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MINNEAPOLIS/ST. PAUL (April 14, 2014)--A series of fact sheets on the Agricultural Act of 2014 - the farm bill - is available to help the agricultural community prepare for changes introduced by the recently passed federal legislation.

University of Minnesota Extension economist Kent Olson prepared the six-part series, which emphasizes changes in programs and rules affecting crop commodities.

"Passage of the farm bill removes uncertainty about what farm programs will be for the next five years," Olson said. "Farmers will have to make choices, but the rules are different compared to the old farm bill."

Gone are the Average Crop Revenue (ACRE) and Counter-Cyclical Program (CCP). In their place, farmers must decide between new programs: the Price Loss Coverage (PLC) or the county- or individual-based Agriculture Revenue Coverage (ARC).

The fact sheets are on Extension's web site at www.extension.umn.edu/agriculture/business/farm-bill/. They cover details on the new crops programs, including comparative information designed to help farmers choose their best option. Other information focuses on updating payment yields and reallocating base acres.

"There is also an important warning: Farmers have to act. If farmers and landowners fail to make a unanimous election of the program in which they enroll, the bill says that no payments can be made to the farm for the 2014 farm year and the farm will be deemed to have elected PLC for the 2014 through 2018 crop years," Olson notes.

The farm bill information sheets are offered through Extension's Agricultural Business Management program. Olson and his colleagues connect farmers and other industry professionals with University research-based information on farm management and marketing. More information is available at www.extension.umn.edu/agriculture/business/.

For more news from U of M Extension, visit www.extension.umn.edu/news or contact Extension Communications at extnews@umn.edu. University of Minnesota Extension is an equal opportunity educator and employer.

The "Agricultural Act of 2014," commonly called the farm bill, creates the Agriculture Risk Coverage - individual farm coverage (ARC-individual) program which is explained below. These notes are based on the Act as passed by Congress, but please note that the final rules and interpretations will come from the USDA at a future date.

In the Agriculture Risk Coverage (ARC) program, farmers can choose between county coverage and individual farm coverage. If either ARC option is chosen, the farm is not eligible for the Supplemental Coverage Option (SCO) under the crop insurance options in the farm bill.

Under ARC-individual coverage, a payment is made if the actual revenue from all covered commodities is less than the ARC-individual guarantee. The actual revenue for each year is determined by the farm's yield multiplied by the maximum of the national marketing year price and the crop's reference price, summed over all covered commodities and divided by the farm's planted acreage that year. The ARC-individual guarantee is 86% of the ARC-individual benchmark revenue. The ARC-individual benchmark revenue is the most recent 5-year Olympic-average of the revenue from all covered commodities weighted by the ratio of the acreage planted to a covered commodity and the total acreage of all covered commodities. The revenue for each year is determined by the farm's yield multiplied by the maximum of the national marketing year price and the crop's reference price. The ARC-individual payment rate per acre is the difference between the ARC-individual guarantee and the ARC-individual actual revenue, but the payment rate cannot exceed 10% of the ARC-farm benchmark revenue. Under the ARC individual farm coverage program, the payment for a farm is the ARC-individual payment rate for that farm times 65% of the farm's total base acres (compared to 85% for the county based coverage).

Reference Prices ($); set in 2014 farm bill:
Wheat, 5.50/bu
Corn, 3.70/bu
Soybeans, 8.40/bu
Grain Sorghum, 3.95/bu
Barley, 4.95/bu
Oats, 2.40/bu
Other oilseeds, 20.15/cwt
Dry peas, 11.00/cwt
Lentils, 19.97/cwt
Small Chickpeas, 19.04/cwt
Large Chickpeas, 21.54/cwt
Long grain rice, 14.00/cwt
Short grain rice, 14.00/cwt
Peanuts, 535.00/ton

For an example, let's start with determining the ARC-Individual benchmark revenue and guarantee. We start with calculating the revenue for each crop in each of the five most recent years. The revenue for each year is determined by the individual farm's yield multiplied by the maximum of the national marketing year price and the crop's reference price. The 5-year Olympic average revenue for each crop is then calculated ignoring the highest and lowest revenues in these five years. For this example farm, the 5-year Olympic average revenues are calculated to be $957 for corn and $570 for soybeans as shown in the table 2 in the attachment.

Tables for ARC-Individual example March 2014.pdf

The ARC-individual benchmark revenue is the most recent 5-year Olympic average revenue from each covered commodity on the farm weighted by the ratio of the acreage planted to that covered commodity and the total acreage of all covered commodities. If this example farm has a total of 100 base acres and planted 60 acres of corn and 40 acres of soybeans, the ratio for corn is 0.6 and 0.4 for soybeans. The benchmark revenue for the farm is then the sum of the 5-year Olympic average of the revenue multiplied by each crop's weight or ratio. As shown in the table, the benchmark revenue is $802 which is the 5-year Olympic average revenue for corn ($957) multiplied by the weight for corn (0.6) plus the 5-year Olympic average revenue for soybeans ($570) multiplied by the weight for corn (0.4).

The ARC-individual guarantee is 86% of the ARC-individual benchmark revenue which is $690 in this example.

Under ARC-individual coverage, a payment is made if the actual revenue from all covered commodities is less than the ARC-individual guarantee. The actual revenue for each year is determined by the farm's yield multiplied by the maximum of the national marketing year price and the crop's reference price, summed over all covered commodities and divided by the farm's planted acreage that year. For this example farm, the actual revenue is estimated to be $631 per acre. (See Table 3 in the attachment.)

