At 959 pages, the "Agriculture Act of 2014" is hardly a quick read. But it includes a new feature, Agriculture Risk Coverage, that could provide corn and soybean farmers with an important cushion for at least the next two years.
Figuring how the new plan fits in with other marketing tools, including storage, hedging, and crop insurance won't be easy, however. And, with discovery underway for Revenue Protection base prices, the clock is beginning to tick more loudly.
While final decisions on how to participate in the new farm program won't happen anytime soon – signup is months away at best – some type of preliminary roadmap is needed soon to effectively manage risk in what could be a tough year for profits otherwise.
ARC Isn't Your Only Choice
First off, ARC isn't the only alternative. There are other possibilities to evaluate that replaced the old system of direct and counter-cyclical payments and average crop revenue election. Decisions on whether to update base acres and yields must also be weighed. In short, it's a chore similar to those needed during other major farm program overhauls, such as the one in 2002.
For grain growers the first choice is between ARC and Price Loss Coverage, which is similar to traditional price-oriented farm programs but with updated target prices. The "reference" prices that replace the old system are $5.50 for wheat, $3.70 corn and $8.40 soybeans. PLC pays the difference between the reference price and the marketing year price for the crop, or the loan rate, whichever is higher, on payment acres and yields.
The "Olympic" averaging system used for ARC means its prices are higher than the reference prices for 2014 and for the 2015 crop too. Of course, the farm program is a five-year election, so PLC could become more attractive if markets collapse around the time of signup.
Instead of protecting price, ARC is a revenue-based program. It is available based on either individual farm yields or county yields. Early indications suggest the county level program may work best for many farms, because the individual program pays on only 65% of base acres compared to 85% for ARC. The individual program is also a whole farm program, covering all program crops.
The county-level math works like this: "Benchmark" revenue is guaranteed by multiplying county yields times national average cash price times 86%. The county yield is the "Olympic" average for the five previous years, tossing out the high and low years. The same Olympic average system is applied to national cash prices.
If your county yields are the same as the national average, your coverage would look like this:
Payment is made on 85% of base acres by the amount actual revenue is less than the benchmark, up to 10% of the benchmark. Actual revenue is figured by multiplying the county average yield times the higher of the loan rate and the national average cash price.
For expanded information, including illustrations, use the link below to download the full report.