Agricultural Risk Coverage and Price Loss Coverage in

Agricultural Risk Coverage and Price Loss Coverage in the 2018 Farm Bill Ben Brown Department of Agricultural, Environmental, and Development Economics

ARC/ PLC : Outline v Enrollment/ Eligibility v Decisions v Background on Agricultural Risk Coverage (ARC) v Changes to ARC v Background on Price Loss Coverage (PLC) v Changes to PLC v Yield Update v Payments- Physical Location v Marketing Loan Program v Final Thoughts Photo Credit: Paige Clawson

2018 Farm Bill: Decisions to be Made Title 1 of the 2018 Farm Bill allows each Farm Service Agency farm to choose a commodity farm program v Enrollment for the 2019 Crop started Sept. 3, 2019 and will go through March 15, 2020 If a producer does not enroll in a farm bill program for crop year 2019 by March 15, 2020: v NO payment will be made for the 2019 crop v The decision defaults to the producers decision during the 2014 Farm Bill A yield update each FSA farm is available for the 2020 Program Year and starts October, 2019

2018 Farm Bill: Timeline Calendar Year 2019 Sep Oct. Nov. Calendar Year 2020 Dec. Jan. Feb. Mar. Apr May Jun. Jul. Aug Sep Oct 2019 Enrollment 2020 Enrollment Future Year Enrollments 2018 ARC/PLC Payments 2019 ARC/PLC Payments 2020 Yield Update

2018 Farm Bill: Decisions to be Made Elect a Federal Commodity Program Agricultural Risk Coverage- County Agricultural Risk Coverage- Individual Paid on 85% of Base Acres Paid on 65% of Base Acres Price Loss Coverage Paid on 85% of Base Acres Supplemental Coverage Option Share of Base Acres Enrolled in PLC 2018 Nationally Ohio Corn 7% 2% Soybeans 3% 2% Wheat 42% 18% Paid on COMBO Purchased Planted Acres Data Source: USDA-FSA, ARC and PLC Landing Page

2018 Farm Bill: Decisions to be Made Program Years 2019 and 2020 will have the same ARC and PLC election v Even though there are two separate enrollment periods. v Reason: if a producer wants to make a farm structure change (i. e. cash rent vs share rent) Producers can elect annual decisions starting in Program Year 2021 v They do not have to if they want to keep their same election v This reduces the pressure of having to make 1 decision over 5 years v Provides more accurate risk management to producers

2018 Farm Bill- Who is eligible Farms are eligible to participate in ARC/PLC if they: v Have historical base acres v Base acres can not exceed Direct or Counter-Cyclical Program acres v Except in the case of approved double crop acres v Combination of 10 base acres across all ownership shares v Had acreage enrolled in Conservation Reserve Program that either expired, voluntarily terminated or early released v Producers should request their bases be restored after CRP expiration. (FSA should restore it for them, but better safe than sorry) v Complete Grass, Idle or Fallow Farm is allowed to enroll in programs, but can not receive payments v Land must be used for agricultural or related activity v Not for non-ag, commercial or industrial use

2018 Farm Bill: Base Acre Reallocation? No Update to Base Acres v The 2014 Farm Bill Provided Producers with the option to update base acres. v Producers generally updated their base if the updated acres had a higher payment rate. v There are still producers with 1996 Base Acres Unassigned base will remain unassigned and receive no payments during the 2018 Farm Bill v This mostly relates to grass pastureland that was turned into crop land v Hay is not a Title 1 Commodity A farm that was planted to grass, pasture, idled, or fallowed from Jan. 1, 2009 - Dec. 31, 2017 v Will maintain base acre assignment and associated payment yields v NO payments for ARC/PLC shall be made on these base acres during the 2018 Farm Bill. v Eligible for $18/ acre under the Grasslands Program through the Conservation Stewardship Program