Tables for ARC-Individual example March 2014.pdf

The "Agricultural Act of 2014," commonly called the farm bill, creates the Agriculture Risk Coverage - county coverage (ARC-county) program which is explained in this post.

These notes are based on the Act as passed by Congress, but please note that the final rules and interpretations will come from the USDA at a future date.

In the Agriculture Risk Coverage (ARC) program, farmers can choose between county coverage and individual farm coverage. If either ARC option is chosen, the farm is not eligible for the Supplemental Coverage Option (SCO) under the crop insurance options in the farm bill.

In the ARC-county option, crop revenue is estimated using average county yields. A payment is made if the ARC-county actual crop revenue is less than the ARC-county revenue guarantee. The ARC-county actual crop revenue is the actual county yield times the maximum of the national marketing year price or the loan rate specified in the farm bill. The guarantee under the ARC-county coverage is 86% of the ARC-county benchmark revenue. The ARC-county benchmark revenue is the product of the most recent 5-year Olympic-average county yield and the most recent 5-year Olympic-average marketing year average (MYA) price. (The Olympic average is calculated by dropping the highest and lowest yield or price from the most recent 5-years and calculating the average based on the remaining 3 yields or prices.) Under the ARC-county choice, the payment rate per acre is the difference between the ARC-county guarantee and the actual revenue, but the payment rate cannot exceed 10% of the benchmark revenue. The ARC-county payment for a covered commodity is the ARC-county payment rate for that commodity times 85% of the farm's base acres for that commodity.

Loan Rates ($); set in 2014 farm bill:
Wheat, 2.94/bu
Corn, 1.95/bu
Soybeans, 5.00/bu
Grain Sorghum, 1.95/bu
Barley, 1.95/bu
Oats, 1.39/bu
Other oilseeds, 10.09/cwt
Dry peas, 5.40/cwt
Lentils, 11.28/cwt
Small Chickpeas, 7.43/cwt
Large Chickpeas, 11.28/cwt
Long grain rice, 6.50/cwt
Medium grain rice, 6.50/cwt
Peanuts, 355.00/ton

For an example, let's start with determining the ARC-County benchmark revenue for corn and work back to the guarantee and then actual revenue and the potential payment.

To calculate the benchmark revenue, we need five years of MYA prices and county yields. The MYA corn prices for 2009 through 2012 are 3.55, 5.18, 6.22, and 6.89 with a current estimate of 4.50 for 2013. (The 2009 MYA price of $3.55 is replaced with the reference price of $3.70 following the rules in the 2014 farm bill.) For 2009 through 2013, the county where our example farm is had these corn yields: 183.0, 180.4, 165.7, 156.7, and 185.0.

Reference Prices ($); set in 2014 farm bill:
Wheat, 5.50/bu
Corn, 3.70/bu
Soybeans, 8.40/bu
Grain Sorghum, 3.95/bu
Barley, 4.95/bu
Oats, 2.40/bu
Other oilseeds, 20.15/cwt
Dry peas, 11.00/cwt
Lentils, 19.97/cwt
Small Chickpeas, 19.04/cwt
Large Chickpeas, 21.54/cwt
Long grain rice, 14.00/cwt
Short grain rice, 14.00/cwt
Peanuts, 535.00/ton

The high and lows are not used to calculate the 5-year Olympic averages. So the average corn price used for calculating the 2014 benchmark revenue is $5.30 which is calculated as the average of 5.18, 6.22, and 4.50. The average corn yield for the county is 176.4 which is calculated using 183.0, 180.4, and 165.7.

The ARC-county benchmark revenue for this example is the product of the 5-year Olympic-average county yield (176.4) and the most recent 5-year Olympic-average marketing year price (5.30) which is $935. The guarantee for the 2014 crop year under the ARC-county coverage is 86% of the ARC-county benchmark revenue or $804.

In this example, a payment is made if the 2014 ARC-county actual crop revenue is less than this ARC-county revenue guarantee of $804. Suppose the MYA price for corn turned out to be $3.90 and the actual county yield turned out to be 189 bu/acre. The ARC-county actual crop revenue is then 189 bu/ac multiplied by $3.90 or $737. Since $737 is less than the guarantee of $804, a payment is triggered. Under the ARC-county choice, the payment rate per acre is the difference between the ARC-county guarantee and the actual revenue, but the payment rate cannot exceed 10% of the benchmark revenue. In this example, the difference between actual revenue and the guarantee is $67 which is less than 10% of the benchmark revenue of $935. So the ARC-county payment for corn is $67. Our example farm has 330 acres of corn base, so this farm's ARC-County payment is the ARC-county payment rate of $67 multiplied by 85% of the farm's base acres for corn, or $18,793.50:

ARC-County Payment = $67 x (0.85 x 330) = $18,793.50.

More information on other parts of the farm bill can be found in other Agricultural Business Management News blogs. Keep checking back as we'll be adding more posts. The short url is z.umn.edu/jg6.

Price Loss Coverage (PLC) -- details

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The "Agricultural Act of 2014," commonly called the farm bill, creates the Price Loss Coverage (PLC) program which is explained in this post.

These notes are based on the Act as passed by Congress, but please note that the final rules and interpretations will come from the USDA at a future date.

The Price Loss Coverage (PLC) program will make payments to farmers if a covered commodity's national average marketing year price is below its reference price (the new term instead of target price). Payments will be made on a crop by crop basis. Under PLC, the payment is the difference between the national average marketing year price and the reference price multiplied by the payment yield and 85% of the base acres.

