The 2014 Farm Bill MIDCO Winter Outlook Meeting Ames, Iowa Jan. 29, 2015 Chad Hart Associate Professor/Crop Markets Specialist chart@iastate.edu 515-294-9911 1 1

Farm Bill: Old vs. New Direct Payments (DP) Countercyclical Payments (CCP) Marketing Loans (LDP) Revenue Countercyclical Payments (ACRE) Countercyclical Payments (PLC) Marketing Loans (LDP) Revenue Countercyclical Payments (ARC) New programs, but they have strong similarities to previous programs

PLC: Corn Payment Potential Reference Price = $3.70 per bushel Payment Yield = 150 bushels per acre Marketing Year Price ($/bu) PLC Payment Rate ($/bu) PLC Payment ($/base acre) $3.10 $0.60 $76.50 $3.20 $0.50 $63.75 $3.30 $0.40 $51.00 $3.40 $0.30 $38.25 $3.50 $0.20 $25.50 $3.60 $0.10 $12.75 $3.70 $0.00 For PLC, the payment rate is the difference between the reference price and the maximum of either the marketing year average price or the loan rate (if the difference is negative, then the payment rate is zero). Take the payment rate times the payment (or base) yield times 85% to get the PLC payment per base acre. Notes: PLC payments are made on 85% of base acres.

ARC-CO: 2014 Corn Revenue Guarantee Year Yield MYA Price ARC Price 2009 157.0 $3.55 $3.70 2010 186.0 $5.18 2011 187.0 $6.22 2012 163.0 $6.89 2013 156.0 $4.46 Oly. Ave. 168.7 $5.29 Here’s the 5 years of price and yield data for Hardin County, Iowa corn. The red numbers are the high and low ones that are not used in the Olympic average (remember the Olympic average throws out the high and low). Also, the price used in the average can not be below the reference price specified in the farm bill (in this case, $3.70 for corn). So as the black circle above shows, the price in 2009 was replaced by the reference price. So the 5-year Olympic average yield is 168.7 bushels per acre. The 5-year Olympic average price is $5.29 per bushel. Combine the two to get the benchmark revenue of $892.42 per acre. The ARC revenue guarantee is 86% of the benchmark, so it’s $767.48 per acre. Benchmark Revenue = $892.42 per acre ARC Revenue Guarantee = $767.48 per acre Notes: Revenue Guarantee equals 86% of Benchmark.

ARC-CO: 2014 Potential Corn Payment ARC Revenue Guarantee = $767.48 per acre ARC Max Payment Rate = $89.24 per acre But ARC-CO is paid on 85% of base acres and 85% of $89.24 is $75.85 Price: $3.50 $4.00 $4.50 $5.00 Yield: 100 $75.85 125 150 $14.86 175 $57.36 $0.00 200 Let’s say that in 2014, the Hardin County, Iowa average corn yield turns out to be exactly the 5-year Olympic average yield (168.7 bushels per acre). Then, if the corn price falls below $4.55 per bushel, ARC will begin to pay. As the table shows, under this scenario, if the corn price falls below $4 per bushel, the ARC payment rate will hit its maximum (based on 10% of the benchmark revenue or $89 in this case). Since ARC-CO is only paid 85% of a farm’s base acres, you can view the ARC payment per base acre as 85% of the ARC payment rate.

ARC-IC: 2014 Corn & Soybean Combined Revenue Guarantee Year Corn Yield ARC Price Revenue Soy Yield 2009 157.0 $3.70 $580.90 43.0 $9.59 $412.37 2010 186.0 $5.18 $963.48 55.0 $11.30 $621.50 2011 187.0 $6.22 $1163.14 56.0 $12.50 $700.00 2012 163.0 $6.89 $1123.07 50.0 $14.40 $720.00 2013 156.0 $4.46 $695.76 46.0 $13.00 $598.00 Oly. Ave. $927.44 $639.83 For farm-level ARC (ARC-IC), the 5-year Olympic average is taken over the revenues (as opposed the prices and yields separately, as in ARC-CO). For each covered crop, a benchmark revenue is determined. Here, corn has a benchmark revenue of $927 per acre and soybeans has a benchmark revenue of $640 per acre. Then an overall benchmark revenue is calculated, based on the percentages of planted acres by crop on the farm in the current year. For this example, let’s assume the farm is a 60/40 corn/soybean split. Then the overall ARC benchmark revenue is $812 per acre (= 60%*$927 + 40%*$640). The ARC revenue guarantee is 86% of the benchmark, so $699 per acre. In 2014, if the farm is planted 60% to corn and 40% to soybeans, then Benchmark Revenue = $812.40 per acre Revenue Guarantee = $698.66 per acre