2018 Farm Bill: Base Acres Producers will have to control weeds on all acres associated with farm v 2014 Farm Bill Required only those enrolled in programs be weed controlled Planting Flexibility is Maintained for any Title 1 Crop v Payments are tied to base acres not planted acres v Payments can be reduced if Fruits and Vegetables are planted on crop base acres Contract Growers/ Leases v FSA will review Grower contracts to see who holds the “production risk” v Cash Rents- if the landowner does not have risk in the crop then he or she cannot receive payments

2018 Farm Bill: Eligible Crops 22 Covered Commodities Barley Canola Corn Chickpeas Large Chickpeas, Small Crambe Flax Grain Sorghum Lentils Mustard Oats Peanuts Peas, Dry Rapeseed Rice- Long Grain Rice Medium Safflower Seed Cotton Sesame Seed Soybeans Sunflower Wheat

2018 Farm Bill: Agricultural Risk Coverage Revenue Protection Program v Makes payments if per acre revenue falls below 86% of a moving benchmark v No required to plant the crop as payments are made on base acres. Agricultural Risk Coverage – County v 5 year Olympic average of County Yields and Marketing Year Average Prices v Can be elected commodity by commodity Agricultural Risk Coverage- Individual v 5 - year Olympic avg. of weighted per-acre revenues v Individual Yields v Elected for all commodities at the farm level Payments are maxed at 10% of benchmark revenue

2018 Farm Bill: Agricultural Risk Coverage Formula Benchmark is Calculated as Followed 5 -Year Olympic Average of Previous 5 year County Yields* (one lag year)*** Multiplied by 5 -year Olympic Average of Previous 5 -year MYA Price** (one lag year) Multiplied by 86% *Yields (higher of actual yield or 80% of county Transitional yield) **Price (higher of actual Market Year Average Price or Effective Price) ***Because of Lag year, 2019 calculation = years 13, 14, 15, 16, and 17 Maximum ARC-CO Payment is 10% of Benchmark Revenue

2018 Farm Bill: Agricultural Risk Coverage Formula Actual Revenue is calculated as County Average Yield for Current Year Multiplied by Higher of Market Average Price for Year or National Marketing Loan Rate Payment is Triggered when: Actual Revenue is lower than 86% of Benchmark Revenue

2018 Farm Bill: Agricultural Risk Coverage Example for 2019: Current Year Yield 150 bu. and current price= $3. 30/ bu. Historical County Yields Substitute Yield = 130 bu. /acre Marketing Year Average Price Effective Price= $3. 70 2013 160 2013 (Effective Price) $3. 70 2014 153 2014 (Effective Price) $3. 70 2015 164 2015 (Effective Price) $3. 70 2016 188 2016 $3. 75 2017 132 2017 $3. 76 Olympic Average 159 Olympic Average $3. 72 A B A*B = C C* 0. 86 = D C*10= E F G H D- H= I OA Yield OA Price Benchmark 86% of Bench. Max Payment Actual Price Actual Yield 2019 Revenue Formula Rate 159 $3. 72 150 $495 $591. 48 $508. 67 $59. 15 $3. 30 $13. 67 Lesser of I or E > than Zero $13. 67

2018 Farm Bill: Agricultural Risk Coverage Group Activity!- Current Year Yield 35 bu. and current price= $8. 10/ bu. Historical County Yields Substitute Yield = 40 bu. /acre Marketing Year Average Price Effective Price= $8. 40 2013 44 2013 $12. 27 2014 41 2014 $10. 10 2015 51 2015 $8. 95 2016 55 2016 $9. 50 2017 56 2017 $8. 80 Olympic Average A B A*B = C C* 0. 86 = D C*10= E F G H D- H= I OA Yield OA Price Benchmark 86% of Bench. Max Payment Actual Price Actual Yield 2019 Revenue Formula Rate Lesser of I or E > than Zero

2018 Farm Bill: Agricultural Risk Coverage Increases the “plug yield” to 80% from 70% of transitional yield in the ARC Olympic average yield calculation County A Yield Calculation 2015 160 2016 153 2017 164 2018 188 2019 132 Olympic Average 159 Suppose county yield came in at 120 bu. /acre and transitional yield is 165 bu. /acre We would use (165 * 80%)= 132 bu. 2014 Farm Bill (165 *70%) = 123. 75 What this means: A higher benchmark revenue could increases chances of payments and the probability of larger payments.

2018 Farm Bill: Agricultural Risk Coverage Selection of Historical Yield Data- Cascade Approach 2014 Farm Bill 1) National Agricultural Statistics Service. Producer Survey 2) Risk Management Agency- Crop Insurance Yields 3) State Farm Service Agency Committee 2018 Farm Bill 1) Risk Management Agency 2) National Agricultural Statistics Service. Producer Survey 3) State Farm Service Agency Committee

2018 Farm Bill: Agricultural Risk Coverage Starting in 2019 - ARC yields will be Trend Adjusted County A Yield Without Trend Adj. With Trend Adj. 2015 160 166 2016 153 157. 5 2017 164 167 2018 189. 5 2019 132 Olympic Average 159 163. 5 What is trend adjusted yields? FSA will us RMA’s Trend Adjustment Factors used in Crop Insurance Historical Calculations Assume: a 1. 5 bu. /year trend adjustment factor 2015= 160 + (2019 -2015)*1. 5 What this means: Trend adjustment factors will increase the benchmark, increasing probability of payments and size.

2018 Farm Bill: Agricultural Risk Coverage 2018 Farm Bill (2019 -2023) ARC-CO payments will be made on the Physical Location of the tract or an elected/ enrolled farm not the Administrative County Tract 101 - Union County, physical location Corn base= 100 acres Tract 102 - Madison County, physical location Corn base= 50 acres Each Step: Benchmark, Benchmark Guarantee, Actual Revenue is weighted by percent share of acres. Then calculation for payment. It is NOT a weighted average of final payment rates. Important

2018 Farm Bill: Agricultural Risk Coverage Physical Location Payment: v Helps smooth the difference between neighboring farms in two different counties v Counties no longer switching administrative county based on which one has the higher payment. v The farmer has 1 payment rate for all of his or her acres. v This means that there could be 1, 000 s of payment rates across the state do to differing combinations of counties and county yields v This makes it harder to plan for future cash flow v Going to create an excel file that calculates this for producers

2018 Farm Bill: ARC- IC v Provides Income Support at the Producer’s Individual Farm Level v Payments are based on the farm’s actual yields, not county yields. v Producers have to have ownership share in part of the farms planted covered commodities. v FSA will compute benchmark revenue for each covered commodity that is planted in the current year and then weight the revenues v ARC-IC payments trigger when the current revenue for all planted covered commodities falls below the guaranteed revenue for the ARC-IC Farm

2018 Farm Bill: ARC- IC Characteristics v Producer has to plant something for a revenue calculation to happen on his or her FSA Farm v Can be as much as 1% of a planted acre of a covered commodity v Payments are made on 65% of base acres Example: Farm has 200 base acres of corn Option 1: Producer plants 500 acres of corn Payment acres are (200 x 0. 65)= 130 acres Options 2: Producer plants 5 acres of corn Payment acres are (200 x 0. 65) = 130 acres

2018 Farm Bill: ARC- IC Characteristics v ARC-IC is chosen for all base acres on the farm v Cannot do PLC for corn and ARC-IC for everything else v Production Reports are for all planted covered commodities v FSA will compute benchmark revenue for each covered commodity that is planted in the current year and then weight the revenues v ARC-IC payments trigger when the current revenue for all planted covered commodities falls below the guaranteed revenue for the ARC-IC Farm

2018 Farm Bill: ARC- IC Characteristics Agricultural Risk Coverage- Individual Coverage Eligible Commodities v Only initially planted covered commodities and approved double crops are included in revenue calculations v Only covered commodities planted on enrolled ARC-IC Farms are included in revenue calculations v ARC-IC enrolled farms with no covered commodities are ineligible for ARC-IC v 100% approved prevent plant on an enrolled ARC-IC Farm will be counted

