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Time to make protection decisions

Time to make protection decisions

Man looks at fruit apples

Agriculture Risk Coverage and Price Loss Coverage programs remain decoupled from 2021 planting decisions. 

This winter marks the third time producers are heading to a U.S. Department of Agriculture’s Farm Service Agency office to make an Agriculture Risk Coverage and Price Loss Coverage program elections. We thought the decision would become easier with experience, but the 2021 environment is perhaps the most challenging yet. This week’s post highlights six key considerations for the 2021 Agriculture Risk Coverage vs Price Loss Coverage decision.

Before diving into the specifics, this post and related articles are not a substitute for the various Agriculture Risk Coverage and Price Loss Coverage decision-tools. Key trends and realities impact those model outputs. Our goal is to identify, frame and discuss a few of those factors. With any model or forecast, we must think critically about what the results tell us.

Agriculture Risk Coverage and Price Loss Coverage programs remain decoupled from 2021 planting decisions. We continue to observe confusion about Agriculture Risk Coverage and Price Loss Coverage program decisions, and the potential impact on planting decisions – and vice versa. The programs – by design – are decoupled from 2021 planting decisions. That’s to say producers have zero incentive to align their planting decisions with their Agriculture Risk Coverage and Price Loss Coverage program decisions.

We know very little going into this decision. This year’s decision is for the 2021 production year. For corn and soybeans, the relevant marketing year will run from September 2021 through August 2022. It goes without saying but a lot can happen during the next 18 months. Furthermore we know less than usual headed into this enrollment. For example the previous year’s enrollment was for 2019 and 2020 production. We knew little about the 2020 production year, but we had a good idea about the 2019 situation. For some 2019 acted a bit like the “bird in the hand” and helped guide the decision-making. The 2019 situation was similar to what happened in 2015 when producers registered for the 2014-2018 production years.

Price Loss Coverage reference prices are skewed for soybeans and wheat. Even during the depths of the trade war and a 20 percent increase in ending stocks, there has not been a Price Loss Coverage payment for soybeans. Overall the soybean Price Loss Coverage reference price is set at a relatively depressed level. As a result a Price Loss Coverage payment for soybeans is unlikely. On the other hand a relatively inflated Price Loss Coverage price for wheat has resulted in numerous large wheat Price Loss Coverage payments. This isn’t to say anything about the future, but recognizing what’s occurred during the past seven years – the base rates.

Large yield declines are likely necessary to trigger Agriculture Risk Coverage-County payments. Marketing-year-average prices for the 2021-2022 marketing year are half of the equation for triggering potential Agriculture Risk Coverage-County payments. Without digging into the specifics too much, if we assume marketing-year-average prices, we can calculate where yields would need to be to trigger an Agriculture Risk Coverage-County payment. Using current price projections we found a much-reduced county yield is required to trigger an Agriculture Risk Coverage-County payment. For example a marketing-year-average corn price of $4.05 wouldn’t trigger an Agriculture Risk Coverage-County payment until yields were 79 percent or less of the county-benchmark yields. Of course the greater the marketing-year-average price the more-reduced of county yield is necessary to trigger the revenue-based payments.

Payment outlook is bleak given current realities. Overall the current outlook for potential payments under both programs is not bright. Given the number of unknowns and long-time horizons, a lot can happen. But it’s important to recognize current conditions are very different than in 2014 when falling prices meant strong Agriculture Risk Coverage-County payments were possible, and in 2019 when reduced commodity prices made Price Loss Coverage more likely to pay. The mechanics of the program haven’t changed much during the past seven years, but each election period has taken place under very different farm-economic conditions.

Programs offer strategically different options. In mapping out the pros and cons of each program, it reminded us that the Agriculture Risk Coverage and Price Loss Coverage programs have very different strategic advantages. Agriculture Risk Coverage is based on revenue and offers some element of yield protection. But Price Loss Coverage is priced-based. For producers worried about yield risks, Agriculture Risk Coverage might be overall a better program. Alternatively, Price Loss Coverage offers more protection with reduced-price outcomes. Producers should ask themselves, “which would provide more value to my operation?”

Building off that idea, recognize most of the Agriculture Risk Coverage and Price Loss Coverage program tools report an average expected payout under a range of various scenarios. In most cases one will want to dig a little deeper into how the programs work under various conditions.

To illustrate how focusing solely on an average expected payment might lead our thinking astray, the table shows an example. With both options the average expected payout is $10; however the programs are offer very different payout profiles.

Wrapping it Up

There are several considerations and unknowns headed into the 2021 Agriculture Risk Coverage vs Price Loss Coverage program decision. As a starting point producers should ask themselves three questions.

  • What do I know?
  • What are my expectations?
  • What are my primary concerns?

While there isn’t an obvious solution, those questions will help producers zero-in on a decision – or a set of decisions across all their program acres – that works best for them.

Keep in mind that even with the exact same set of information, individuals will weigh the factors differently based on personal preferences. That’s to say producers should not focus on finding the mathematically “right” answers as much as finding a decision that is “right for them.”

For those really invested in making a good decision, we’d suggest capturing your thoughts and ideas as you sort through the 2021 decision. A year from now when you’re facing the decision for 2022 production, you can review your thoughts, evaluate the quality of the 2021 decision and learn from yourself. That won’t be easy but you’ll thank yourself next year.

Brent Gloy and David Widmar are agricultural economists with Agricultural Economic Insights.

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