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ARC vs. PLC choice in central and eastern Kentucky - which is best?

 

University of Kentucky College of Agriculture, Food and Environment

 

LEXINGTON, Ky. — Farmers with base acreage in Kentucky will need to make a choice between two main programs available to them by the end of March. These programs will replace direct payments and are meant to pay out when profitability is low, rather than having a fixed payment each year. As such, projected payment will depend on prices, and in some cases yields, and will be highly variable.

The Price Loss Coverage (PLC) program is strictly price driven with payouts occurring when the actual national marketing price drops below target price levels for corn, soybean, and wheat. The Agriculture Risk Coverage (ARC) County program is revenue-based (at the county level), and will occur when average county revenue for a crop drops below target levels that will change each year. Note that there is an additional ARC Individual program, but that most farmers in Kentucky would not likely consider it. ARC County will henceforth be called ARC in this article. For more information on the basics of these programs, please see the following site with additional links: http://www.uky.edu/Ag/AgEcon/farmbill/.

For the past month, the bulk of my extension work has focused on helping central and eastern Kentucky farmers evaluate this decision on a county-by-county basis. The following article summarizes the insights and recommendations from this process.

In general, the ARC program will prove better if prices stay closer to the projected market prices for 2015-18 (roughly $4/bu for corn, $9.50/bu soybeans, and $5.50/bu wheat). The lower actual prices drop from these projected prices, the better the PLC program will pay relative to the ARC program. Soybeans would have to fall to very low levels before PLC would be the better program (note that farmers can allocate ARC for one crop and PLC for another). All of these statements are generalities, as yield also plays into the ARC program. Higher actual county yields (compared to the average county yield) will reduce ARC payments and vice versa.

However, the choice between PLC and ARC will change based on the percentage of base acres relative to total planted acres. This dynamic will be different in central/eastern Kentucky compared to western Kentucky in that the latter generally has high percentages of base acres compared to planted acres, while the former generally has low percentages. The lower the percentage of base acres to planted acres, the more advantageous the PLC program becomes. This is because there is a supplemental crop insurance (SCO), created by the Farm Bill, that can be used on non-base acres for a crop if PLC is chosen for that crop, but not if ARC is chosen. The SCO insurance is subsidized at a 65% level and brings the base insurance up to 86%. Since this is an insurance product, you will want to contact your crop insurance agent to find out the specifics of it related to your county. However, the following link will give you estimates of the cost and subsidies of various SCO insurance options: http://prodwebnlb.rma.usda.gov/apps/CIDT/.

Since SCO can be used on non-base acres, the overall benefit of SCO will start to outweigh any potential advantages ARC may have had over PLC in those areas with low base acres. In general, it appears that that where the percentage of base acres compared to planted acres on a farm is less than 40%, the PLC + SCO combination will outperform ARC in most reasonable situations. This is not to say that ARC will always be better when the percentage is greater than 40%. SCO is available on a county-by-county basis and a crop-by-crop basis. Almost all counties will have corn availability, and most will have soybean availability. Wheat is not available in central and eastern Kentucky, and much of western Kentucky.

Other Considerations

In situations where farmers have base acres, but are not planting row crops; or in situations where they are planting row crops, but do not plan to take out a base crop insurance policy, the SCO option will be of no benefit. In these situations, the ARC program will probably be the best bet, but this will also be somewhat county dependent. In particular, exceptionally high county yields in 2014 for a crop will severely reduce or eliminate ARC payments.


In areas with high percentages of base acres to planted acres, the decision dynamics will be different. The ARC program will probably be best for established farmers who have a high level of equity. This is assuming the farmer in this situation can survive 1-2 years of $2.50-$3/bu corn. Conversely, the PLC program will likely be best for beginning farmers that have not built up much equity, have high cash rents, and where 1-2 years of $2.50-$3 corn could put them out of business.

Farmers will also have the opportunity to update program yields and reallocate (but not increase) base acreage between crops. Reallocation would be based on the last four years of planted history for each FSA farm. You will have two options: keep your original allocation, or choose the new allocation based on the four-year history. In general, it is best to choose the option that gives you the most corn base acreage.

For additional information on the Farm Bill decision, go to http://www.uky.edu/Ag/AgEcon/farmbill/.

 

This article was written by Greg Halich, agriculture economist at the University of Kentucky College of Agriculture, Food and Environment. The article first appeared in the Feb. 25 edition of Economic and Policy Update.