Reference Prices ($); set in 2014 farm bill:
Wheat, 5.50/bu
Corn, 3.70/bu
Soybeans, 8.40/bu
Grain Sorghum, 3.95/bu
Barley, 4.95/bu
Oats, 2.40/bu
Other oilseeds, 20.15/cwt
Dry peas, 11.00/cwt
Lentils, 19.97/cwt
Small Chickpeas, 19.04/cwt
Large Chickpeas, 21.54/cwt
Long grain rice, 14.00/cwt
Short grain rice, 14.00/cwt
Peanuts, 535.00/ton

As an example, suppose the corn price drops in a future crop year to a marketing year average (MYA) price of $3.50. This is lower than the reference price of $3.70 per bushel set in the 2014 farm bill so a payment is triggered.

Using an example farm with a payment yield of 160 bushels for corn and a corn base acreage of 350 acres, the payment would be the difference between the reference price and the current MYA price or $0.20 per bushel (3.70-3.50) multiplied by the corn payment yield and 85% of the corn base acres.

For this example farm, the PLC payment would be:

0.20 x 160 x (0.85 x 350) = $9,520.

More information on other parts of the farm bill can be found in other Agricultural Business Management News blogs. Keep checking back as we'll be adding more posts. The short url is z.umn.edu/jg6.

Choosing between PLC and ARC

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The "Agricultural Act of 2014," commonly called the farm bill, requires farmers to make a one-time, irrevocable decision to elect either the Price Loss Coverage (PLC) program or the Agricultural Risk Coverage (ARC) program.

These notes are based on the Act as passed by Congress, but please note that the final rules and interpretations will come from the USDA at a future date.

Here's a warning. If all the producers and owners on a farm fail to make a unanimous election of which program to enroll in, the bill says the Secretary of Agriculture may not make any payments to that farm for the 2014 crop year, and the farm will be deemed to have elected PLC for the 2015 through 2018 crop years.

Price Loss Coverage (PLC)

The Price Loss Coverage (PLC) program will make payments to farmers if a covered commodity's national average marketing year price is below its reference price (the new term instead of target price). Payments will be made on a crop by crop basis. Under PLC, the payment is the difference between the national average marketing year price and the reference price multiplied by the payment yield and 85% of the base acres.

Reference Prices ($); set in 2014 farm bill:
Wheat, 5.50/bu
Corn, 3.70/bu
Soybeans, 8.40/bu
Grain Sorghum, 3.95/bu
Barley, 4.95/bu
Oats, 2.40/bu
Other oilseeds, 20.15/cwt
Dry peas, 11.00/cwt
Lentils, 19.97/cwt
Small Chickpeas, 19.04/cwt
Large Chickpeas, 21.54/cwt
Long grain rice, 14.00/cwt
Short grain rice, 14.00/cwt
Peanuts, 535.00/ton

Agriculture Risk Coverage - county coverage (ARC-county)

In the county coverage option, crop revenue is estimated using average county yields. A payment is made if the ARC-county actual crop revenue is less than the ARC-county revenue guarantee. The ARC-county actual crop revenue is the actual county yield times the maximum of the national marketing year price or the loan rate specified in the farm bill. (The loan rate is $1.95 per bushel for corn, $5.00 for soybeans, and $2.94 for wheat.) The guarantee under the ARC-county coverage is 86% of the ARC-county benchmark revenue. The ARC-county benchmark revenue is the product of the most recent 5-year Olympic-average county yield and the most recent 5-year Olympic-average marketing year price. (The Olympic average is calculated by dropping the highest and lowest yield or price from the most recent 5-years and calculating the average based on the remaining 3 yields or prices.) Under the ARC-county choice, the payment rate per acre is the difference between the ARC-county guarantee and the actual revenue, but the payment rate cannot exceed 10% of the benchmark revenue. The ARC-county payment for a covered commodity is the ARC-county payment rate for that commodity times 85% of the farm's base acres for that commodity.

Agriculture Risk Coverage - individual farm coverage (ARC-individual)

Under ARC-individual coverage, a payment is made if the actual revenue from all covered commodities is less than the ARC-individual guarantee. The actual revenue for each year is determined by the farm's yield multiplied by the maximum of the national marketing year price and the crop's reference price, summed over all covered commodities and divided by the farm's planted acreage that year. The ARC-individual guarantee is 86% of the ARC-individual benchmark revenue. The ARC-individual benchmark revenue is the most recent 5-year Olympic-average of the revenue from all covered commodities weighted by the ratio of the acreage planted to a covered commodity and the total acreage of all covered commodities. The revenue for each year is determined by the farm's yield multiplied by the maximum of the national marketing year price and the crop's reference price. The ARC-individual payment rate per acre is the difference between the ARC-individual guarantee and the ARC-individual actual revenue, but the payment rate cannot exceed 10% of the ARC-farm benchmark revenue. Under the ARC individual farm coverage program, the payment for a farm is the ARC-individual payment rate for that farm times 65% of the farm's total base acres (compared to 85% for the county based coverage).

Mix and match?

Farmers can choose PLC for some crops and ARC-county for other crops. For example, a farm can choose PLC for corn and wheat and ARC-County for soybeans.

The ARC-individual option covers all covered commodities on the farm. PLC or ARC-County are not options for any crop on a farm enrolled in ARC-individual.

The Supplemental Coverage Option (SCO) can be chosen only for those crops enrolled in PLC. If the ARC-County option is chosen for a crop, that crop is not eligible for SCO. If the ARC-Individual option is chosen, none of the crops on the farm are not eligible for SCO.

