The Farm CPA
By:
Paul Neiffer
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 Versus PLC - 2014-2018
Apr 28, 2014
I have gotten several questions regarding which program is better - ARC or PLC. There is no one right answer to this question since there are so many unknown variables. However, I decided to run out the numbers for corn, soybeans and wheat assuming certain crop marketing prices for each year. For corn, I elected to run the numbers assuming an average crop price for each year (2014-2018) of (1) $3.00, (2) $3.75, (3) $4.50 and (4) $5.25. For soybeans, I elected to use (1) $7.50, (2) $9.00, (3) $10.50 and (4) $12.00. For wheat, I used (1) $4.75, (2) $5.50, (3) $6.25 and (4) $7.00.
From the University of Illinois Farmdoc database, the actual average marketing crop prices for each of these crops by crop year are:
Crop 2009 2010 2011 2012 2013
Corn $3.55 $5.18 $6.22 $6.89 $4.65
Soybeans $9.59 $11.30 $12.50 $14.40 $13.25
Wheat $4.87 $5.37 $7.24 $7.77 $6.50
2013 crop year prices are my estimates. These crop years do not end for corn and soybeans until August 31, 2014.
In my analysis, I assumed that the average crop price for 2014-2018 would remain exactly the same for each year. I also assumed that the yield would remain static during each year. PLC makes a payment based on price only, whereas, ARC makes a payment on both price and yield. All calculations shown are based upon a per bushel basis.
Corn Analysis - PLC only pays when corn prices drop below $3.70. Therefore, at the $3.00 price level, a full payment of 70 cents per bushel would occur during all five crop years for a cumulative payment of $3.50. For ARC, payments would occur at the $3.00, $3.75 and $4.50 level. At the $5.25 level, no payments would be made. At $3.00, the cumulative payments would be $1.59, at $3.75 cumulative payments would equal $1.52 and at $4.50, cumulative payments would equal 20 cents. At either $3.00 or $3.75, 54 cents of payments are made in 2014 and 2015. The reason for this is that the Olympic averages throws out the 2009 low year for 2014 and uses the same three years (2010,2011 and 2013) for the 2015 crop year.
Soybean Analysis - Since the PLC reference price is $8.40, payments only occur when bean prices average $7.50 per bushel. In this case, the cumulative payments equal $4.50. For ARC, cumulative payments equal $4.19 for $7.50, $3.44 for $9.00 and $.24 for $10.50. No payments occur at the $12 level. At both the $7.50 and $9.00 price level, full payments of $1.24 per bushel occur during 2014 and 2015. In 2016, $1.11 is paid at the $7.50 level and $.96 at the $9 level. In all cases, these payments would exceed any PLC payments.
Wheat Analysis - The PLC wheat reference price is $5.50. Therefore, only the $4.75 price payment yields a PLC payment and the cumulative amount is $3.75. For ARC, the $4.75 level yields cumulative payments of $1.83, while the $5.50 level drops cumulative payments all the way down to $.04. The $6.25 and $7.00 price levels yields no payments at all.
Corn Conclusions - If you believe that corn prices will remain below $3.70 for all five years of the farm bill, then PLC will yield more than ARC. However, under this scenario, ARC will yield almost as much for the first three years and you should receive a payment for the 2014 and 2015 crop year even if prices average $4.50 during those crop years. It appears that there is still a slight advantage to ARC over PLC based on recent price trends.
Soybean Conclusions - Bean prices would have to average less than $8.40 for all five years for PLC to make any material payments. At the $7.50 price level, PLC does make a cumulative payment of $4.50, however, ARC at this price level almost pays the same amount ($4.19) with additional payments all the way up to the $10.50 level. It appears that ARC has a large advantage over PLC for soybeans (unless bean prices decrease dramatically over the next five years).
Wheat Conclusions - It appears that material payments for wheat will only occur if wheat averages less than $5.50 for either PLC or ARC. If wheat averages $4.75 for all years, PLC would payout $3.75 for PLC, whereas ARC yields only $1.83 and at the $5.50 level and above, ARC would yield little or no payments under either program. It appears that PLC has an advantage over ARC since wheat prices would have to be at the $5.50 reference price for any ARC payments to kick in. Also, PLC allows the farmer to take advantage of the Supplemental Coverage Option (SCO) while ARC does not allow for this option.
Care must be taken in reaching any conclusion from this limited analysis especially since we do not know the final 2013 crop marketing year average prices. However, based on current price trends, we would not think the final numbers will be off by that large of amount and at least this analysis provides some clarity on how PLC and ARC might pay-out assuming certain price levels.