probably the more likely choice given this perspective.
2. The second perspective is to maximize government payments. Economists have found that this perspective has generally driven past government program decisions by farmers. However, there is a catch this time: ARC and PLC payments are more uncertain than most past government program payments. In short, the decision involves uncertainty as opposed to known government payments. Thus, the ability to maximize government payments will depend upon the FSA farm owner’s ability to forecast accurately yield and price over the 2015 through 2018 crop years.”
However, they also provide a disclaimer, noting that, “economists have consistently found the ability to forecast price with any degree of accuracy is limited.”
After the decisions have been made regarding base reallocation and yield, the next steps will require producers to look at their options via these new online tools, talk to extension and university educators and crop insurance agents, and decide some combination of ARC, PLC, SCO, and crop insurance.
And then, growers will need to make their best estimate on what economists say they can’t do: forecast whether or not commodity prices will continue at about the same level, increase or decrease.
For now, there is no definitive end date for signup because Vilsack says he wants to give producers plenty of time to explore the various options and allow time to see what creeps up on “issues of technology” or any “unanticipated questions.” But several experts suggest signup could close by late next spring.
“There is no one answer here. It’s a very much farm by farm decision and producers should wait until they are confident with their decision,” he told reporters during a press call.