The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
ARC Could Lock in More Revenue Than Crop Insurance
Feb 16, 2014
We have written several posts on Agricultural Risk Coverage over the last couple of weeks, however, the Olympic average calculations called for in ARC may yield higher income levels than crop insurance for the 2014 and 2015 crop years. ARC is calculated by taking the average revenue for either county or individual coverage. This Olympic average is based upon the average revenue for each year over the last five years. After calculating the revenue for each year, you then throw out the high and low year and take the average of the remaining three years.
For example, I looked at Buchanan County, Iowa and have calculated my estimated Olympic benchmark revenue for 2014. The average US corn price for each crop year is $3.55 (2009), $5.18 (2010), $6.22 (2011), $6.89 (2012). The 2013 average is not known yet since that crop year will end August 31, 2014. For purposes of this calculation, I assumed $4.20 for the 2013 crop average. The average yields for Buchanan County is 171 (2009), 167.50 (2010), 187 (2011), 140.40 (2012) and 2013 will be released shortly, but I assumed 178 (actual yields may be a tiny bit different based on final FSA calculations). We now arrive at average revenues for each year which is as follows:
- 2013 - $748
- 2012 - $967
- 2011 - $1,163 (highest)
- 2010 - $868
- 2009 - $607 (lowest)
2009 is the lowest and 2011 is the highest and these are thrown out. We then average the remaining three and come up with $861 of benchmark revenue. Our maximum payment is 10% of this number or $86 and we do not start to collect until revenues are lower than 86% of this number or $740.
Now, under crop insurance, you would take the greater of the spring or harvest price and then essentially multiply your trend APH to arrive at your "benchmark" revenues. Let's assume for this year, that the county APH is simply the average of the last 5 years or 169 bpa. If we take our current ARC benchmark revenue of $861 and divide by 169 bpa we arrive at a price of $5.09 which would be the crop insurance equivalent spring or harvest price. This means that right now ARC is essentially offering about the equivalent of $5.10 corn pricing for the 2014 corn crop.
Now for the 2015 corn crop, the numbers are actually probably a little higher than 2014 unless corn prices and yields fall dramatically. In my example, I am assuming that the 2014 crop yield for the county is 185 bpa and the average US corn price will be $4.10. This results in average revenue of $777. Since we have a trailing 5 year Olympic average, we now throw the 2009 crop year completely and then 2013 is our low year and 2011 is our high. After doing the calculations, we end up with benchmark revenue of $749 about $9 higher than our 2014 crop year example.
The Price Loss Coverage guarantee is currently $3.70 for the 2014-2018 crop years. ARC appears to be offering coverage levels closer to $5.10 per bushel than $3.70 for 2014 and 2015. Who knows what 2016-18 would be, but prices would need to be substantially lower than now for PLC to beat ARC over the five-year farm bill cycle. This is one example for corn. Each crop will have different numbers for county yields, prices and PLC reference prices, but so far, my analysis indicates ARC is probably better for corn, beans and wheat than PLC.