1. Commodity Programs: Small Changes, Big Choices
Pat Westhoff
Tri-State Farm Bill Summit
Versailles, Ohio
April 11, 2019

2. Agenda 2018 farm bill provisions ARC-PLC election decision
Price Loss Coverage (PLC)
Agriculture Risk Coverage (ARC)
Marketing loans
Dairy Margin Coverage
Other important provisions
ARC-PLC election decision
Some big-picture perspective

3. Disclaimer What follows is based on my reading of the 2018 farm bill
USDA has not yet proposed required changes of rules to implement the bill
Experience demonstrates that my reading of the bill will not always prove to be correct; final rules may differ from my expectations

4. 2018 farm bill: 10-year CBO “score” (change in federal spending vs
2018 farm bill: 10-year CBO “score” (change in federal spending vs. baseline that continued 2014 bill)
Provision
10-year total change in outlays, million dollars
Title I. Commodities (PLC, ARC, dairy program and more)
+263
Title II. Conservation (CRP, CSP, EQIP and more) -6
Title III. Trade (market development programs and more)
+470
Title IV. Nutrition (primarily SNAP)
Title VI. Rural Development (mostly lower interest on RUS “cushion of credit”)
-2,530
Title VII. Research & Extension (organic research and more)
+615
Title X. Horticulture (mostly Local Agriculture Market Program)
+500
Title XI. Crop insurance
-104
All other titles
+792
Net effect of the entire bill on the federal deficit over FY 2019 to FY 2028
Source: CBO letter to Chairman Conaway, Dec. 11, 2018.
Note: The letter estimates total 10-year outlays of $867 billion.

5. Agriculture Improvement Act of 2018: Commodity program overview
Evolutionary, not revolutionary
But, there are some important changes
Ability for some to update PLC yields
Formula that lets reference prices increase if market prices high enough
Trend adjustment in determining ARC benchmark revenues
Multiple opportunities to make new ARC/PLC elections
Higher loan rates for many crops
Changes in payment limitation rules
Restructuring of dairy margin program

6. Title I of the farm bill: 10-year CBO “score” (change in federal spending vs. baseline that continued 2014 bill)
Provision
10-year total change in outlays, million dollars
Sec Allowing new ARC-PLC elections in 2019, 2021, 2022 and 2023
+153
Sec Net changes to PLC (includes shifts in enrollment due to other provisions, ability to update program yields, changes in base acreage rules and more)
+137
Sec Net changes to ARC-CO (includes shifts in enrollment due to other provisions, use of trend-adjusted yields, changes in base acreage rules and more)
-186
Sec Higher loan rates for many commodities
+136
Sec Dairy program changes (Dairy Margin Coverage and more)
-76
All other provisions (includes change in payment limitations and more)
+99
Net change in outlays for Title I
+263
Source: CBO letter to Chairman Conaway, Dec. 11, 2018.
Note: in CBO’s Jan baseline, the 10-year total cost of farm commodity programs is $64.3 billion. In other words, the net increase in federal commodity program spending is 0.4% of the total.

7. PLC payment yields
Producers can update their PLC yields under some circumstances
Will make sense if average yields are sufficiently above the existing program yield
Adjustment depends on how national yields for a crop changed between the average and the average
Formula implies that corn and soybean producers will benefit if 81% of their average yield is greater than their current PLC yield
New PLC yield is higher of current PLC yield or approximately this percentage of average yields*
Corn
81%
Soybeans
Wheat
87%
Seed cotton
Rice
85%
Source: Calculations by Scott Gerlt based on statute and reported national NASS yields per harvested acre for corn and wheat. Actual percentages may differ, as the statute specifies use of yields per planted acre.

8. Where the PLC yield update might matter
The yield update depends on yields on a particular farm.
Counties in blue and red on the map are counties where county-average yields suggest it is likely that many producers will benefit from updating PLC yields for corn.
In the counties in white, fewer producers are likely to benefit from the update.
Source: Calculations by Scott Gerlt of FAPRI-MU based on NASS data

9. Where the PLC yield update might matter
The yield update depends on yields on a particular farm.
Counties in blue and red on the map are counties where county-average yields suggest it is likely that many producers will benefit from updating PLC yields for soybeans.
In the counties in white, fewer producers are likely to benefit from the update.
Source: Calculations by Scott Gerlt of FAPRI-MU based on NASS data

