The Farm CPA:Which Insurance Coverage Is Best?

September 3, 2014 10:19 PM
 
paul neiffer
The 2014 farm bill has been out for a few months, and it includes several major changes important to producers.

First, farmers will no longer get a direct payment simply for being a farmer. Rather, they must elect either Agricultural Risk Coverage (ARC) or Price Loss Coverage (PLC). They must decide by late this year or early 2015.  

Let’s begin by defining these options and examining how payments are structured. ARC is both a price and yield payment similar to revenue crop insurance, while PLC is strictly a price payment.

For corn and soybeans, it is likely ARC will make a payment in crop years 2014 and 2015 because of high Olympic average crop prices. As of this writing, USDA projects an ARC crop benchmark price of $5.35 for corn and a price of $12.30 for soybeans. The guarantee price—86% of these numbers—is $4.60 and $10.58, respectively. 

Conversely, prices must drop substantially for PLC to make a payment. The PLC reference price is $3.70 for corn and $8.40 for soybeans. That means a 90¢ corn payment and a $2.18 soybean payment might be necessary before PLC pays anything.  

The bottom line for corn and soybean farmers is in the first and second years. ARC will most likely make higher payments than PLC unless prices get extremely low. From the third year to the fifth year, corn prices must drop into the low $3-range and soybean prices must fall below $8 for PLC to catch up. Farmers must use their crystal balls on the five-year price trend to determine which is better.  

Five-year projections by USDA in early 2014 result in no PLC payments for soybeans. The lowest projected price for the crop is $8.85 in 2015. For corn, USDA projects a five-year average price of about $3.50, which would lead to PLC payments of about $1 over the five years. ARC should pay closer to $1.50 assuming average yields.

Every farmer should review estimates to determine which is better, but for corn and soybeans, this writer leans toward ARC. For crops such as wheat, peanuts and barley, PLC might make more sense.  Estimated prices for those crops are either close to the PLC reference price or, in the case of peanuts, substantially under it.

Additional Considerations. As they choose between ARC and PLC, farmers must make two more decisions. One choice is to update their payment yields to reflect the average yield during crop years 2008 to 2012. This election applies for farmers electing PLC, but they may still want to update yields since this may be used in future farm bills. Generally, if current yields are greater than historical yield, a farmer will make the election.

The other choice for farmers relates to base acres and payments. The farm bill calls for PLC and ARC payments to be made on base acres, which often are many years out of date, rather than planted acres. Payment acres for both PLC and ARC are based on 85% of base acres for county coverage and 65% of base acres for farm coverage. 

A one-time election provision allows farmers to update base acres to reflect crop year average acres from 2008 to 2012. This does not increase total base acres but rather reallocates them using the respective percentage for each crop. 


For example, assume Farmer Bean has base acres totaling 600 for corn, 400 for soybeans, 200 for wheat and 100 for barley. From 2008 to 2012, the farmer strictly grew corn-on-corn. The farmer projects that, through the 2018 crop year, returns per acre will be $200 for corn, $70 for soybeans, $80 for wheat and $60 for barley. If all base acres are changed to corn, total estimated returns will be $221,000 at the 85% level. Returns from existing base would only return $144,500. Therefore, Farmer Bean should consider reallocation.  

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