Farm Program Payments and Projections - May 2018
Updated commodity price projections from USDA point to substantial changes in farm program payment projections as well for the coming year. Small increases in marketing year average price projections for the 2017 crop and substantial increases in projections for the 2018 crop relative to the 2017 crop offer a perspective that crop prices and revenues could improve, lessening the reliance on and role of farm program payments to support farm income in the year ahead.
USDA's World Agricultural Outlook Board (WAOB) provided the first projections of 2018 crop year yields and prices in their May supply and demand estimates (available at https://www.usda.gov/oce/commodity/wasde/index.htm). Those initial estimates typically start with trend yield assumptions and don't yet reflect growing conditions or crop progress. But, the price estimates do reflect updated supply and demand conditions to date and provide at least an initial range of potential prices for the coming marketing year. Given that the 2018 crop (other than wheat) is barely getting started across much of the country and the 2018 crop marketing year has not even started, these estimates provide limited insight other than a baseline for the year ahead.
That being said, the USDA numbers include substantial changes in price projections for the year ahead. Whiel the national marketing year average corn price for the current marketing year is projected at $3.40 per bushel (actually, the midpoint of a range between $3.25 and $3.55 as reported by USDA), the projection for the 2018 marketing year is for a season-average price between $3.30 and $4.30, with a midpoint at $3.80 per bushel. Note that USDA typically reports a price range in its monthly projections, that might conveniently be described like a confidence interval in statistics, with a certain degree of confidence that the final season-average price will fall within the reported range. Over the course of the marketing year, the range would generally narrow month by month as more of the crop has been marketed and more is known about price expectations for the remaining months, until the marketing year is complete and a final price estimate is given.
While the May reports provide the first official USDA supply and demand projections for the 2018 crop, the projected prices are substantially higher than both the 2017 projected prices and also the previous baseline estimates for the 2018 crop year as released from USDA and other sources. With those updated estimates in hand, one can calculate projected farm program payments looking forward to assess projected farm income support and cash flow in the coming months. Note that the utilization of the USDA numbers is not meant to imply judgement about the projections or the current market conditions. Rather, it is common convention to use the midpoint of the USDA price range from the monthly reports as an price projection for economic analysis and program calculations. USDA's Farm Service Agency (FSA) also publishes monthly price projections for program purposes based on the WAOB projections and additional estimates for crops not included in the monthly supply and demand reports. Those estimates are available by program and year at https://www.fsa.usda.gov/programs-and-services/arcplc_program/arcplc-program-data/index.
The following tables summarize current farm program payment projections based on the available price and yield data from the WAOB, the FSA, and also the USDA National Agricultural Statistics Service (NASS) published 2017 yield estimates for many county-crop-practice combinations as of late February through the Quick Stats database on their website (https://nass.usda.gov). The numbers are still subject to revision as FSA has to adjust yield numbers to yields/planted acre and also determine final prices after the end of the marketing year for each crop.
In the meantime, the current estimates provide a good planning guide as to ARC-CO payments to come, particularly for county-crop-practice combinations where county-level NASS data is available. In addition, the price projections also lead to estimates for PLC program payments to be paid on the 2017 crop in October 2018 as well. The following tables summarize the current projections.
Table 1 provides actual and projected prices for the 2014-2018 crops used to calculate the program payments and projections. While the national marketing year average prices for the 2014-2016 crop years are complete and final as published by NASS, the 2017-2018 crop year prices are currently projections subject to revision until the end of the respective marketing years (September-August for corn, grain sorghum, and soybeans; June-May for wheat).
Table 1. National Marketing Year Average Prices and Projections*
From the prices and projections in Table 1, one can calculate the PLC payments and projections shown in Table 2. While PLC payments for any farm enrolled in the PLC program are a function of that farm’s PLC payment yields, the weighted average PLC payment yield across all counties in Nebraska is shown in Table 2 to provide a basis for calculating payments. A PLC payment is calculated based on the PLC payment rate (equal to the reference price minus the higher of the market price or the loan rate) multiplied by the PLC payment yield on the farm multiplied by the farm’s paid acres (equal to base acres times 85%).
