OSU Policy & Outlook Program 10/30/2009 2014 Crop Program Decisions http://aede.osu.edu/research/crop-program-decisions farmdoc – University of Illinois Carl Zulauf (zulauf.1@osu.edu), Ag. Economist, Ohio State University, Ohio Agricultural Research and Development Center, Ohio State University Extension OSU, AEDE Outlook Meetings December 2014

Overview – Crop Program Decisions September 22, 2018 Carl Zulauf

Program Yield Update Decision (every FSA farm owner should actively do) OPTIONS: (1) current countercyclical yield (default) OR (2) 90% of simple 2008-12 average yield - update can be less OR (3) payment yield update substitute yield ► includes all years for which crop was planted ► elected on a crop-by-crop and FSA farm-by-FSA farm basis ► decision straightforward but need to consider proving yields Table 1. Example Calculation of Updated Payment Yield for Corn   2008 2009 2010 2011 2012 Sum of Yields Average Yield (divide by 4) Payment Yield (90%) Yield per planted acre planted: no evidence 154 175 no planted acres 100 Substitute Yield: 75% of 08-12 county average 112 Yield used 553 138 124 September 22, 2018 Carl Zulauf

Program Acre Reallocation Decision (every FSA farm owner should actively do) OPTIONS: (1) current program acres (default) OR (2) current total program acres allocated by share of all covered crop acres planted or prevent planted to each covered crop during 2009-12 ► elected by FSA farm ► important because ARC and PLC pay on program acres Table 1. Example Calculation of Reallocated Program (Base) Acres Crop Option 1: Program Acres 9/30/2013 Crop History 2009 Crop History 2010 Crop History 2011 Crop History 2012 Average Planting 2009-12 Reallocated Percent Option 2: Reallocated Program Acre Option Alfalfa not covered crop  20 not applicable Corn 50 40 30 40.0 50% Oats 10 0.0 0% Soybeans 32 36.0 45% 45 Wheat 8 4.0 5% 5 All covered crops 100 80 100% September 22, 2018 Carl Zulauf

Commodity Program Choice Parameters (FSA farm producer decision) 1 time choice for 2014-2018, irrevocable after final sign-up date Decision follows land, not owner or producer. OPTIONS: (a) PLC (plus SCO) ▬ program crop by FSA farm decision (b) ARC–CO (county) ▬ program crop by FSA farm decision (c) ARC–IC (individual) ▬ FSA farm decision ► can mix election of PLC and ARC-CO by crop and FSA farm DEFAULT: If no program elected OR if producers on a FSA farm disagree on election: no 2014 payment and in PLC for 2015-2018 Sign Up vs. Enrollment September 22, 2018 Carl Zulauf

farmdoc – University of Illinois Summary Thoughts http://aede.osu.edu/research/crop-program-decisions farmdoc – University of Illinois ► Rediscovering crop safety net has 2 pillars: commodity programs and insurance. Commodity programs address multiple year loss risk, which is very real in farming. ► Economics says wait to make program choice: improves information about 2014 payments. ► Limited, if any, insight on 2015 payments will exist; then depends on forecast ability. Should 2014 payments be weighted more because more is known about them? ► ARC-CO’s strength is multiple year shallow loss ▬ for example, corn’s crop year price (CYP) is $3.50 to $4.25. PLC’s strength is multiple years of price well below reference price ▬ for example, corn’s CYP is below $3.00. Also, ARC but not PLC can pay on yield declines. ► In short, ARC & PLC are different risk programs. September 22, 2018 Carl Zulauf

farmdoc – University of Illinois Summary Thoughts http://aede.osu.edu/research/crop-program-decisions farmdoc – University of Illinois ► FSA farm producer with more than 1 FSA farm can mix ARC-CO and PLC-SCO by FSA farm. Should program choice be diversified given uncertainty? ► Current thinking on key questions: (1) “Does ARC-IC fit my FSA farm?”; (2) “Is SCO insurance cost competitive with higher coverage individual farm insurance?”; (3) “How should reasonably known 2014 payments be weighed against uncertain payments for later years?”; (4) “If possible, should program choice be diversified?” ► Once these big picture questions are assessed, then farm program calculators can help aid (not make) the decision. September 22, 2018 Carl Zulauf

