1. Associate Professor/Crop Markets Specialist
ARC & PLC
July 21, 2014
Chad Hart
Associate Professor/Crop Markets Specialist 1 1

2. New 5-Year Farm Program (2014-2018)OR
So the new farm bill provides a variety of somewhat overlapping support. The marketing loan program provides catastrophic price support. PLC provides additional price coverage, up to specific price levels set by Congress. ARC provides revenue coverage based on prices and yields from the past 5 years. Traditional crop insurance provides yield or revenue coverage based on current year futures market prices. And the new farm bill also creates a new crop insurance product, called Supplemental Coverage Option (SCO), which is a county-based crop insurance policy that can be purchased on top of traditional crop insurance.
Marketing Loan National Rates:
$1.95/bu Corn
$5.00/bu Soybeans
Source: The Agricultural Act of 2014, February 2014

3. PLC instead of CCP Price-based support program
Reference prices establish targets
Works like CCP
Payment rate = Max(0, Reference price – Max(MYA price, Loan rate))
Payment = Payment rate * Payment yield * Payment acres
Price Loss Coverage works just like the old CCP program. The big difference is in the “target” (old farm bill terminology) or “reference” (new farm bill terminology) price. For corn, the old CCP program protected against prices falling below $2.63 per bushel. The new PLC program protects against prices falling below $3.70 per bushel.

4. PLC: Corn 2014 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.

5. PLC: Soybean 2014 Payment Potential
Reference Price = $8.40 per bushel
Payment Yield = 42 bushels per acre
Marketing Year Price ($/bu)
PLC Payment Rate ($/bu)
PLC Payment ($/base acre)
$7.20
$1.20
$42.84
$7.40
$1.00
$35.70
$7.60
$0.80
$28.56
$7.80
$0.60
$21.42
$8.00
$0.40
$14.28
$8.20
$0.20
$7.14
$8.40
$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.

6. ARC instead of ACRE Revenue-based support program
Revenues based on 5-year Olympic average yields and prices
Yields and prices have cups (County T-yields and reference prices)
Triggers at county or individual farm level, instead of state level
Similarly, ARC is like the old ACRE program. But here, the changes are more substantial. The revenue trigger was moved to the county or farm level (ACRE was at the state level). Revenues are updated with 5-year Olympic averages for price and yield.

7. ARC Payment Rate Payment rate = Max(0, Min(10% of Benchmark revenue,
Actual crop revenue – ARC guarantee))
So the basic payment structure is the same as it was under ACRE
ARC does have a payment cap of 10% of the benchmark revenue. Benchmark revenue is just the 5-year Olympic average price times the 5-year Olympic average yield.

8. ARC-CO: 2014 Corn Revenue Guarantee
Year
Yield
MYA Price
ARC Price
2009
163.4
$3.55
$3.70
2010
184.1
$5.18
2011
174.2
$6.22
2012
133.2
$6.89
2013
146.3
$4.45
Oly. Ave.
161.3
$5.28
Here’s the 5 years of price and yield data for Howard County, Iowa corn. The gray 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 bushels per acre. The 5-year Olympic average price is $5.32 per bushel. Combine the two to get the benchmark revenue of $ per acre. The ARC revenue guarantee is 86% of the benchmark, so it’s $ per acre.
Benchmark Revenue = $ per acre
ARC Revenue Guarantee = $ per acre
Notes: Howard County, Iowa actual corn yields. Revenue Guarantee equals 86% of Benchmark.

9. ARC-CO: 2014 Potential Corn Payment
ARC Revenue Guarantee = $ per acre
ARC Max Payment Rate = $85.22 per acre
But ARC-CO is paid on 85% of base acres
and 85% of $85.22 is $72.44
Price: $3.50
$4.00
$4.50
$5.00
Yield: 100
$72.44
125
150
$49.21
$0.00
175
$27.96
200
Let’s say that in 2014, the Howard County, Iowa average corn yield turns out to be exactly the 5-year Olympic average yield (161.3 bushels per acre). Then, if the corn price falls below $4.57 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 $86 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.

