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Farm Bill Contingency Plans
Thursday, October 16, 2014 4:56PM CDT

By Marcia Zarley Taylor
DTN Executive Editor

LOUISVILLE (DTN) -- Some of the nation's most prominent agricultural economists have a confession to make: Their computer simulators misgauged how fast and deep commodity prices would fall in the last six months. That price surprise completely upended conventional wisdom on how much the new farm safety nets will pay growers for 2014 crops. For farmers, it's also complicated the decision on which support program to elect during the five-year farm program sign-up this winter.

When it comes to deciding which farm program to choose -- Agriculture Risk Coverage (ARC) or Price Loss Coverage (PLC) -- your degree of optimism toward a five-year price forecast is what matters most. Doomsayers favor PLC, those forecasting only slightly depressed prices favor ARC. Kansas State University economist Art Barnaby helps to draw a clearer line: For corn, average yields and season average prices above $3.30 per bushel favor ARC; average yields and prices below $3.30 per bushel favor PLC.

In October, USDA dropped its mid-point estimate of the 2014 season-average price for corn to $3.40 per bushel, down 10 cents from September and down $1.20 per bushel since April.

When the season-average price of corn was supposed to average $4.60 six months ago, American Farm Bureau economist John Anderson thought the farm bill choice was simple: ARC would be the clear winner for most Midwest corn growers. PLC's price triggers were set so low, few policy analysts thought they could be triggered any time soon.

But the mammoth-sized harvest means prices have tumbled so far and fast in the interim that the 2014 corn crop could sell for 46% less than its 2010-2012 average. That dive means potential PLC payments could narrow the difference with ARC down to just a few dimes per acre.

"The ARC and PLC choice is not clear cut," Anderson told an audience attending an economics conference in Louisville last week. In fact, he thinks the choice for most crops is so close, "growers could flip a coin."

"There's a lot of uncertainty in the five-year horizon, so it's not possible to say without a doubt which program will pay more," he added.

Ohio State University economist Carl Zulauf has warned about big uncertainties in price forecasting for months. In August, using an average U.S. yield and USDA price forecasts, he estimated a typical 2014 county ARC payment could run $41 per acre, versus $0 for PLC. By October, those same assumptions ran $79 per acre for county ARC versus $39 for PLC.

Writing on farmdoc daily Oct. 14 (http://farmdocdaily.illinois.edu/…), Zulauf substituted USDA's 2014 low-price corn estimate -- $3.10 per bushel. Suddenly, both county ARC and PLC paid $79 per acre in his estimates. That tie means the higher-paying program will depend on the relationship among yields. Like old counter-cyclical payments, PLC triggers strictly on price. Under county ARC, high county yields can offset low prices and fail to trigger revenue losses.

To illustrate even more uncertainty, when Zulauf used USDA's high-price estimate -- $3.70 -- county ARC paid $50 per acre and PLC nothing.

"The sizable difference in estimated indicator payments at the low and high October [USDA] price projections needs to be underscored," he wrote. "The current range on U.S. crop year price projections is such that both high payments and no payments may occur ... simply put, it's too early in the 2014 crop year to talk with much certainty about the size of payments."

Given the potential for sizable price swings between now and March, Barnaby urges growers to watch price trends for as long as possible before signup. For corn, over half of the marketing-year price is determined in the first five months of the season, so farmers will have more confidence in potential payouts by then.

LONG-TERM CLAIRVOYANCE

Even if growers wait until March to sign up for the five-year USDA farm program, they won't necessarily have better clairvoyance on which farm program option will pay more over the 2015-2018 crop years.

First-year payments may favor ARC, but on average it's incredibly close between ARC and PLC with a Supplemental Coverage Option (SCO), the University of Missouri's Food and Agricultural Policy Research Institute (FAPRI) estimates. Should prices remain at depressed levels for several years, PLC and its companion crop insurance rider SCO suddenly charge ahead.

Keith Coble, a Mississippi State University economist and U.S. Senate Agriculture Committee consultant during the 2014 farm bill, blames the size of record grain crops for 2014's surprise harvest prices, not a flaw in computer models. Forecasting weather months or years in advance adds a high degree of uncertainty to ag prices.

"People were reasonable saying what they did six months ago [with ARC clearly favoring corn]," he said. "But with the price collapse this fall, it's a lot closer call now."

EDITOR'S NOTE: To test a range of price scenarios on farm program outcomes, try the University of Illinois or Texas A&M farm program calculators.

Easiest to use is the Five-Minute sample county tool at the University of Illinois calculator at http://fsa.usapas.com/…

Texas A&M's calculator requires more inputs, but saves data and gives crop insurance analysis at http://usda.afpc.tamu.edu/…

Follow Marcia Taylor on Twitter@MarciaZTaylor

(AG/CZ)


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