More information on other parts of the farm bill can be found in other Agricultural Business Management News blogs. Keep checking back as we'll be adding more posts. The short url is z.umn.edu/jg6.

Updating Payment Yields and Reallocating Base Acres

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The "Agricultural Act of 2014," commonly called the farm bill, gives farmers the opportunity to update their payment yields and reallocate their base acres. In this posting, we look at these two decisions. More information can be found in other posts.

These notes are based on the Act as passed by Congress, but please note that the final rules and interpretations will come from the USDA at a future date.

Updating Payment Yields

Landowners have a one-time opportunity to update their current payment yields established under the 2008 farm bill to 90% of their 2008-2012 average yields. This can be done on crop by crop basis.

As an example, consider a farm that has a current payment yield for corn of 142 bushels per acre. This farm owner has the opportunity to keep this payment yield of 142 bushels or update to 90% of the average yield per planted acre on the farm for the 2008 through 2012 crop years. This example farm has had corn yields of 188, 195, 185, 178, and 154 in 2008 through 2012 for an average yield of 180 bushels per planted acre. The potentially new payment yield is 90% of this 2008-12 average or 162 bushels per acre (180 * 0.90). Since 162 is obviously larger than the current payment yield of 142, this is an easy decision to update the payment yield to 162.

Since the potential payment yield is easy to calculate from historical yields, the comparison to the current payment yield is straightforward and the decision to update or not will be just as straightforward. For many farms, the current payment yields are 93.5% of their 1998-2001 average yields, so if the 2008-2012 average yield is more than 3.9% higher (0.935/0.90) than the 1998-2001 average, the choice will be to update. For most crops in most locations, yields have increased more than this so this chance to evaluate and probably update payment yields should not be missed.

Reallocating Base Acres

Landowners also have a one-time opportunity to reallocate their current base acres to reflect their cropping pattern in 2009-2012. Landowners can choose to keep their current base acres for their covered commodities (typically the average of their 1998-2001 acreages) or reallocate their current base acre total according to the mix of crops in 2009-2012. The current total cannot be increased. This choice is not as straightforward as the choice to update payment yields. If the acreage has changed, the decision to reallocate depends on the projection of whether payments for one crop will be higher in 2014-18 than other crops. The base acre allocation does not affect the choice of what to plant in a specific year, but it does affect potential payments.

As an example, consider a farm that has a current of total base acreage of 936 allocated to 468 acres for corn and 468 acres for soybeans. Because of economic conditions and other considerations, this example farm increased the acreage of corn and decreased the acreage of soybeans over the years. For 2009-2012, this example farm has had an average of 495 acres of corn and 441 acres of soybeans. The total acreage is the same. This farm owner has the opportunity to change the allocation of base acres from 468 acres of corn and 468 acres of soybeans to 495 acres of corn and 441 acres of soybeans.

As a second example, consider a farm that has increased the acreage of both crops and changed the mix of corn and soybeans. This farm has a current of total base acreage of 828 allocated to 406 acres for corn and 422 acres for soybeans. The acreages of both corn and soybeans have increased over the years. For 2009-2012, this example farm has had an average of 490 acres of corn and 493 acres of soybeans for a total of 983 which works out to 49.8% corn and 50.2% soybeans. The farm bill does not allow the total base acreage to be increased, but the allocation can be adjusted based on the mix of crops in 2009-2012. Multiplying the percentages by the current total base acres of 828, this example farm owner has the opportunity to change the allocation of base acres from 406 acres of corn and 422 acres of soybeans to 412 acres of corn and 416 acres of soybeans.

More information on other parts of the farm bill can be found in other Agricultural Business Management News blogs. Keep checking back as we'll be adding more posts. The short url is z.umn.edu/jg6.

2014 Farm Bill -- Commodities Overview

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The "Agricultural Act of 2014," commonly called the farm bill, changes many programs and rules affecting crop commodities. In this blog, I give an overview of these changes and new programs.

These notes are based on the Act as passed by Congress, but please note that the final rules and interpretations will come from the USDA at a future date.

What's gone!

Several previous programs are repealed in the new farm bill. Direct payments are gone (except for a declining amount for cotton growers). The Average Crop Revenue Election (ACRE) program and the Counter-Cyclical Program (CCP) are repealed. While the new programs may look similar to these, the new programs are different: simpler in some ways, more complicated in other ways.

Updating & Reallocating

Landowners have a one-time opportunity to update their current payment yields established under the 2008 farm bill to 90% of their 2008-2012 average yields. This can be done on crop by crop basis. For many, the current payment yields are 93.5% of their 1998-2001 average yields, so if the 2008-2012 average yield is 3.9% higher (0.935/0.9) than the 1998-2001 average, the best choice is probably to update.

Landowners can also reallocate their current base acres to reflect their cropping pattern in 2009-2012. Landowners can choose to keep their current base acres (typically the average of their 1998-2001 acreages) or reallocate their current base acre total according to the mix of crops in 2009-2012. The current total cannot be increased.

Choices for crop commodity programs

Under the new farm bill, crop farmers need to make a one-time, irrevocable decision to elect either the Price Loss Coverage (PLC) program or the Agricultural Risk Coverage (ARC) program. Under the ARC program, farmers can choose between county coverage and individual farm coverage. Farmers can make the PLC and ARC-county decision crop by crop, and coverage is by individual crop. However, the ARC individual farm coverage requires all covered commodities on the farm to be enrolled, and coverage is for losses over all covered commodities, not crop by crop.