10. Reference price adjustment formula
Reference prices for most commodities are kept at current levels under most likely circumstances (Japonica rice is the exception)
Reference price is higher of current reference price or 85% of the 5- year Olympic average marketing-year-average (MYA) price
In other words, it can increase if the Olympic average price exceeds the reference price by 17.6%
This does not occur for any major commodity if prices evolve according to FAPRI-MU’s average price projections
However, in an uncertain world, it could happen if there are at least two years with abnormally high prices in a five-year period
A single high-price year is inadequate, as it is an Olympic average that is used

11. ARC changes
Trend-adjusted yield (like that in crop insurance) for determining ARC revenue benchmark
Use 80% of transitional yield to replace especially low yield years in calculating benchmark
Both of these changes should increase the probability of an ARC payment in any given year

12. ARC/PLC elections
Producers can make a new election in 2019 for the 2019 and crop years
And they can revise those elections in 2021, 2022 and 2023
As in 2014, FAPRI will work with AFPC colleagues at Texas A&M to provide a tool to help with this choice, once program rules are clear

13. ARC Olympic average prices (Last 5 years, higher of MYA or reference)

14. U.S. average corn ARC and PLC payments (Dollars per base acre for participating producers)
Source: FAPRI-MU April 2019.
are based on FSA-reported data; 2018 is a FAPRI-MU stochastic estimate (average of 500 outcomes)

15. U.S. average soybean ARC and PLC payments (Dollars per base acre for participating producers)
Source: FAPRI-MU April 2019.
are based on FSA-reported data; 2018 is a FAPRI-MU stochastic estimate (average of 500 outcomes). If the final 2018/19 MYA price exceeds $8.40, no PLC payments will be made.

16. U.S. average wheat ARC and PLC payments (Dollars per base acre for participating producers)
Source: FAPRI-MU April 2019.
are based on FSA-reported data; 2018 is a FAPRI-MU stochastic estimate (average of 500 outcomes)

17. Why ARC may look less attractive than it did

18. Why ARC may look less attractive than it did
When MYA price is below 86% of Olympic average price, ARC payments occur with average yields
When MYA price is above 86% of Olympic average price, ARC payments do not occur with average yields

19. Why ARC may look less attractive than it did

20. Why ARC may look less attractive than it did
If reference price is above 86% of the Olympic average price, PLC payments can occur at prices that do not generate ARC payments with average yields

21. Why ARC may look less attractive than it did

22. Why ARC may look less attractive than it did

23. 2019/20 U.S. average corn prices and yields

24. 2019/20 U.S. average corn prices and yields
Average of 500 outcomes: 174 bu./a. and $3.81/bu.

25. 2019/20 U.S. average corn prices and yields
47% of the 500 outcomes result in a price less than the $3.70 reference price

26. Implications for program participation
For corn and soybean producers, ARC was very attractive in 2014
For 2019, comparisons of ARC and PLC may be very different
If actual county yields equal trend-adjusted Olympic average yields, MYA corn prices will have to drop below $3.18/bu. for ARC to pay
PLC will pay any time the MYA price is below the $3.70 reference
We expect higher PLC participation in 2019 than under the 2014 bill

27. 2014-18 average payment rates FAPRI-MU projections from March 2015 and April 2019
Projected ARC payment/base a.
Projected PLC payment/base a.
Actual share of base in ARC
Actual share of base in PLC
Corn 2015 proj.
$27
$20
93% 7%
Corn 2019 proj.
$26
$17
Soybeans 2015
$10
97% 3%
Soybeans 2019 $8 $1
Wheat 2015
$11
$14
56%
44%
Wheat 2019
$13
$19
Sources: FAPRI-MU stochastic projections from March 2015 and April The 2015 projections were discussed in a 2015 Choices article by Westhoff & Glauber, available at

28. 2014-18 average payment rates FAPRI-MU projections from March 2015 and April 2019
We’re not this good--there was a lot of luck involved
Projected ARC payment/base a.
Projected PLC payment/base a.
Actual share of base in ARC
Actual share of base in PLC
Corn 2015 proj.
$27
$20
93% 7%
Corn 2019 proj.
$26
$17
Soybeans 2015
$10
97% 3%
Soybeans 2019 $8 $1
Wheat 2015
$11
$14
56%
44%
Wheat 2019
$13
$19
Sources: FAPRI-MU stochastic projections from March 2015 and April The 2015 projections were discussed in a 2015 Choices article by Westhoff & Glauber, available at

29. 2014-18 average payment rates FAPRI-MU projections from March 2015 and April 2019
Projected ARC payment/base a.
Projected PLC payment/base a.
Actual share of base in ARC
Actual share of base in PLC
Corn 2015 proj.
$27
$20
93% 7%
Corn 2019 proj.
$26
$17
Soybeans 2015
$10
97% 3%
Soybeans 2019 $8 $1
Wheat 2015
$11
$14
56%
44%
Wheat 2019
$13
$19
Wheat is the one major crop where elections didn’t reflect our expected payments
Sources: FAPRI-MU stochastic projections from March 2015 and April The 2015 projections were discussed in a 2015 Choices article by Westhoff & Glauber, available at

30. Projected ARC payment/base a. Projected PLC payment/base a.
Average payment rates by farm bill and projections by FAPRI-MU, April 2019
Projected ARC payment/base a.
Projected PLC payment/base a.
Share of base in ARC
Share of base in PLC
Corn avg.
$26
$17
93% 7%
Corn avg.
$12
$28
29%
71%
Soybeans $8 $1
97% 3%
Soybeans
$10
$13
32%
68%
Wheat
$19
56%
44%
Wheat $7
20%
80%
Source: FAPRI-MU stochastic projections from April The projected participation rates assume that expected payment rates have a strong effect on participation decisions.

31. U.S. average ARC and PLC payments, 2014-18 (Dollars per base acre for participating producers)
Source: FAPRI-MU April 2019
rates are based on FSA-reported data; 2018 is a FAPRI-MU stochastic estimate (average of 500 outcomes)

32. U.S. average ARC and PLC payments, 2019-23 (Dollars per base acre for participating producers)
Source: FAPRI-MU April 2019

33. U.S. average ARC and PLC payments, 2014-18 (Dollars per base acre for participating producers)
Source: FAPRI-MU April 2019.
rates are based on FSA-reported data; 2018 is a FAPRI-MU stochastic estimate (average of 500 outcomes)
*Seed cotton only became eligible in 2018, so no 5-year avg. is reported

34. U.S. average ARC and PLC payments, 2019-23 (Dollars per base acre for participating producers)
Source: FAPRI-MU April 2019

35. PLC participation rates by crop (Share of base acreage)
Source: FSA data for ; FAPRI-MU April 2019 for projections

36. Page 4 of FAPRI-MU 2019 U.S. Baseline Outlook

37. 2018 ARC-CO calculation example Audrain Co., MO corn
Max of (national avg. farm price, reference price)
County yield
Revenue
2013/14
$4.46/bu.
122 bu./a.
2014/15
$3.70
186
2015/16
$3.70 ($3.61 MYA)
107
2016/17
$3.70 ($3.36 MYA)
172
2017/18
179
Olympic average
158
2018/19 benchmark revenue
$583
86% of benchmark
$502
1st option triggering payments
<$3.83
131
<$502
2nd option triggering payments
<$3.18

38. Some things to note about the ARC-PLC choice
The “right” choice will differ by crop, county and producer
The relationship between expected ARC and PLC payments differs across crops—PLC may seem an obvious choice for some crops, while it may be a closer call for others
County yield history matters a lot—ARC will be more likely to pay in some counties than others
PLC program yields and other farm-specific factors can mean different farms within a county could have different optimal choices
What type of risk is of greater concern--long-term depressed prices (PLC), or a short-term drop in revenues caused by lower prices or yields (ARC)?

39. Same, except cannot decline more than 2% in one year
Loan rates
Loan rates are increased for several commodities
The new rates are still below expected market prices, so loan deficiency payments appear unlikely
But, improves the ability to use the program as a marketing tool, by providing access to more cash at harvest
2014 farm bill
2018 farm bill
Corn/bu.
$1.95
$2.20
Soybeans/bu.
$5.00
$6.20
Wheat/bu.
$2.94
$3.38
Sorghum/bu.
Rice/cwt
$6.50
$7.00
Upland cotton/lb.
Formula, from $0.45-$0.52
Same, except cannot decline more than 2% in one year

40. Some other Title I crop provisions
Changes in payment limitation rules
Nieces, nephews and first cousins more likely to qualify
I’m an economist, not a lawyer: ask Jonathan Coppess if you have questions 
Seed cotton provisions created in pre-farm bill legislation continue
Reference price of 36.7 cents/lb. for seed cotton—weighted average of cotton fiber and cotton seed prices
At FAPRI-projected prices, payments would occur every year under this program
Base acreage for seed cotton typically less than old upland cotton base
No ARC or PLC payments if no crop planted on base acres in last 10 years
However, producers can qualify for an $18/acre CSP payment
Base is retained and theoretically could be restored in a subsequent farm bill

41. Title I dairy provisions
Dairy Margin Coverage (DMC) program replaces Margin Protection Program
Biggest change: lower premiums to protect higher margins for first 5 million pounds of milk on a farm (Tier I)
25% discount if commit in 2019 to maintain same coverage for 5 years
Producers can participate in both DMC and Livestock Gross Margin on the same production
Partial refund of MPP premiums
Dairy Product Donation Program replaced with Milk Donation Program ($5 mil./yr.)
Coverage level
Tier I premium
Tier II premium
$4.00
None
$4.50
$0.0025/cwt
$5.00
$0.005
$5.50
$0.030
$0.100
$6.00
$0.050
$0.310
$6.50
$0.070
$0.650
$7.00
$0.080
$1.107
$7.50
$0.090
$1.413
$8.00
$1.813
$8.50
$0.105
n.a.
$9.00
$0.110
$9.50
$0.150

42. Comparing annual average crop program benefits under recent farm bills: Title I
Notes: Historical data for crop years are primarily from FSA. The 2018 crop years estimates are by FAPRI-MU, and the crop year estimates by CBO and FAPRI-MU.

43. Comparing annual average crop program benefits: adding crop insurance
Notes: Historical data for crop years are primarily from FSA. The 2018 crop years estimates are by FAPRI-MU, and the crop year estimates by CBO and FAPRI-MU.

44. Comparing annual average crop program benefits: adding MFP payments
Notes: Historical data for crop years are primarily from FSA. The 2018 crop years estimates are by FAPRI-MU, and the crop year estimates by CBO and FAPRI-MU.

45. Comparing annual average crop program benefits: adding conservation payments
Notes: Conservation payments are calendar year figures as reported in ERS farm income estimates. Projections are by the author, and are a function of CBO FY estimates.

46. Some things to note
In aggregate, ARC and PLC payments under 2014 bill were similar to direct payments under the 2008 bill A string of above-average yields resulted in unusually low crop insurance net indemnities under 2014 bill—and higher ARC & PLC MFP payments for 2018 are likely to exceed other program benefits combined CBO projects PLC will account for lion’s share of Title I spending under the 2018 farm bill Crop insurance costs are higher from because of assumed “normal” weather variability, not because of program changes

47. U.S. farm payment, income projections (FAPRI-MU April 2019 baseline)
Source: FAPRI-MU baseline April 2019; USDA ERS, Mar

48. Farm real estate values and rental rates
Source: History from USDA’s National Agricultural Statistics Service. Projections by FAPRI-MU, April 2019.

49. It’s not the 1980s, but…
During the 1980s farm financial crisis, the farm debt/asset ratio peaked at 22%
It declined to half that level in 2012, but has been increasing since then
Besides lower levels of debts relative to assets, interest rates are far lower now than in the 1980s
But it is concerning that the debt/asset ratio continues to increase, even as interest rates are rising
Sources: Debt/asset ratio from USDA and FAPRI-MU, April 2019; Prime rate from FRED and IHS Markit, Jan. 2019

50. Thanks! FAPRI-MU website: www.fapri.missouri.edu
Follow us on
To contact Pat Westhoff:
@WesthoffPat on Twitter
FAPRI-MU team:
Lauren Jackson
Julian Binfield
Byung Min Soon
Sera Chiuchiarelli
Wyatt Thompson
Scott Gerlt
Jarrett Whistance
Hoa Hoang
Peter Zimmel
This material is based upon work supported by the U.S. Department of Agriculture, Office of the Chief Economist, under Agreement # , and the USDA National Institute of Food and Agriculture, Hatch project number MO-HASS0024. Any opinion, findings, conclusions, or recommendations expressed in this publication are those of the authors and do not necessarily reflect the view of the U.S. Department of Agriculture nor the University of Missouri.