10. ARC-CO: 2014 Soy Revenue Guarantee
Year
Yield
MYA Price
ARC Price
2009
43.3
$9.59
2010
54.5
$11.30
2011
51.1
$12.50
2012
45.7
$14.40
2013
40.1
$13.00
Oly. Ave.
46.7
$12.27
Here’s the 5 years of price and yield data for Howard County, Iowa corn. The gray 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 bushels per acre. The 5-year Olympic average price is $5.32 per bushel. Combine the two to get the benchmark revenue of $ per acre. The ARC revenue guarantee is 86% of the benchmark, so it’s $ per acre.
Benchmark Revenue = $ per acre
ARC Revenue Guarantee = $ per acre
Notes: Howard County, Iowa actual soybean yields. Revenue Guarantee equals 86% of Benchmark.

11. ARC-CO: 2014 Potential Soy Payment
ARC Revenue Guarantee = $ per acre
ARC Max Payment Rate = $57.28 per acre
But ARC-CO is paid on 85% of base acres
and 85% of $57.28 is $48.69
Price: $9.00
$10.00
$11.00
$12.00
Yield: 35
$48.69 40
$44.76
$10.76 45
$36.26
$0.00 50 55
Let’s say that in 2014, the Howard County, Iowa average corn yield turns out to be exactly the 5-year Olympic average yield (161.3 bushels per acre). Then, if the corn price falls below $4.57 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 $86 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.

12. ARC-IC: 2014 Corn & Soybean Combined Revenue Guarantee
Year
Corn Yield
ARC Price
Revenue
Soy Yield
2009
163.4
$3.70
$604.58
43.3
$9.59
$415.25
2010
184.1
$5.18
$953.64
54.5
$11.30
$615.85
2011
174.2
$6.22 $
51.1
$12.50
$638.75
2012
133.2
$6.89
$917.75
45.7
$14.40
$658.08
2013
146.3
$4.45
$651.04
40.1
$13.00
$521.30
Oly. Ave.
$840.81
$591.97
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 $846 per acre and soybeans has a benchmark revenue of $593 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 $745 per acre (= 60%*$ %*$593). The ARC revenue guarantee is 86% of the benchmark, so $641 per acre.
In 2014, if the farm is planted 60% to corn and 40% to soybeans, then
Benchmark Revenue = $ per acre
Revenue Guarantee = $ per acre
Source: Schulte, ISU Extension, June 2014

13. ARC-IC : 2014 Potential Corn & Soybean Combined Payment
Actual 2014 farm yields: Corn 150 bushels per acre
Soy 45 bushels per acre
Marketing year prices: Corn $4.00 per bushel
Soy $10.50 per bushel
Calculated revenues: Corn $ per acre
Soy $ per acre
ARC Revenue: 60%*$ %*$ = $549.00
ARC-IC is paid on 65% of base acres
ARC-IC Payment = $48.18 per acre (65% of $ $549.00)
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 $677 per acre and soybeans has an actual revenue of $502 per acre. Then the overall actual revenue is calculated as $607 per acre (= 60%*$ %*$502). The ARC payment rate would be $34 per acre ($641 - $607) and the ARC payment per base acre would be $22 per acre (= 65%*$34, as ARC-IC is paid on 65% of base acres).
Source: Schulte, ISU Extension, June 2014

14. 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 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.

15. 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.

16. 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 crop years

17. PLC pays, ARC does not Neither pay Both pay ARC pays, PLC does not
The red line is the ARC-County payment trigger. ARC payments are triggered when the combination of price and yield is below and to the left of the red line.
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.

18. Thank you for your time. Any questions. My web site: http://www. econ
Thank you for your time! Any questions? My web site: Iowa Farm Outlook: Ag Decision Maker: