Posted January 16, 2015
Note: The following article is for informational purposes only and should not be considered recommendations or advice for decisions to be made on your individual farm.
Kansas farmers and landowners have big decisions to make in the next two months on updating yields and base acres as well as electing new Farm Bill programs. Luckily, K-State Research and Extension is conducting a series of meetings across the state to help, sponsored in part by Kansas Wheat. About 350 people attended the first Making the Decision meeting at the Sedgwick County Extension Office on Monday, Jan. 12.
Dr. Mykel Taylor, K-State assistant professor in agricultural economics, stressed that the decisions made in 2015 will affect more than this year’s crop.
“You are signing up for something now for the life of the Farm Bill,” Taylor said. “And that is at least five years.”
A quick overview of the decisions and options available follows below. Kansas Wheat encourages all farmers and landowners to utilize the resources provided by www.AgManager.Info, which includes information on the K-State Research & Extension meetings.
For reference, a farm as used below describes an individual Farm Service Agency (FSA) serial number. As with other farm programs, each FSA-designated farm requires its own paperwork and signatures. However, for these programs, farmers have the ability to make different decisions on different FSA-designated farms.
Decision 1: Update Yields
The first decision is to update the FSA program yield on base acres, which has not been available since at least 2002.
For years where the farm yield was lower than the county average yield, a plug yield equal to 75 percent of the county yield average from 2008 to 2012 may be substituted. However, if no crop was planted, no yield can be substituted.
In some cases, the yield update could be lower than the previous FSA program yield. In that case, one would not want to update yields.
K-State has provided additional information and examples here.
Decision 2: Allocate Base Acres or Maintain Current Base Acres
No matter if base acres are kept as is or reallocated, the farmer still has the freedom to plant whatever crop he/she chooses on those base acres.
Additional information and examples can be found here.
Decision 3: Elect to Enroll in PLC, ARC-CO or ARC-IC
Under the new farm bill, farmers have the option to elect one of two new programs –Price Loss Coverage (PLC) or Agricultural Risk Coverage (ARC). The ARC program also has two options – County Agricultural Risk Coverage (ARC-CO) or Individual Agricultural Risk Coverage (ARC-IC).
Farmers can enroll different commodities in different programs. For example, a farmer with both wheat and sorghum base acres could enroll wheat in ARC-CO and enroll sorghum in PLC. The exception is if an individual elects to participate in ARC-IC, all acres on that farm must be enrolled in ARC-IC.
For both PLC and ARC, 2014 payments will not be made until October 2015, after the national marketing year prices are finalized. Additionally, there is a payment limit for either ARC or PLC at $125,000 for each individual actively involved in farming. Spouses can receive an additional $125,000.
Note, even though farmers have to elect which program they will enroll in by the end of March of this year, farmers will be required to enroll in that program on an annual basis, even though they cannot change their option.
PLCnational marketing year average price, calculated by USDA’s National Agricultural Statistics Service (NASS), must fall below the new reference prices. For wheat, the new reference price is $5.50.
If the marketing year average price falls below $5.50, payments will be made on 85 percent of wheat base acres.
For wheat, the marketing year is June to the following May. As a result, only a few months remain in the marketing year. Additionally, NASS gives more weight to months where more wheat is sold, meaning that more than half of the marketing year price is determined in the first three months of the marketing year (June, July, August). That means the December 2014/15 estimated marketing year average price of $6.00 is unlikely to drop enough in the next three months to trigger a PLC payment for 2014.
However, this program will last through the life of the next Farm Bill, at least through 2018. As a result, the national marketing year average price could fall below $5.50 and trigger payments in the future. AgManager.Info will be publishing the latest information on marketing year averages as they are available. USDA also provides a monthly update on projected marketing year prices in its World Agricultural Supply and Demand Estimates (WASDE) report.
Learn how to calculate PLC payments here.
County benchmark revenue consists of the five-year Olympic average of national marketing year average price multiplied by the five-year Olympic average county yield. For reference, a five-year Olympic average takes five years, removes the high and the low and averages the remaining three years. Using an Olympic average means that the county’s benchmark revenue will change on an annual basis as new years are added to the data set and the oldest are removed.
When county revenue falls below 86 percent of benchmark revenue, a payment is triggered. This means a county could have a revenue loss, and a farmer not, and the farmer would still receive a payment or vice versa. Payments are based on 85 percent of a farm’s base acres in each commodity.
Of note, county yields are determined in the county where the FSA programs are administered. In some cases, this may differ from the county where the farm is physically located.
Learn how to calculate ARC-CO payments with this instructional video.
The Individual Agricultural Risk Coverage (ARC-IC) program is also a shallow revenue loss program. But, instead of basing benchmark revenue on the county, benchmark revenue is calculated only for that farm.
If the farm’s revenue falls below 86 percent of the benchmark revenue (as explained above, substituting farm yield for county yield), a payment is triggered. This payment is also capped at 10 percent of benchmark revenue.
Of note, ARC-IC will only pay on 65 percent of total base acres, compared to 85 percent for either ARC-CO or PLC. Additionally, if a farm elects ARC-IC, all crops on that farm must be enrolled in ARC-IC. This differs from ARC-CO or PLC where different commodities can be enrolled in different programs.
Finally, for ARC-IC only, the tenant must report both planted acres and yields every year to their local FSA office.
Learn how to calculate ARC-IC with this instructional video.
Decision 4: Select SCO
According to Oklahoma State University economist Dr. Jody Campiche, SCO may provide cheaper coverage, but the payout is based on a county loss compared to an individual farm loss. As such, if a farm has a crop loss, but the county does not, no payment would trigger. As a result, Campiche suggests comparing the cost of upping an individual crop insurance policy versus the cost (and payout probability based on a county loss) of SCO.
For winter wheat, the deadline to sign up for SCO has passed for this year, so farmers will need to make this decision next year.
More information from USDA’s Risk Management Agency is available here.
Making the Decision
Ultimately, these programs are complex and future prices and yields are only forecasts at this point. This makes these decisions even harder to make. That is why K-State Research & Extension experts are traversing the state to answer questions. Find a schedule of upcoming meetings here.
Economists from K-State and Oklahoma State University have also developed an Excel-based tool intended to help farmers determine potential payouts for their farm under each program.
The decision tool will not tell farmers what program to choose, but it does allow producers to run different scenarios (drought years versus bumper crops, high prices versus low) to see how the different programs will or will not pay out.
To answer questions about farm bill options, contact your local K-State Research & Extension staff or Kansas Wheat staff will help connect you with the appropriate resource.