2018 Farm Bill: ARC- IC Agricultural Risk Coverage- Individual Eligible Commodities Farm 1, Enrolled in ARC-IC • 100 acres of planted corn (initial crop) • 200 acres of failed winter wheat (initial crop) • 300 acres of soybeans (subsequent crop) • 500 acres of alfalfa (initial crop) Answer • 100 acres of planted corn (initial crop) YES • 200 acres of failed winter wheat (initial crop) YES • 300 acres of soybeans (subsequent crop) NO (not initial) • 500 acres of alfalfa (initial crop) NO (not a covered crop)

2018 Farm Bill: Eligible Crops 22 Covered Commodities Barley Canola Corn Chickpeas Large Chickpeas, Small Crambe Flax Grain Sorghum Lentils Mustard Oats Peanuts Peas, Dry Rapeseed Rice- Long Grain Rice Medium Safflower Seed Cotton Sesame Seed Soybeans Sunflower Wheat

2018 Farm Bill: ARC- IC Agricultural Risk Coverage- Individual Eligible Commodities Farm 2, Enrolled in ARC-IC • 100 acres of approved prevent plant corn (initial crop) • 300 acres of approved prevent plant winter wheat (initial) • 300 acres of soybeans (subsequent crop) Farm 2, Enrolled in ARC-IC • 400 Acres of Prevent Plant YES (100% of acres were PP) • 300 acres of soybeans (subsequent crop) NO (not initial)

2018 Farm Bill: ARC- IC Agricultural Risk Coverage- Individual Eligible Commodities Group Activity! What are the eligible commodities Farm 3, Enrolled in ARC-IC • 100 acres of approved prevent plant corn (initial crop) • 300 acres of winter wheat (initial) • 300 acres of soybeans (subsequent crop)

2018 Farm Bill: ARC- IC Takeaways ARC-IC Calculations are difficult- will provide a worksheet with information. If you have someone that has 100% prevent plant- at least inform them that ARC-IC could be an option that provides production. The Challenge with ARC-IC that will make it difficult for producers to choose for 2019/2020 is: v If they took 100% prevent plant in 2019 are they planning on it again in 2020 (two year decision) v Payments are only on 65% of base acres- whereas ARC-CO and PLC are on 85% of acres. v Requires high recordkeeping

2018 Farm Bill: Price Loss Coverage PLC Payments Effective Reference Price* PLC Payment Rate $7. 00 times Marketing Year Average Price PLC Payment Rate Price Loss Coverage Example $6. 00 Dollars/ Bushel minus MYA Reference Price $5. 00 $4. 00 equals PLC Payment Rate equals PLC Payment/ Base Acre When the market price falls below the reference price a payment is triggered If average prices fall below the Marketing Loan Ratethen MLR is used instead $3. 00 $2. 00 3 /1 2012 /15 /17 4 6 1 1 0 0 2 2 Marketing Year 9 /1 2018

2018 Farm Bill: Marketing Loan Rates Commodity 2014 Rate 2018 Rate Barley $1. 95/bu. $2. 50/bu. Corn $1. 95/bu. $2. 20/bu. Cotton $0. 45 -$0. 52/lb Grain Sorghum $1. 95/bu. $2. 20/bu. Oats $1. 39/bu. $2. 00/bu. Soybean $5. 00/bu. $6. 20/bu. Wheat $2. 94/ bu. $3. 38/bu. Other Oilseeds $10. 09/cwt. Dry Peas $5. 40/cwt $6. 15/cwt. Lentils $11. 28/cwt $13. 00/cwt. Long/Med. Grain Rice $6. 50/cwt $7. 00/cwt. Small/ Large Chick Peas $7. 43/ $11. 28 $10. 00/$14. 00 Peanuts $355/ton Loan rates are still below expected market prices, but improves ability to use program as a marketing tool by providing more cash at harvest. However, higher loan rates also lower the maximum payments under the PLC program. Perfect scenario is not needing PLC max and utilizing higher loan rates

2018 Farm Bill: Reference Price Escalator ü The 2018 Farm Bill created a reference price escalator provision that allows the reference price to increase to 115%. The price between the reference price and the max is called the effective price. Commodity Corn Soybeans Wheat 2014 and 2018 Reference Prices $3. 70/bu. $8. 40/bu. $5. 50/bu. ü The effective price is set on 85% of a 5 -year Olympic moving average of previous prices ü Higher effective price = higher payments Price Loss Coverage Example $7. 00 $6. 00 Dollars/ Bushel ü Need high prices relative to reference price to get a higher effective price Effective Reference Price Max $4. 26/ bu. $9. 66/ bu. $6. 33/ bu. $5. 00 $4. 00 $3. 00 $2. 00 /13 2012 /15 /17 2014 2016 Marketing Year /19 2018

2018 Farm Bill: Reference Price Escalator Corn Reference Price Esculator under the 2018 Farm Bill $4. 50 ($/ Bushel) $4. 00 $3. 50 $3. 00 $2. 50 2019 MYA 2020 2021 Reference Price 2022 2023 2024 85% of 5 -Year Average 2025 2026 2027 2028 115% of Reference Price Projected Marketing Years Source: USDA- WASDE & FAPRI

2018 Farm Bill: Reference Price Escalator Soybean Reference Price Esculator under the 2018 Farm Bill $10. 00 $9. 50 ($/ Bushel) $9. 00 $8. 50 $8. 00 $7. 50 $7. 00 2019 MYA 2020 2021 Reference Price 2022 2023 2024 2025 85% of 5 -Year Average 2026 2027 2028 115% of Reference Price Projected Marketing Years Source: USDA- WASDE & FAPRI

2018 Farm Bill: Reference Price Escalator Wheat Reference Price Esculator under the 2018 Farm Bill $6. 50 $6. 00 ($/ Bushel) $5. 50 $5. 00 $4. 50 $4. 00 $3. 50 2019 MYA 2020 2021 Reference Price 2022 2023 2024 85% of 5 -Year Average 2025 2026 2027 2028 115% of Reference Price Projected Marketing Years Source: USDA- WASDE & FAPRI

2018 Farm Bill: PLC Example Soybeans Payment Rate ($/bu. ) x Payment Yield (bu. /acre) x 85%= PLC Pmt. per Base Acre Marketing Year Average Price* Effective Price ($/bu. )** PLC Payment Rate ($/bu. ) Farm Payment Yield ($/bu. ) Base Acres Covered (%) PLC Payment ($/base acre) $8. 50 $8. 40 $0. 00 53 85% $0. 00 $8. 30 $8. 40 $0. 10 53 85% $4. 51 $8. 20 $8. 40 $0. 20 53 85% $9. 01 $8. 10 $8. 40 $0. 30 53 85% $13. 52 *Market Year Average Prices are determined by the Secretary of Ag or Designee after the Marketing Year (soybeans: Sept. 1 - Aug. 31) **in this example we are assuming that the market price 5 -year average does not exceed the reference price

2018 Farm Bill: Yield Updates The Owner or Owners Decision not the Producers 1) They do not have to update program yields even though it would be to their advantage to do so. 1) When payments are triggered and if elected into PLC- higher PLC payments 2) Rental rates and values could increase with higher payments 2) This decision last through the remainder of the 2019 Farm Bill and will be available for future farm bills if applicable 3) Producers can sign for Owner if they have Power of Attorney 4) All owners must agree to make the yield update Producers can update their yields no matter want commodity program they elect.

2018 Farm Bill: Yield Update ü Producers will have the option to update PLC yields in 2020. ü Based on a formula using historical yields from 2013 -2017 and 20082012. (Some producers might see an increase in yields and therefore payments) Formula: 90% of the FSA Farm Yield simple average from 2013 -2017 excluding any years that the crop year was zero or not planted. reduced By a ratio of the corresponding 2008 - 2012 National Yields Ratio: Average of 2013 -2017 National Yield divided by 2008 - 2012 National Yield The Ratio can not be below 0. 9 or above 1

2018 Farm Bill: Yield Update Ratios Here is the Math Calculation for you- per commodity! Commodity PLC Yield Factor Barley 0. 9437 Peanuts 0. 9273 Canola 0. 9643 Rapeseed 1. 0000 Chickpeas – Large 1. 0000 Rice- Long Grain 0. 9330 Chickpeas – Small 0. 9760 Rice- Med/Short 0. 9887 Corn 0. 9000 Rice-Temp. Japon. 0. 9591 Dry Peas 0. 9988 Safflower 1. 0000 Flaxseed 1. 0000 Seed Cotton 0. 9000 Grain Sorghum 0. 9077 Soybeans 0. 9000 Lentils 1. 0000 Sunflower 0. 9396 Mustard 0. 9460 Wheat 0. 9545 Oats 0. 9524

2018 Farm Bill: Yield Update Example 5 -Year Average of Farm Yields x 90% x Commodity Ratio Corn RMA Yields for Farmer Smith 2013 - 160 bu. 2014 - 170 bu. 2015 - 165 bu. 201645 bu. 2017 - 160 bu. Simple Average= 160 bu. / Acre Corn Ratio= 0. 90 1) If one of these years the Farmer Smith did not plant corn- it would be a simple average of the remaining years 2) Low Year can be replaced with a substitute yield 160 bu. /Acre x 90% x 0. 90= 130 Bushels If Farmer Smiths previous PLC yield was less than 130 - he or she should update to a yield of 130

2018 Farm Bill: Yield Update Group Activity! – Calculate the Yield Update or not Substitute Yield* Current PLC Yield Corn 112 122 150 145 138 162 175 Soy 35 38 48 46 53 54 60 Wheat 56 55 52 48 34 45 40 Corn 112 122 Soy 35 38 Crop 2013 2014 2015 104 52 2016 2017 90% of Simple Average Up. Date Ratio 160 45 56 *Substitute Yield= 75% of 2013 - 2017 county average yield Up-Date Yes or NO

2018 Farm Bill: Irrigation Practice Payments In the years 2013 - 2017, a county and crop that was 10% irrigated and non-irrigated FSA data and an average of 5, 000 acres planted to that crop every year breaks ARC-CO (ONLY) by irrigated and non-irrigated Soybeans: Allen, Auglaize, Champaign, Hardin, Putnam, Seneca, Shelby, Union, Van Wert, Williams and Wyandot Corn: Champaign, Pickaway, Ross and Williams

2018 Farm Bill: Payment Limitations Combined ARC and PLC payments person or legal entity cannot exceed $125, 000 v Different from 2014 - this is now separate of Loan Deficiency Payments (LDP)and Marketing Assistance Loans (MAL) Adjusted Gross Income v Still $900, 000 person or legal entity v ARC and PLC do not contain the exemption to AGI if 75% of the incomes from the farming or ranching operation like the Market Facilitation Program Family Members v First cousins, nieces, and nephews are to be included in the definition of family members eligible for payments

Final Thoughts The same programs exist with some minor modifications ARC/PLC v Enrollment for 2019 ends March 15 and is for two years v Annual decisions after that v Yield Update (does the update give you a higher yield? ) Best fit for your operation will depend on your preference for risk management v Protection against catastrophic price declines (PLC) v Protection against shallow revenue losses (ARC) or v Highest program Payments (use decision tools with best information available: forecast methods, educated guess on world markets, supply, demand) ARC-IC will likely remain unpopular v Complex and heavy record keeping

This material is based upon work supported by the USDA-NIFA under Award Number 2018 -70027 -28586 and prepared by Ben Brown- The Ohio State University College of Food Agriculture and Environmental Sciences with reference of information to Pat Westhoff- University of Missouri, Mykel Taylor- Kansas State University, Gary Schnitkey-University of Illinois and Aaron Smith- University of Tennessee