1. OSU Policy & Outlook Program
10/30/2009
2014 Crop Program Decisions
farmdoc – University of Illinois
Carl Zulauf Ag. Economist,
Ohio State University, Ohio Agricultural Research and Development Center, Ohio State University Extension
OSU, AEDE Outlook Meetings
December 2014

2. Overview – Crop Program Decisions
September 22, 2018
Carl Zulauf

3. Program Yield Update Decision
(every FSA farm owner should actively do)
OPTIONS: (1) current countercyclical yield (default) OR (2) 90% of simple 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 county average
112
Yield used
553
138
124
September 22, 2018
Carl Zulauf

4. 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
► 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
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

5. Commodity Program Choice Parameters (FSA farm producer decision)
1 time choice for , 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
Sign Up vs. Enrollment
September 22, 2018
Carl Zulauf

6. farmdoc – University of Illinois
Summary Thoughts
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 $ 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

7. farmdoc – University of Illinois
Summary Thoughts
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

8. ARC-CO vs. PLC vs. PLC-SCO Decision
broad question
“For FSA farm as a whole over the 5 years, , 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

9. 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

10. 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

11. 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

12. Payment Indicator 2014: October 2014
farmdoc – University of Illinois
September 22, 2018
Carl Zulauf

13. Payment Indicator 2014 – October 2014
farmdoc – University of Illinois
September 22, 2018
Carl Zulauf

14. 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

15. (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