What if USDA Average Prices Occur?
May 15, 2014
The USDA has provided their long-term price outlook for the major crops over the next few years. Since ARC and PLC are both based upon what the average marketing price by crop year will be, I decided to run another analysis assuming that these prices occur. PLC has no yield variability, while ARC can be impacted by yields above or below the five-year Olympic average. Therefore, this analysis assumes that yields will remain constant over the five-year life of the farm bill.
For corn, USDA is forecasting the following prices (crop year marketing years and based on February, 2014 FAPRI forecast):
- 2014 $3.65
- 2015 $3.30
- 2016 $3.35
- 2017 $3.40
- 2018 $3.60
Plugging these numbers into the calculations for PLC, it shows that total payments per eligible bushel over the five years is $1.20. Plugging the same numbers into ARC calculations and assuming the 2013 crop average price will be $4.60, we come up with payments in 2014 and 2015 of $.53 (limited to 10% of benchmark revenue per bushel of $5.33) and $.48 in 2016. This equates to a total payment of $1.54 which is greater than PLC. Remember, however, that if yields are lower, then payment will be higher (subject to 10% limit) and if yields are higher, than payments are lower.
For soybeans, USDA is forecasting the following prices:
- 2014 $9.75
- 2015 $8.85
- 2016 $8.90
- 2017 $9.05
- 2018 $9.25
Since these prices are all higher than the $8.40 reference price, there would be no PLC payment. Plugging in these numbers for ARC calculations, we come up with payments ranging from $.09 in 2017 to $1.23 per bushel in 2015 (limited to 10% of benchmark revenue). Total payments will equal $3.37 over the five-year life of the farm bill.
For wheat, USDA is forecasting the following prices:
- 2014 $4.90
- 2015 $4.35
- 2016 $4.35
- 2017 $4.45
- 2018 $4.60
In this case, since all of these prices are lower than the $5.50 reference price, a PLC payment would be made each year. These five payments total $4.90. Plugging these prices into the ARC calculation, we come up with maximum payments in 2014 and 2015 of $.65 and $.63 in 2016 and a final payment of $.17 in 2017 for a total of $2.10
As you can see compared to our previous analysis, our final conclusions do not change much. We previously indicated a leaning toward ARC for corn and using USDA prices, that is still the conclusion. Total ARC payments are about $.34 higher than PLC. With regards to soybeans, our analysis indicated ARC would be better than PLC and using USDA that is certainly true since there would be no PLC payments. For wheat, we leaned toward wheat in our previous analysis and using USDA still bears this out. Total PLC wheat payments would be about $2.80 higher than ARC.
USDA is not always right on these forecasts (OK, almost never right) and they tend to be fairly conservative. If they are indeed conservative for the 2014-2018 crop years, then ARC will tend to perform even better than what is shown here.
The USDA is supposed to have decided on which organizations to award their $3 million of grants for decision-making analysis, but I am hoping that this analysis and others we have done will give you a head start.