by Emily Unglesbee, DTN Staff Reporter
COLUMBIA, Mo. (DTN) — The U.S. Department of Agriculture's recent release of a January 2015 deadline for farm bill program sign-ups has given growers a bit more breathing room.
“Don't rush the decision now,” said Pat Westhoff, program director for the University of Missouri's Food and Agricultural Policy Research Institute. “We don't expect sign-ups to occur for quite some time yet, not until 2015,” he told bankers and lenders gathered for the Emerging Issues in Agricultural Lending Conference in Columbia, Mo., on June 3 and 4.
In the meantime, land-grant economists like Westhoff continue to crunch numbers and run future commodity price scenarios in an effort to help producers decide which farm bill program is better suited to their needs.
On Tuesday, Westhoff presented FAPRI's most recent analysis of the two programs to conference attendees. The analysis reflected the growing consensus among economists that the Agricultural Risk Coverage program (ARC) is more likely to benefit corn and soybean producers in the next two or three years, while wheat and rice growers might find more protection in the price-driven Price Loss Coverage (PLC) program.
To refresh your memory, growers must enroll for five years in one of two programs: PLC, which makes payments when the annual average of each commodity's prices drop to a certain trigger level, or ARC, which makes payments when per-acre revenues fall below a trigger.
The PLC triggers, known as “reference prices,” are set at $3.70 per bushel for corn, $8.40/bu for soybeans, $5.50/bu for wheat, $3.95/bu for sorghum, and $14/cwt for rice. ARC payments are triggered when per-acre revenues drop below 86{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} of a benchmark, calculated by multiplying the five-year average national price, with an average yield. Growers have two options for the yield average: 85{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} of the five-year average county yield or 65{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} of their farm's five-year average yields.
FAPRI's analysis was based on January market conditions and the Institute's average price projections released in March, which were produced by running 500 different market outcomes based on factors like weather and export demand, Westhoff explained. “Things will change,” he noted. “By the time producers sign up, we'll know more about the market circumstances and we'll know the final rules.”
CORN AND BEANS
FAPRI's price projections, which favor $4 corn for the next five years, suggest that the PLC program will hold little short-term attraction for corn farmers. ARC payments are more likely to be triggered in the next two years for corn, but growers should keep in mind that ARC's benchmark revenue level is not rigid, Westhoff noted.
“Note that as prices fall in our projections from where they've been, that benchmark eventually adjusts downward,” he explained. “It's a five-year moving average, so it takes out the highs and it takes out the lows. So those high prices we had in 2012 eventually drop out of the mix, and we're left with a bunch of average prices around $4.50 or less. Multiply that by average yields for the last couple years, and that benchmark drops.”
By FAPRI's calculations, average PLC payments could overtake average ARC payments for corn farmers as early as the 2016-17 crop season.
“This is going to be a common theme,” Westhoff said of this trend. “ARC may be likely to provide payments for farmers the first two years, and the reverse may be true later.”
The FAPRI analysis of the two programs for soybeans favored ARC slightly more, with average PLC payments not overtaking average ARC payments until the 2018-19 crop season.
Corn farmers might face more of a dilemma than soybean growers if FAPRI's price projections hold true, Westhoff pointed out. Across the next five years, the payment differences between the two programs in FAPRI's analysis actually cancel each other out for corn growers.
“The average across those five years is almost identical,” Westhoff noted. “The bottom line is if you think prices are going to be higher than we project, ARC may be a better option. If you think prices are lower than we project, PLC may be the better option than we're suggesting here. It's a tough call.”
“It depends on what kind of risk you're trying to protect against,” he added. “Are you worried primarily about prices? Or are you worried about both prices and yields in your county or farm?”
WHEAT AND RICE
Of all the commodities covered by the two new farm bill programs, rice and wheat growers might have the easiest decision, Westhoff said.
Starting in 2015, the FAPRI analysis suggests that average PLC payments to rice producers would be roughly six times larger than average ARC payments each year.
“Unless you're a lot more optimistic about future rice prices than we are, it looks like PLC is more likely to be attractive to rice producers than ARC,” Westhoff said. “You don't have as much yield variation in rice as you do in other crops, so it doesn't trigger payments as often (under ARC).”
Likewise, average PLC payments for wheat growers overtake average ARC payments in 2015 and the gap only widens over the next four years in FAPRI's analysis. The results are driven by FAPRI's projections of wheat prices falling under $6 starting in 2015.
“Given our price projections for wheat, which are a bit lower than the (PLC) reference price, in the first year there isn't much difference between the programs, and in later years, if prices are as low as we project on average, PLC pays out more than ARC,” Westhoff noted.
Growers don't need to make any permanent decisions for some time, and future market conditions and trends could make the final sign-up in 2015 less nerve-wracking, Westhoff concluded.
“By that time, we'll have a pretty good idea what happened in 2014 production and prices and will probably have a reasonable guess what to expect in 2015,” he said. “It looks to me that the bottom line will be your take on prices. If you're very optimistic about the future of crop prices, with little downside at least for corn and soybeans, then ARC will be better. If you're very pessimistic or concerned about prices, then PLC may be a better choice.”
For FAPRI's price projections, see their March 2014 U.S. Baseline Briefing Book here: http://goo.gl/….
To see FAPRI's overall analysis of the farm bill, visit this site: http://goo.gl/….
For USDA's timeline for ARC and PLC sign-ups, see this Farm Service Agency news release: http://goo.gl/….
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Posted with DTN Permission by Haylie Shipp
