During the next six months producers will need to again decide between the U.S. Department of Agriculture’s Agriculture Risk Coverage and Price Loss Coverage programs. The programs were first introduced in the 2014 Farm Bill. They were reauthorized with a few changes by the 2018 farm bill. Agriculture Risk Coverage-County was in 2014 favored for corn at 93 percent of program acres, soybeans at 97 percent of program acres and wheat at 56 percent of program acres.
Throughout the fall we plan to share a few thoughts and insights into the upcoming farm-bill election. This week’s post sets the stage by framing one of the biggest changes since 2014 – the farm economy.
Keep in mind the 2014 Farm Bill went into effect for the 2014-2015 crop. That crop – harvested in 2014 – didn’t receive potential payments until fall 2015, or the end of the 2014-2015 marketing year.
For Agriculture Risk Coverage-County the process of setting the annual benchmark revenue required a five-year moving olympic average for establishing benchmark marketing-year-average prices and county yields. That meant the benchmark revenue for the 2014-2015 Agriculture Risk Coverage-County program was based on prices and county yields from 2009-2010 through 2013-2014. Of course that was a time of historically inflated prices. As a result heading into the 2014 program Agriculture Risk Coverage-County had a built-in advantage of offering inflated price benchmarks.
This time around the situation is different because the olympic average-price guarantees are now close to the Price Loss Coverage reference prices. The data for the 2018-2019 and 2019-2020 marketing years are preliminary and estimates. Specifically those data were based on the USDA’s World Agricultural Supply and Demand Estimates price forecasts in August.
Corn yields, payments considered
Figure 1 plots three pieces of data that capture how the farm economy has dramatically changed during the past five years. Annual marketing-year-average prices for corn are shown in blue. That’s the average price producers received for corn sold during the marketing year.
When the 2014 Farm Bill decision was made, corn prices had been at well more than $4 per bushel for the previous four years. That set the stage for inflated Agriculture Risk Coverage Benchmark prices during the first few years of the Agriculture Risk Coverage-County program. In 2014 there was a lot of confidence that Agriculture Risk Coverage-County would have an annual Agriculture Risk Coverage Benchmark Price of more than $5 per bushel for the first few years. That was the case – shown in green.
It was the wide gap between depressed marketing-year-average prices in blue and better Agriculture Risk Coverage Benchmark Prices in green that made the Agriculture Risk Coverage-County program so attractive in 2014. In many ways if prices declined, which they did, Agriculture Risk Coverage-County had large potential payments built into the early years.
The other data point from Figure 1 is the Price Loss Coverage reference price shown by the orange line for corn at $3.70. Annual marketing-year-average prices must fall to less than that level to trigger Price Loss Coverage payments. The Price Loss Coverage program has made payments for corn since 2015-2016.
Table 1 provides a slightly different way to think about the Agriculture Risk Coverage-County program. The annual Agriculture Risk Coverage Benchmark Price and marketing-year-average Final Price from Figure 1 are shown in the top two rows. The next two rows show how much county yields could climb and still trigger payments. In other words the greater that number the easier it was to trigger an Agriculture Risk Coverage-County payment. Take 2014-2015 for example. Given the actual marketing-year-average price and the benchmark Agriculture Risk Coverage-County price, a payment would be triggered if county yields fell to less than 123 percent of the county olympic average yield. The maximum payment would be achieved if yields were less than 111 percent of average.
Looking at the bottom two rows of the table one can see that in the first three years of the program, counties would receive payments unless they achieved yields of well more than 100 percent of their olympic averages. The large gap between Agriculture Risk Coverage Benchmark Price and marketing-year-average Final Price made that yield threshold quite inflated in the first few program years.
Looking at the six years of data, consider how far those yield triggers have decreased. In 2018-2019 it took a yield at less than 88 percent of the county benchmark to receive a payment. As a result payments under Agriculture Risk Coverage-County decreased rapidly. Thinking about the current crop – for which producers need to make an election – it will almost certainly take a depressed yield at 88 percent of the county olympic average to trigger a payment given current price estimates.
Soybeans yields, payments considered
Figure 2 and Table 2 present the same data for soybeans. The first few years of the soybean Agriculture Risk Coverage-County program had an Agriculture Risk Coverage Benchmark Price at more than $12 per bushel. For the 2019-2020 crop the benchmark has decreased to $9.25.
The interesting thing about soybeans is that the Price Loss Coverage reference price is quite depressed. Note that soybean’s marketing-year-average prices have not decreased to less than the reference Price of $8.40 – even in the depths of the trade war. That’s to say the Price Loss Coverage program has not made a payment for soybeans. That said, we are approaching that threshold as the USDA’s most recent soybean marketing-year-average price forecast for 2019-2020 is at $8.40.
Notice initial payment thresholds for soybeans weren’t nearly as good as they were for corn. In 2014-2015 soybean yields of less than 104 percent were necessary to trigger a soybean Agriculture Risk Coverage payment. But most recently a county-average soybean yield of less than 95 percent was necessary to trigger a payment for the 2019-2020 crop – which is a larger payment potential than for corn.
Wheat yields, payments considered
Figure 3 and Table 3 show the data for wheat. Producers recognized the Price Loss Coverage program had some appeal given the $5.50 reference price; just under half opted for Price Loss Coverage. When the marketing-year-average price for wheat hit $3.89 during 2016-2017 that triggered large Price Loss Coverage payments.
Wheat has reached the point where the statuary minimums have taken effect and the Agriculture Risk Coverage Benchmark price has reached the floor of $5.50.
Table 3 shows the yield story for wheat has been a bit different than for corn and soybeans. Specifically the maximum county-level yield required to trigger an Agriculture Risk Coverage-County payment peaked at 148 percent in 2016-2017. That’s when the marketing-year-average price was far less than the Price Loss Coverage Reference Price. Furthermore counties with a yield at or less than 133 percent of the county benchmark yield hit the Agriculture Risk Coverage-County payment cap that year. For the 2019-2020 crop the current estimate is that Agriculture Risk Coverage-County payments will be made in counties with yields of less than 95 percent of the benchmark.
Wrapping it Up
As producers make their 2018-farm-bill elections during the next six months, a major difference to keep in mind is the shift in the farm economy since 2014. The 2014 Farm Bill elections were made in an era when inflated prices provided a lot of incentive to the Agriculture Risk Coverage-County program. The 2018-farm-bill decisions – at least for the 2019-2020 and 2020-2021 production decision producers must make this fall and winter – the slug of poor commodity prices has removed a lot of the appeal Agriculture Risk Coverage-County had five years ago.
Producers considering the Agriculture Risk Coverage-County program must consider changes in revenue. In the early years of the program many producers received payment even with strong county-average yields. County yields of less than 120 percent for corn would still trigger an Agriculture Risk Coverage-County payment. But most recently the yield threshold has decreased significantly. It’s currently estimated that a yield of less than 88 percent of the county-yield benchmark would be needed to trigger a payment for the 2019-2020 produced corn crop.
Regular readers know we’ve had our concerns and frustrations about the Agriculture Risk Coverage and Price Loss Coverage programs. As we’ve said before, there are several ways those programs don’t do well in trying to help producers manage risks. Producers will need to carefully consider their upcoming election for the 2019-2020 and 2020-2021 crops.
In our mind there are two bad strategies.
Select what the producer did the previous time because it worked well.
Pick Price Loss Coverage because that’s what everyone is talking about.
In future posts we’ll continue to review the 2014 Farm Bill and help producers thinking through the upcoming decision. Specifically we’ll look at county-level data to see which program paid more and how Agriculture Risk Coverage-County benchmark yields have changed.
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