A Look at the Proposed ARC Re: Farm Bill

January 5, 2012 02:09 AM
 

The Farm Bill recommendations to the Joint Select Committee on Deficit Reduction included provisions for a shallow loss program - the Ag Risk Coverage (ARC) program. This program is designed to make a payment when an individual's actual crop revenue falls to between 75% and 87% of that individual's 5-year Olympic average revenue (excluding high and low years).

Under the terms of the program, payment would be made on 60% of the individual's planted acres (including prevented planting acres).

While program parameters were set to attempt to minimize overlap with crop insurance coverage, substantial overlap still exists in areas were 85% coverage levels are available.

One little-discussed consequence of that overlap is the incentive that it creates for producers facing a potential loss. Consider the following figure showing total gross revenue from corn production at a series of different yields. Revenues in this figure include crop revenue, ARC payments, and indemnities from 85% revenue insurance. In this example, expected yield is 190 bushels per acre and expected price is $5.25/bushel.

01 05 12

Note that as yields fall below about 160 bushels per acre, total revenue actually increases because both ARC and crop insurance pay out for the same loss in the range of 75% to 85% of expected revenue. The practical implication of this is that the farmer is actually better off taking a larger yield loss in order to receive a larger total payment. One farm policy analyst said, "This is clearly not the type of incentive that such programs should provide."

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