3 Rules of Thumb When Choosing ARC vs. PLC

 
3 Rules of Thumb When Choosing ARC vs. PLC

As farmers inch closer to an election of PLC (Price Loss Coverage) or ARC (Agricultural Risk Coverage) ahead of the March 31 deadline, Farm Journal Media hosted the second of four Farm Bill Decisions webinars, walking through the particulars of each program and answering farmer questions.

Here are some basics about PLC and ARC that will help clarify the decision-making process.

PLC

  • PLC is a risk management tool that addresses deep, multiple year price declines.
  • Payments on covered commodity are made if the effective price for the crop year is less than the reference price (see table below), or if the effective price is the higher of the midseason price or the national average loan rate for the covered commodity, whichever is higher.
  • PLC Payment Rate = Reference Price – Effective Price
  • PLC Payment Amount = Payment Rate X Payment Yield X Payment Acres (85% of base acres)

PLC_chart

ARC-CO

  • ARC is a risk management tool that addresses revenue losses.
  • Producers who elect ARC must unanimously select whether to receive county-wide coverage (ARC-CO) on a commodity-by-commodity basis or choose individual coverage (ARC-IC) that applies to all of the commodities on the farm.
  • You must incur a 14% loss before coverage will start (guarantee revenue)
  • ARC coverage occurs between 76% to 86% of benchmark revenue
  • ARC has a maximum limit of 10% of benchmark revenue unlike PLC which has not limit (until loan rate is hit)

Farmers can also choose ARC-IC – however, that does not appear to be a popular option, according to Paul Neiffer, The Farm CPA.

“You’re probably going to elect this only if your yields are about 25% higher than your county average,” he says.

That still begs the question – ARC or PLC? A lot of it depends on how your yields stack up against averages, Neiffer says.

“Growers with low farm yields will gravitate toward County ARC,” he says. “Growers with high yields compared to county will gravitate toward Individual Farm ARC or PLC.”

But even if you don’t get an ARC-CO payment for your 2014 crop due to high yields, this could set you up for a possible higher payment in 2015 due to higher yield, Neiffer says. For example, if you yielded 217 bu. per acre in McLean Co., Ill., you would likely get no payment for 2014, but you could get a maximum $78 payment for 2015 if yields end up 10% higher than the Olympic average.

Use these three rules of thumb to help make a final decision, Neiffer says:

1. Always elect PLC on highest-yielding acres first.

2. Always elect ARC-CO on lowest-yielding acres first.

3. You can mix PLC and ARC-CO. For example, if you are bumping up against payment limits, elect PLC after maximizing ARC-CO payments.

The final two webinars in the Farm Bill Decisions series air March 17 and 24 at 11 a.m. CST. Much of these events will be devoted to conducting an interactive Q&A session. Register today.

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Comments

 
Spell Check

Marty
Torrington, WY
3/11/2015 09:25 AM
 

  It is very important to understand that the comments made by Mr. Neiffer concerning a high yield in 2014 are more likely to be false because if a county has a high yield in 2014, enough to negate a payment. It will most likely have a good chance of being the highest yield in the benchmark calculations for 2015 and be thrown out therefore the 2015 benchmark yield will be very similar to 2014 and so could the ARC-CO guarantee. Also a producer needs to understand that he has to caclulate where the PLC payment amount diverges from the ARC-CO amount when making his decision. It is always somewhere south of the $3.70 reference price in my county it is about $3.07. Therefore I make more money in ARC-CO until corn hits the $3.07 mark for the 12 month market year average.

 
 

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