Farm Program Payment Update - October 2018
The USDA Farm Service Agency (FSA) began issuing payments to producers in October for Price Loss Coverage (PLC) and Agriculture Risk Coverage (ARC) programs for the 2017 crop year. While these farm program payments had provided substantial cash flow to help buffer falling market price and farm income projections in the past three years, the current programs will provide relatively little cash flow for now and for the coming year. Only the ad hoc trade assistance payments and the outlook for new farm programs and decisions in 2019 may provide potential relief from the current outlook.
An analysis of farm program payments provides details on current payments as well as projections for future support. A fundamental part of both PLC and ARC program support is the underlying national marketing year average prices and projections. Table 1 provides final price estimates from USDA for the 2014-2017 crop years along with the midpoint of the current price range projected for the 2018 crop year national average market price as reported in the October 2018 supply and demand report from USDA.
Table 1. National Marketing Year Average Prices and Projections*
|* Final price estimates for 2014-2017 from USDA-NASS. Price projections for 2018 from USDA-WAOB and USDA-FSA as of October 2018. Sources: USDA-FSA, USDA-NASS, and USDA-WAOB.|
For base acres enrolled in PLC, the PLC payment is then equal to the PLC payment rate multiplied by the farm program payment yield for the farm multiplied by base acres enrolled multiplied by 85% for paid acres. Table 2 reports the average PLC payment rates per base acre, using average payment yields in Nebraska and making the 85% adjustment for paid acres.With these prices, the calculation of PLC payment rates is straightfoward. The PLC payment is equal to the difference between the legislated reference price and the market price if the market price is below the reference price, subject to a maximum rate equal to the reference price minus the national average marketing loan rate (if the marketing year national average price falls as far as the loan rate).
Table 2. Average PLC Payment Rates and Projections for Nebraska*
|Commodity||Average PLC Payment Yield (bushels/acre)||Average PLC Payment Rates per Base Acre|
|* PLC payments and payment projections based on weighted average PLC payment yields in Nebraska. Payments based on prices for 2014-2017 from USDA-NASS, price projections for 2018 from USDA-WAOB and USDA-FSA as of October 2018. Sources: USDA-FSA, USDA-NASS, and USDA-WAOB.|
While PLC payment rates have grown since 2014 due to lower price levels, the total amount of PLC payments have been limited in Nebraska. While a substantial share of grain sorghum and wheat acres were enrolled in PLC, corn and soybean base acres were overwhelmingly enrolled in ARC-CO (ARC at the county level). Even with substantial payment rates, PLC payments in Nebraska have been less than $100 million per year.
Most base acres in Nebraska were enrolled in ARC-CO (a minimal number of base acres were enrolled in ARC-IC, the farm-level, individual coverage alternative for ARC). Under the ARC-CO program, the payments are tied to actual revenue (actual county yield multiplied by the national marketing year average price) compared to the ARC-CO revenue guarantee. The guarantee is calculated for each county, crop, and practice based on 86% of a benchmarket revenue equal to the 5-year Olympic average yield multiplied by the 5-year Olympic average price (with a minimum of the reference price in each year of the average price). If actual revenue falls below the guarantee, there is an ARC-CO payment, limited to a maximum of 10% of the benchmarket revenue and paid on 85% of base acres.
Table 3 shows the average ARC-CO payment rates in Nebraska per base acre taking into account the 85% paid acre factor. Payments started relatively high as recent high market prices translated into relatively strong revenue guarantees against falling price and revenue levels. Now, with continued lower prices, the 5-year Olympic average price has fallen as well, leading to lower gurantees, and little to no ARC-CO payments.
Table 3. Average ARC-CO Payment Rates and Projections for Nebraska*
|Commodity||County/Practice Combinations||Average ARC-CO Payment Rates per Base Acre|
|* ARC-CO payments and payment projections averaged across all counties and practices in Nebraska where data is available. Payments for 2014-2017 from USDA-FSA. Payment projections for 2018 based on yield and price projections from USDA-NASS, USDA-WAOB, and USDA-FSA as of October 2018. Sources: USDA-FSA, USDA-NASS, and USDA-WAOB.|
Payments under the ARC-CO program in Nebraska had been substantial at more than $500 to $600 million per year for the 2014-2016 crops, but have fallen to less than $100 million on the 2017 crop. Projected ARC-CO payments on the 2018 crop to be paid next fall are essentially nil at current price and statewide yield projections, unless some counties end up with below-average yield results.
Detailed ARC-CO payment rates by county, crop, and practice for each year from 2014 through 2018 are available in a series of tables by year at the following links:
In sum, farm program payments have helped Nebraska crop producers cope with the dramatic drop in prices since 2013 with $500-$600 plus in payments received on each of the 2014-2016 crops. But, that support, largely in ARC-CO, is quickly disappearing with around $100 million or less in payments and projections for the 2017-2018 crops. That decline in farm program payments is buffered somewhat for now by approximately $300 million plus in expected trade assistance payments in Nebraska that were announced by the Secretary of Agriculture earlier this fall. However, the outlook for the year ahead is more challenging.
Barring significant market recovery or further trade assistance, producers will be managing for relatively low market prices and relatively little farm program support in 2019. Producers wil likely face a new farm program decision in 2019 under a new farm bill or an extension of current legislation, but that decision would affect 2019 crop support to be paid in 2020. Producers will need to carefully manage their risk in the meantime, including not just farm programs, but also production, insurance, and marketing decisions that all contribute to a portfolio approach to risk management.
Further details on farm program payments and propects under current programs as well as potential new farm bill legislation are covered in a recent issue of the Cornhusker Economics newsletter (available at https://agecon.unl.edu/cornhusker-economics/2018/farm-programs-payments-prospects).
Posted by Bradley D. Lubben, Monday, October 29, 2018