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Project All Years Before Making ARC/PLC Decision

Published on: 17:13PM Nov 12, 2014

A difficult choice for producers this year regarding the election between ARC-CO and PLC is for those areas where yields are dramatically higher than the five-year average. In these cases, ARC-CO is likely not to make any payment for the 2014 crop year whereas PLC will make a payment assuming the MYA corn price stays under $3.70. These farmers may tend to go toward getting a payment for this year and elect PLC, however, this may cost them over the life of the farm bill. Let's look at an example:

Suppose we have a farmer in Wayne County, Iowa. The county yields for this county from 2009 to 2013 were 146, 93,126,93 and 123, respectively. This results in benchmark yield of 114 bushels per acre. It is estimated that the final county yield for Wayne County will be 170 bushels per acre (could be higher or lower). If the MYA price follows the USDA current estimate of $3.40 for 2014 crop year will result in a PLC payment of about $33,000 assuming a payment yield of 104 bpa. Remember that PLC is paid based on your payment yield. It will not be paid on your 2014 yield which is substantilly higher than the payment yield. There will be no ARC-CO payment for 2014 crop year due to the high yield. However, now lets assume the bearish USDA corn prices will happen for 2015-2018 (average of about $3.5 for each year) and the yields go back to what they were for 2009-2013. I have plugged in 95, 125, 95 and 125 for 2015-2018 based on the history for those years. Under those assumptions, the total PLC payments over the five years will be about $115,000, but ARC-CO will pay about $165,000.

Now, lets assume that the corn prices are closer to the CBO assumptions for 2015 to 2018. In that case, the price slowly increases from $4 to $4.45. Under this scenario, PLC only makes a payment in year one, while ARC-CO makes a payment in 2015 of about $65,000 and a small payment in 2017 for total payments of about $66,000.

Therefore, it is extremely important to run your numbers for all years. In cases where 2014 is showing a payment for PLC and none for ARC-CO, run some assumptions assuming normal yields and your estimate on prices. Based on that analysis, you may find it still makes sense to elect ARC-CO. Or at least consider hedging your bets and elect PLC on some farm(s) and ARC-CO on other farm(s).