The 2014 farm bill also creates the Supplemental Coverage Option (SCO). The SCO is a supplement to the crop insurance choices currently available. It is available for only those crops under the PLC program. Electing either of the ARC options eliminates the possibility of the SCO. The SCO will be available for the 2015-2018 crop years but not for the 2014 crop.

And here's a warning. If all the producers and owners on a farm fail to make a unanimous election of which program to enroll in, the bill says the Secretary of Agriculture may not make any payments to that farm for the 2014 crop year, and the farm will be deemed to have elected PLC for the 2015 through 2018 crop years.

Payment and adjusted gross income (AGI) limits

Under the new farm bill, the total amount of payments received, directly or indirectly, by a person or legal entity (except a joint venture or general partnership) for any crop year under the PLC and ARC programs and as marketing loan gains or loan deficiency payments (other than for peanuts) may not exceed $125,000.

A person or legal entity with a 3-year average adjusted gross income (AGI) over $900,000 is not eligible to receive any benefit from PLC and ARC programs, supplemental agricultural disaster assistance programs (for livestock and trees), marketing loan gains, loan deficiency payments, conservation programs (starting in 2015), and some other payments (from previous bills). AGI includes both farm and nonfarm income.

More information on other parts of the farm bill can be found in other Agricultural Business Management News blogs. Keep checking back as we'll be adding more posts. The short url is z.umn.edu/jg6.

The "Agricultural Act of 2014," commonly called the farm bill, changes many programs and rules for farmers. Farmers need to make a crucial one-time, irrevocable election under the crop commodity programs. Farmers also have an opportunity to update their base acres and their base yields.

In the sections below, I summarize the new programs and the impending decisions for Minnesota farmers based on my reading of the bill in February. However, please note that the final rules and interpretations will come from the USDA, and these may differ from my current interpretation.

What's gone!

Several previous programs are dropped in the new farm bill. Direct payments are gone (except for a declining amount for cotton growers). The ACRE and DCP programs are repealed. While the new programs may look similar to these, the rules are different: simpler in some ways, more complicated in other ways.

Choices for crop commodity programs

Under the new farm bill, crop farmers need to make a one-time, irrevocable decision to elect either the Price Loss Coverage (PLC) program or the Agricultural Risk Coverage (ARC) program. If a farmer elects the ARC program, they will need to choose between county coverage and individual farm coverage. Farmers can make the PLC and ARC-county decision crop by crop, and coverage is by individual crop. But, for the ARC individual farm coverage, all covered commodities on all the farmer's farms need to be enrolled, and coverage is for losses over all covered commodities not crop by crop.

And here's a warning. If all the producers on a farm fail to make a unanimous election of which program to enroll in, the bill says the Secretary of Agriculture may not make any payments to that farm for the 2014 crop year, and the farm will be deemed to have elected PLC for the 2015 through 2018 crop years.

Price Loss Coverage (PLC)

The Price Loss Coverage (PLC) program will make payments to farmers if a covered commodity's national average marketing year price is below its reference price (the new term instead of target price). Payments will be made on a crop by crop basis. For corn the reference price is $3.70 per bushel; for soybeans, $8.40; for wheat, $5.50. (Marketing years are October thru September for corn, September thru August for soybeans, and July thru June for wheat.) Under PLC, payments to farmers are made on the basis of the difference between the national average marketing year price and the reference price, the farmer's payment yield, and the farmer's payment acres. Farmers have a one-time opportunity to update payment yields from 93.5% of their 1998-2001 average yields to 90% of their 2009-2012 yields. If the 2009-2012 yield is 3.9% higher (0.935/0.9) than the 1998-2001 average, the best choice is probably to update. Payment acres will be 85% of either their current base acres (typically the average of their 1998-2001 acreages) or farmers can choose to reallocate their current base acre total according to their mix of crops in 2009-2012.

Agriculture Risk Coverage (ARC) - county coverage

In the Agriculture Risk Coverage (ARC) program, farmers can choose between county coverage and individual farm coverage. If either ARC option is chosen, the farm is not eligible for the Supplemental Coverage Option (SCO) under the crop insurance options in the farm bill.

In the county coverage option, crop revenue is estimated using average county yields. A payment is made if the ARC-county actual crop revenue is less than the ARC-county revenue guarantee. The ARC-county actual crop revenue is the actual county yield times the maximum of the national marketing year price or the loan rate specified in the farm bill. (The loan rate is $1.95 per bushel for corn, $5.00 for soybeans, and $2.94 for wheat.) The guarantee under the ARC-county coverage is 86% of the ARC-county benchmark revenue. The ARC-county benchmark revenue is the product of the most recent 5-year Olympic-average county yield and the most recent 5-year Olympic-average marketing year price. (The Olympic average is calculated by dropping the highest and lowest yield or price from the most recent 5-years and calculating the average based on the remaining 3 yields or prices.) Under the ARC-county choice, the payment rate per acre is the difference between the ARC-county guarantee and the actual revenue, but the payment rate cannot exceed 10% of the benchmark revenue. The ARC-county payment for a covered commodity is the ARC-county payment rate for that commodity times 85% of the farm's base acres for that commodity.

Agriculture Risk Coverage (ARC) - individual farm coverage

Within the ARC program, a farmer can choose individual farm coverage instead of county coverage (as described above). The ARC-farm coverage is based on all the covered commodities on the farm, not crop by crop.