ARC-CO vs. PLC vs. PLC-SCO Decision broad question “For FSA farm as a whole over the 5 years, 2014-2018, is expected ARC-CO payments + expected net payments from any insurance chosen greater or less than expected PLC payments + expected net payments from any insurance chosen + expected net payments from SCO if also chosen.” KEY POINT: insurance decision should be considered with crop program decision since SCO is excluded with ARC and individual insurance required for SCO. No reason to think same insurance is bought with ARC-CO as with PLC. ARC-CO + Insurance PLC + Insurance + SCO September 22, 2018 Carl Zulauf

ARC-CO and PLC Calculation Formulas (both use crop year price & pay on 85% of program acres) ARC-CO payment/program acre = Minimum [(86% times ARC revenue benchmark) – ARC actual revenue, 10% times ARC revenue benchmark] ● ARC revenue benchmark = (Olympic average of county yield/planted acre for 5 prior crop years times Olympic average of U.S. crop year price for 5 prior crop years) ● Olympic average discards high and low values. ● ARC actual revenue = county yield/planted acre times U.S. crop year price ● ARC price for year = maximum(crop year price, PLC reference price) PLC payment/program acre = program payment yield times (reference price – maximum(U.S. crop year price, loan rate)) ● fixed reference prices and loan rates are specified in 2014 farm bill September 22, 2018 Carl Zulauf

PLC (Price Loss Coverage) OVERVIEW: pays on 85% of program, not planted, acres if crop year price is below reference price PLC is a slightly revised target price program ► higher target price (now called reference price) ► corn reference price = $3.70 ► soybean reference price = $8.40 ► wheat reference price = $5.50 THUMB NAIL ASSESSMENT: effective multiple year price risk option if crop year price is well below reference price for multiple years ▬ ▬ but beware of ▬ ▬ price decline from 2013 level that last multiple years and crop year price stays around or above reference price September 22, 2018 Carl Zulauf

ARC-CO (Agriculture Risk Coverage – County) OVERVIEW: pays on 85% of program, not planted, acres if county revenue declines below 86% of county benchmark revenue [essentially 5 prior year’s Olympic average county revenue] but capped at 10% of benchmark revenue ARC is a substantively revised ACRE program, but should not be confused with ACRE. Revisions include: ► elected by crop, not by farm ► uses county, not state yield ► minimum price exists (PLC reference price) ► coverage level is 76% to 86%, not 67.5% to 90% THUMB NAIL ASSESSMENT: effective multiple year shallow revenue loss option if crop year price does not stay below reference price for multiple years ▬ ▬ but beware of ▬ ▬ multiple years when price is well below the reference price September 22, 2018 Carl Zulauf

Payment Indicator 2014: October 2014 http://aede.osu.edu/research/crop-program-decisions farmdoc – University of Illinois September 22, 2018 Carl Zulauf

Payment Indicator 2014 – October 2014 http://aede.osu.edu/research/crop-program-decisions farmdoc – University of Illinois September 22, 2018 Carl Zulauf

Insurance Decision: SCO (Supplemental Coverage Option) SCO pays on acres planted to crop if, over growing season, county revenue or yield decline falls in SCO coverage zone: county loss between individual farm coverage level and 86% (for example, 75% to 86%). KEY QUESTION: Does SCO add cost competitive coverage vs. higher individual insurance after considering differential change in farm vs. county? ► At same coverage, risk protection is usually better with individual farm than county insurance. Farm and county revenue or yield rarely change the same. Moreover, subsidy rate is higher for SCO than enterprise insurance only at 85% coverage and only by a small margin (65% vs. 53%). Thus, SCO appears to be a clear consideration only (1) if enterprise insurance not available up to 85% coverage or (2) cash flow is constrained (SCO generally) is cheaper. September 22, 2018 Carl Zulauf

(Agriculture Risk Coverage – Individual) ARC-IC (Agriculture Risk Coverage – Individual) KEY QUESTION: Does ARC-IC fit FSA farm? ► don’t ignore ARC-IC even though it pays on 65% of program acres (85% for ARC-CO & PLC) and calculations are complex OVERVIEW: pays if average experience of all covered crops planted on whole ARC-IC farm unit is less than 86% of ARC-IC unit revenue benchmark. Payment capped at 10% of benchmark. ► portrayed as individual farm but only true if producer has only 1 FSA farm in a state in ARC-IC THUMB NAIL ASSESSMENT: among situations to consider ARC-IC 1. FSA farm yield is 30% higher than county yield 2. production on ARC-IC farm varies highly ► more attractive if only 1 FSA farm and 1 crop per year ► higher probability of payment and no premium 3. fruits/vegetables may be planted on ARC-IC farm unit ► more flexibility to plant them than with ARC-CO & PLC September 22, 2018 Carl Zulauf