ARC-IC : 2014 Potential Corn & Soybean Combined Payment Actual 2014 farm yields: Corn 180 bushels per acre Soy 50 bushels per acre Marketing year prices: Corn $4.00 per bushel Soy $10.50 per bushel Calculated revenues: Corn $720.00 per acre Soy $525.00 per acre ARC Revenue: 60%*$720.00 + 40%*$525.00 = $642.00 ARC-IC is paid on 65% of base acres ARC-IC Payment = $36.83 per acre (65% of $698.66-$642.00) To calculate the actual revenue, the revenue for each crop is computed and the same percentages of planted acres are applied to create an overall actual revenue for the farm. Here, for example, if corn has an actual revenue of $720 per acre and soybeans has an actual revenue of $525 per acre. Then the overall actual revenue is calculated as $642 per acre (= 60%*$720 + 40%*$525). The ARC payment rate would be $57 per acre ($699 - $642) and the ARC payment per base acre would be $37 per acre (= 65%*$57, as ARC-IC is paid on 65% of base acres).

Supplemental Coverage Option (SCO) An additional policy to cover “shallow losses” Shallow loss = part of the deductible on the producer’s underlying crop insurance policy SCO has a county-level payment trigger Indemnities are paid when the county experiences losses greater than 14% Premium subsidy: 65% Starts in 2015 Can’t have ARC and SCO together If owner/operators choose PLC, then they are also eligible to purchase SCO in 2015. SCO is a county-based crop insurance product that covers yield or revenue losses below 86% of the county guarantee. The SCO coverage sits on top of your other crop insurance (RP, YP, etc.). An example is shown in the following slide.

Supplemental Coverage Option (SCO) RP RPHPE YP For example, if a producer currently buys 80% RP, then SCO covers county losses between 80-86%. If the producer moves their crop insurance down to 70% RP (click to trigger the animation), then SCO coverage expands to 70-86% for the county.

Three Choices PLC + SCO ARC-County ARC-Individual Price protection with top-up county-level insurance protection ARC-County County-level revenue protection based on historical averages ARC-Individual Farm-level revenue protection based on historical averages Choice holds for 2014-2018 crop years

PLC pays, ARC does not Neither pay Both pay ARC pays, PLC does not The choice depends on where you expect prices and yields to be over the next 5 years. There are price/yield combinations where PLC pays and ARC does not. There are also price/yield combinations where ARC pays and PLC does not.

Corn Marketing Year Average Price Projections I pulled the CME estimates from Alejandro’s decision tool on a particular day. Of course it will not be the same on the day you use it. You can get CBO, FAPRI, and USDA with the Show Prices toggle on the University of Illinois tool. You can get the FAPRI and USDA prices on the Texas A&M tool. That is the toggle we use when looking at projected program payments. The CME price isn’t terribly relevant. The CBO price isn’t terribly relevant. Why do I say that? The Texas A&M tool only uses FAPRI and USDA prices. I can’t show projected payments using the CBO or CME prices easily, and in 45 minutes we don’t have time to show them the results anyway.

Soybean Marketing Year Average Price Projections Same as prior, except for soybeans. How strong is the confidence in the room that over the next five years we will not see a soybean price that starts with an 8? That’s the kicker on whether you just choose County Agricultural Risk Coverage for Soybeans and forget about it. Especially for larger operators who might be maxing out on payments and needing diversification for that purpose. Do they choose a farm or two to put soybeans in PLC as a hedge against unforeseen prices?

Thank you for your time. Any questions. My web site: http://www. econ Thank you for your time! Any questions? My web site: http://www.econ.iastate.edu/~chart/ Iowa Farm Outlook: http://www.econ.iastate.edu/ifo/ Ag Decision Maker: http://www.extension.iastate.edu/agdm/