Under ARC-farm coverage, a payment is made if the actual revenue from all covered commodities is less than the ARC-farm guarantee. The actual revenue for each year is determined by the farm's yield multiplied by the maximum of the national marketing year price and the crop's reference price, summed over all covered commodities and divided by the farm's planted acreage that year. The ARC-farm guarantee is 86% of the ARC-farm benchmark revenue. The ARC-farm benchmark revenue is the most recent 5-year Olympic-average of the revenue from all covered commodities weighted by the ratio of the acreage planted to a covered commodity and the total acreage of all covered commodities. The revenue for each year is determined by the farm's yield multiplied by the maximum of the national marketing year price and the crop's reference price. The ARC-farm payment rate per acre is the difference between the ARC-farm guarantee and the ARC-farm actual revenue, but the payment rate cannot exceed 10% of the ARC-farm benchmark revenue. Under the ARC individual farm coverage program, the payment for a farm is the ARC-farm payment rate for that farm times 65% of the farm's total base acres (compared to 85% for the county based coverage).

Payment and adjusted gross income (AGI) limits

The total amount of payments received, directly or indirectly, by a person or legal entity (except a joint venture or general partnership) for any crop year under the PLC and ARC programs and as marketing loan gains of loan deficiency payments (other than for peanuts) may not exceed $125,000.

A person or legal entity with a 3-year average adjusted gross income (AGI) over $900,000 is not eligible to receive any benefit from PLC and ARC programs, supplemental agricultural disaster assistance programs (for livestock and trees), marketing loan gains, loan deficiency payments, conservation programs (starting in 2015), and some other payments (from previous bills). AGI includes both farm and nonfarm income.

An early, initial assessment

The requirement to make a one-time, irrevocable election between PLC and ARC is a 5-year decision full of many uncertainties. An initial analysis for a few example farms in Minnesota shows that the ARC county coverage option is the best option for the 2014 crop year given current information. (This quick analysis does not include the option of adding SCO and other new crop insurance options starting in 2015.)

The reference prices under PLC ($3.70 for corn, $8.40 for soybeans, and $5.50 for wheat) are low compared to recent prices especially prices received in 2011 and 2012. For 2014, the markets seem to indicate a very low chance of a PLC payment for corn, a bit higher chance for soybeans, and perhaps a higher chance for wheat (but, in early February, less than 40%). The marketing years for 2015-2018 are full of more uncertainty. Unless market developments show an increase in worldwide production and thus decay in prices in the future in the weeks leading up to the as yet unannounced election deadline, the PLC option does not look like a viable option for Minnesota farmers.

The ARC individual coverage option appears less desirable due to the revenue loss being determined over all covered commodities and the payment calculated using 65% of base acres (versus 85% for the county option). A farmer will need to consider how variability in weather affects each of his or her crops differently. If the yields for different crops move together and are more variable than the county, then individual coverage may be the best choice. If crop yields do not move together and the farm's yield pattern seem to match the county yield variation pattern, then the county based ARC may be the best choice.

With so much uncertainty regarding the next 5 years (which is normal for any 5 years into the future), let's take a general view on the choice. PLC covers price drops and not yield losses. ARC covers revenue losses, that is, both price and yield changes. So, ARC is a more comprehensive program. If prices drop in a future year, this is likely due to higher total production so revenue will probably not drop as much as prices. If yields drop across a wide swath of the production area, prices will likely rise, so revenue won't drop as much as overall yields drop. If my farm and my county were to suffer a yield loss but most of the country does not suffer a yield loss, prices would likely not drop as much as my yield drops, so my revenue will drop. In this case, PLC would not make a payment, but ARC likely would make a payment. So for Minnesota, should a farmer bet on price changes or aim to protect revenue?

As the USDA finalizes the rules and with more time to fine tune these estimates and include more years as well as the SCO option starting in 2015, this initial assessment may need to be altered. But this is my view at this early date.

Choosing ACRE or DCP: The view in late May

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Earlier this month, the choice between the Average Crop Revenue Election (ACRE) program and the Direct and Countercyclical Program (DCP) seemed to be tilting towards signing up for DCP in 2013. Now in late May, that tilting towards DCP has strengthened for Minnesota farmers after the rapid planting rate, the improvement in soil moisture in Minnesota, and the recent upward price movements in future prices.

The rapid planting rate during May and the soil moisture improvement have made it harder to argue that yields will vary widely from averages and trends. So, ACRE payments appear to depend more on the future prices for the crops being planted now. The recent improvement in future prices for the new crop suggest that prices will not be at levels that make the actual state revenue below the benchmark.

Using trend yields for the state yields and historical yields for individual farms, my analysis of 17 example farms across Minnesota show that the breakeven Marketing Year Average (MYA) prices for individual crops are estimated to be about $4.35 per bushel for corn, $10.90 for soybean, and $5.35 for wheat. These are not absolute, but they do give us some information for decisions. If MYA prices were to drop below these price levels (and yields were at trend levels), the ACRE program would likely make a payment larger than the required 20% cut in direct payments under ACRE. If the MYA prices end up higher than these estimated breakeven prices, the DCP program would be the best program for the farmers.

Looking at recent history, the MYA price has tracked the Chicago futures price very closely for the December contract for corn and wheat and November for soybean. In late May, the Chicago price is over $5 for corn, over $12 for soybean, and over $7 for wheat. These are well above the breakeven prices I estimated for the 17 example farms. If these prices hold and yields are close to average levels, the DCP program would be the best choice.

However, there is still uncertainty on actual state and individual farm yields. So every farmer still needs to evaluate his or her own conditions and payment limits and decide whether the ACRE or DCP program is the best option for their farm in 2013.
Farmers and their advisers can use a worksheet provided by University of Minnesota Extension (http://z.umn.edu/dkf) to help them evaluate their situation for the 2013 decision.