Table 2 provides estimates of average PLC payments per base acre at the weighted average PLC payment yield in Nebraska after adjusting for the 85% paid acre factor for four major commodities in the state. With prices dropping below the reference rate for most commodities since 2014, the PLC payment rates have grown substantially. However, for soybeans, the prices have remained above the reference rate, leading to no PLC payments and for corn, the initial price projection for the 2018 crop year at $3.80 per bushel would be a return to price levels above the $3.70 reference rate and thus, no PLC payment.
Table 2. Average PLC Payment Rates in Nebraska*
Finally, with both the current price and yield data and projections, one can calculate ARC-CO payment rates. ARC-CO payments are made when calculated crop revenue at the county level for the crop and practice in question is below the ARC-CO guarantee for that county-crop-practice combination. The guarantee for each year is equal to 86% of the benchmark revenue (equal to the preceding 5-year Olympic average yield multiplied by the preceding 5-year Olympic average price with some minimum adjustments for both). When crop revenue falls below the ARC-CO guarantee, the ARC-CO payment rate is calculated as the difference, subject to a maximum limit of 10% of the benchmark revenue. To calculate ARC-CO payments on a farm, the ARC-CO payment rate is multiplied by the farm’s paid acres (equal to base acres times 85%).
Table 3 summarizes the average ARC-CO payment rates per base acre for four major commodities after adjusting for the 85% paid acre factor. The average is calculated as a simple average across all county-practice combinations for each crop to provide an indicator of relative ARC-CO payment levels. Each county-practice combination for a given crop may have a different payment rate based on differences in actual yield and 5-year Olympic average yields for that respective county-practice combination.
Table 3 demonstrates that ARC-CO payments on the 2017 crop to be paid in October 2018 are projected to be substantially lower than the payments of the past 3 years on the 2014-2016 crops. Projections for 2018 show continued low or non-existent ARC-CO payment projections as the 5-year Olympic average price in the ARC-CO guarantee has fallen to its minimum at reference rate level prices and projected price recovery in all crops leads to greater revenue calculations and lesser (or no) ARC payments.
Table 3. Average ARC-CO Payment Rates in Nebraska*
In addition to the summarized data in Table 3, calculated ARC-CO payment rates are available for every county-crop-practice combination in Nebraska in a set of tables dating to the 2014 crop year. While the 2014-2016 data is final as published by FSA, the 2017 data builds on either the current estimated yields from NASS at the county level where available or the state yield estimate form NASS extrapolated to the county level (assuming similar yield results relative to the 5-year Olympic average). The projections for 2018 rely on similar analysis of current state or national yield estimates from NASS extrapolated to the county level. ARC-CO payment estimates for each year from 2014 through 2018 by county, crop, and practice are available in a series of tables by year at the following links:
Looking backward, it is apparent that ARC-CO provided substantially greater payments than PLC early in the 2014-2018 period as prices were falling from the high levels of 2009-2013. But, as prices fell below reference rate levels, PLC payment rates have increased and now look to be larger than ARC-CO payment rates per acre, except for commodities with prices staying at or returning to price levels above the reference rate (such as soybeans and also corn for 2018).
Remembering however, that producers had a one time decision under the 2014 Farm Bill to choose PLC or ARC-CO (or ARC-IC, the individual farm-level ARC program) for the 2014-2018 crop years, overall farm program payments in Nebraska will shrink substantially given the predominant enrollment in ARC-CO across the state. Enrollment in ARC-CO exceeded 95% of base acres for both corn and soybeans in Nebraska while grain sorghum and wheat were more evenly mixed between PLC and ARC-CO. Total farm program payments for PLC, ARC-CO, and ARC-IC exceeded $600 million in Nebraska for each of the 2014-2016 crops. In contrast, pending payments for each of the 2017 and 2018 crops could fall to less than $100 million in Nebraska.
A new farm program or an extension of current programs could likely provide producers a new enrollment decision between PLC and ARC in 2019. Absent substantial changes to the programs or to the market outlook, the enrollment decision then could look very different than it did in 2014. But, those decisions and any payments under the 2019 programs would not help support producers bottom lines before October 2020, so there is a significant cash flow decline coming from current farm programs and a sizable adjustment period before new programs or new decisions can provide any support.
Posted by Bradley D. Lubben, Wednesday, May 16, 2018