As noted before, the extension of the 2008 Farm Bill opens up the decision to participate in either of the safety net programs: ACRE or DCP. Farmers have until June 3, 2013 to sign up for the ACRE program and August 2, 2013 for the DCP program.

Under the earlier rules of the 2008 Farm Bill, farmers who signed up for ACRE had to remain in ACRE through 2012. The extension changes that requirement. Even if farmers signed up for ACRE before, the extension allows them to change their choice and sign up for DCP if they think that is a better choice for them in 2013.

ACRE vs. DCP in 2013

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The extension of the 2008 Farm Bill opens up the decision to participate in the Average Crop Revenue Election (ACRE) program or the Direct and Countercyclical Program (DCP). Under the earlier rules of the 2008 Farm Bill, if a farmer signed up for ACRE, they had to remain in ACRE through 2012. But the extension changes that requirement. Even if farmers signed up for ACRE before, the extension allows them to change their choice and sign up for DCP if they think that is a better choice for them in 2013. (Farmers do have the option to not sign up for either program, but this is not a sensible choice for 2013 in almost all cases.)

Farmers have until June 3, 2013, to sign up for the ACRE program and August 2, 2013, for the DCP program.

The 2013 decision to sign up for ACRE involves some uncertainty because the drought of 2012 has cast doubt on the potential yields for 2013 and thus the potential market prices. Plus, changes in the demand side for grains may have weakened the market's ability to absorb higher production at current price levels.

At this point in late April, the decision seems to tilt towards the sign up for the DCP in 2013. As we learn more about the planting season and potential production levels and price movements, this situation may change. So farmers need to pay attention to these changes and make their final choice between ACRE and DCP closer to the deadline of June 3.

Due to this uncertainty and their individual situations, every farmer needs to evaluate their own conditions and payment limits and decide whether the ACRE or DCP program is the best option for their farm in 2013. Even if they had signed up for ACRE previously, they can change their choice under the extension of the farm bill for 2013.

Farmers and their advisers can use this Excel worksheet to help them evaluate their situation for the 2013 decision.

Kent Olson, Professor and Extension Economist, Applied Economics

May 2012

Direct payments to farmers under the current farm bill have been a small, but stable and important part of farmers' income. These direct payments are cut in the draft farm bill from the Agriculture Committee of the U.S. Senate.

In the last few years, those direct payments have been essentially the only government payments made to farmers on the basis of their crop acreage. Crop prices have been higher that the levels that would create payments under the counter-cyclical and ACRE programs. Based on the Minnesota farms in the FINBIN sample at the University of Minnesota, direct payments have been a fairly stable source of income for farmers: a five-year average of $13,044 for all farms in the sample and $17,980 for crop farmers. For all farms, the highest average payment was $13,873 per farm in 2010; the lowest was $12,399 per farm in 2011.

These direct payments have been a small part of gross cash farm income: 2% over the past 5 years for all of these farms and 2.8% for crop farmers. However, direct payments have been an important part of net farm income: 8.8% for all farms and 9.8% for crop farmers. These percentages have declined slightly over the past five years except for 2009 which was a low income year for farmers. For crop farmers, direct payments as a % of net farm income ranged from a low of 7.7% in 2011 to a high of 19.1% in 2009.

Direct payments are a fixed payment in contrast to Counter Cyclical payments that vary with price levels and ACRE payments which vary with price and yield levels. The policy draft from the committee replaces these three payment systems with a new program called Agriculture Risk Coverage (ARC) and expanded insurance subsidies. These proposals will move federal farm support into more of a risk management program with coverage levels moving with changes in yields and market prices over a moving five year time frame.

Direct Payments table.pdf

ACRE Payments more likely for 2010

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If they did not sign up in 2009, farmers have until June 1, 2010, to sign their farms up for the Average Crop Revenue Election (ACRE) program, the optional safety net for farmers provided in the 2008 Farm Bill. And farmers should pay close attention to this decision for 2010.

Current research results from University of Minnesota Extension tilt towards the decision to sign up for the Average Crop Revenue Election (ACRE) program in 2010. The decision in 2009 was a toss up as to whether ACRE or counter-cyclical payments (CCP) was a better bet.

My example calculations point toward ACRE payments for corn, soybean and wheat in Minnesota, but this is not certain. There are many interrelated moving parts in this decision. To predict the probability of ACRE payments in the midst of uncertainty, I estimated the potential values and distributions of yields and prices for 2010 and combined them with the ACRE program's rules in a statistical model. The results estimate potential state ACRE payment rates in Minnesota near $50 per acre for corn, $30 for soybeans, and $27 for wheat, with positive payment rates estimated to occur in more than 50 percent of the estimations. Actual payments to individual farms would depend on whether each farm had a loss under ACRE rules, the second trigger in the ACRE program. However, these are just estimates. The possibility of no payments also exists.

Farmers who did not sign up for ACRE in 2009 need to evaluate their specific conditions and payment limits and decide which program is the best option for them in 2010. (Those who signed up for ACRE in 2009 cannot revoke this decision.)

Further information for Minnesota farmers and an Excel worksheet for analyzing the choice between ACRE and CC payments in 2010 are available in the Farm Bill section at Minnesota Extension's Ag Business Management web page. Also, further information on the ACRE and other FSA programs are available at local or State FSA offices or on FSA's Web site at: www.fsa.usda.gov.

2010 DCP and ACRE Signup begins, deadline June 1, 2010

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USDA announced today that the signup period for the 2010 Direct and Counter-Cyclical Program (DCP) and the Average Crop Revenue Election (ACRE) program has begun and will continue through June 1, 2010.

However, don't rush out to sign up. Let's watch how the programs unfold for the 2009 crop being harvested now. Let's see how the ACRE payments work for those signed up for ACRE.

Since the deadline is June 1, 2010, we'll have a good idea of actual planting decisions, but we won't know much about the weather for the 2010 crop. So the decision to switch from DCP to ACRE will require more analysis about potential yield variability on the farm and for the State as well as some estimates of price variability. We can't assume that the 2010 ACRE payment will be the same as the one for the 2009 crop. Stay tuned for more information about decision tools as we move into the fall and winter.

If you signed up for ACRE in 2009, you can't change back. That decision is irrevocable.

ACRE for 2009? More likely for corn and wheat

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If yesterday's yield and price forecast releases from USDA hold, the potential for a positive ACRE payment rate for Minnesota has increased. This is especially true for corn and wheat. If the low part of the WASDE price forecast becomes reality, we would likely see positive State ACRE payment rates for corn, soybeans, and wheat at current yield estimates.

However, the State payment rate is only the first trigger for an ACRE payment to an individual farm. The individual farm also has to have lower revenue than that farm's benchmark revenue. If a farm is expecting better than average yields from recent years, the farm may not receive a payment even if the State has a revenue shortfall.

And if farmers sign their farms up for the 2009 crop, the farm is enrolled for all four years. If farmers expect normal yields and future prices to be below recent levels, the ACRE program could look very attractive compared to the 20% cut in direct payments. If future prices are expected to increase, the likelihood of ACRE payments decreases.

Farmers have until August 14, 2009, to elect and enroll their farms in either the ACRE program or the Direct and Counter-cyclical Program (DCP) program for their 2009 crop.

Especially due to the closeness of this decision, every farmer needs to evaluate their own conditions and payment limits and decide whether the ACRE or DCP program is the best option for their farm in 2009. Further information for Minnesota farmers and an Excel worksheet for analyzing the choice between ACRE and CC payments is available in the 2008 Farm Bill section at Minnesota Extension's Ag Business Management web page. Also, further information on the ACRE and other FSA programs are available at local or State FSA offices or on FSA's Web site at: www.fsa.usda.gov.

ACRE for 2009? We're on the fence in late July

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With recent crop price declines, farmers have become more interested in whether they should sign up for the Average Crop Revenue Election (ACRE) program. And they are right to be more interested. Farmers have until August 14, 2009, to elect and enroll their farms in either the ACRE program or the Direct and Counter-cyclical Program (DCP) program for their 2009 crop.

For corn and soybeans, current average price and yield projections for the 2009-10 marketing year and the 2009 crop put potential actual state revenue for corn and soybeans essentially equal to the almost final state ACRE guarantees. If the actual is equal to or more than the guarantee, the State payment rate for ACRE would be zero. However, my estimates show that it doesn't take much of a price drop to have an ACRE payment rate that would cover the required 20% in direct payments (DP).

For wheat, the forecast wheat price for 2009-10 indicates a high likelihood that the potential ACRE payment will be greater than the required 20% reduction in direct payments. Any farmer with wheat needs to give serious consideration to signing up for ACRE instead of DCP and watch which direction price forecasts move before August 14.

This decision is not an obvious choice for corn and soybeans but it is becoming clearer, especially for wheat, as we learn more about where yields and prices may be for the 2009 crop and the 2009/10 crop marketing year. Under ACRE program rules, the revenue guarantees are being set fairly high for Minnesota due to good yields and high prices in recent years. But since forecast prices for 2009/10 are also quite high and Minnesota crop conditions are good for the 2009 crop (from a statewide perspective), actual revenue in Minnesota may not be low enough to trigger an ACRE payment large enough to counter the required 20% reduction in direct payments (DP). In Minnesota, the highest chance of an ACRE payment being made is for wheat. For corn and soybeans, the choice lies in great part on whether prices for the 2009-10 year will be lower than current forecasts, not what prices are doing right now, but what we think prices will be for the entire 2009-10 marketing year.

Especially due to the closeness of this decision, every farmer needs to evaluate their own conditions and payment limits and decide whether the ACRE or DCP program is the best option for their farm in 2009. Further information for Minnesota farmers and an Excel worksheet for analyzing the choice between ACRE and CC payments is available in the 2008 Farm Bill section in the left hand menu at Ag Business Management web page. More information on the ACRE and other FSA programs are available at local or State FSA offices or on FSA's Web site at www.fsa.usda.gov.

ACRE? -- a new worksheet

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A new Excel worksheet has been developed that makes a few corrections.

new Excel worksheet

ACRE? Sign up or not?

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Starting with the 2009 crop year, the Average Crop Revenue Election (ACRE) program is a new, optional safety net for farmers provided by Congress in the Food, Conservation, and Energy Act of 2008 (commonly called the farm bill). The ACRE program is based on changes in crop revenue. It is an alternative to the counter-cyclical (CC) program which is based only on changes in crop prices. Farmers have to choose between the two programs; they cannot receive benefits from both. At first, farmers may find this safety net based on crop revenue appealing; however, making this choice is more complicated than it first appears. The complexities essentially take away any possibility to develop simple decision rules or breakeven prices for farmers to make the decision to choose between ACRE and CC. The attached factsheet and Excel worksheet are designed to help farmers understand the ACRE program and to help farmers make the choice between ACRE and CC by estimating payments under different views of the future.
ABM factsheet
new Excel worksheet

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