Cornhusker Economics October 25, 2017Farm Program Payments and Projections for Nebraska

The USDA Farm Service Agency (FSA) began issuing payments to producers in early October for Price Loss Coverage (PLC) and Agriculture Risk Coverage (ARC) programs for the 2016 crop year. These payments continue to be substantial, adding more than $600 million to cash flows for Nebraska producers this fall. However, this could be the last year of such large payments, as early estimates for 2017 crop payments to be paid in the fall of 2018 could be just one-third as much and 2018 crop payments in 2019 could be even less.

An analysis of farm program payment rates provides details on the current payments as well as the outlook for future support. The federal farm program support comes from commodity programs created in the 2014 Farm Bill. The legislation gave producers a choice of enrollment by commodity and by county in either a price-based program (PLC) or a revenue-based program (ARC) at either the county level (ARC-CO) or the farm level (ARC-IC for “individual coverage”). As commodity prices have declined from pre-2014 levels, both ARC and PLC have become important components of the farm income safety net and also substantial infusions of cash flow for producers

Table 1 provides historic national marketing year average prices and current national marketing year price projections for the primary Nebraska crops for the 2014-2018 crop marketing years, the years covered by the 2014 Farm Bill programs. National marketing year average prices are used to calculate potential PLC payments and ARC payments. ARC-CO payments are also dependent on county yields while ARC-IC is dependent on individual farm-level yields.

Table 1. Farm Program Outlook Price Projections*

Commodity	Reference Price ($/bushel)	Prices ($/bushel)
		2014	2015	2016	2017	2018
Corn	3.70	3.70	3.61	3.36	3.20	3.59
Grain Sorghum	3.95	4.03	3.31	2.79	2.90	3.38
Soybeans	8.40	10.10	8.95	9.47	9.20	9.53
Wheat	5.50	5.99	4.89	3.89	4.60	4.84

* Final price estimates for 2014-2016 from USDA-NASS. Price projections for 2017 from USDA-WAOB and USDA-FSA as of October 2017. Price projections for 2018 from CBO as of June 2017.
Sources: USDA-FSA, USDA-NASS, USDA-OCE, USDA-WAOB, and CBO.

The multi-year decline in prices has translated into substantial farm program payments and projected payments. However, the differing objectives and mechanics of ARC and PLC create very different payment levels and projections.

Payment and Projections

PLC payment rates are directly tied to the difference between the legislated reference price and the national marketing year average price for each commodity, with a maximum payment rate equal to the difference between the reference price and the national average marketing loan rate. Table 1 also provides the reference price for each major commodity to allow comparisons of market prices and reference prices. PLC payment rates per base acre for each crop are based on the calculated payment rate multiplied by the producer’s program yield and 85% of the producer’s base acreage. The total payment is limited by producer payment limit and eligibility rules and is reduced according to the rules of budget sequestration.

PLC payments were negligible in Nebraska for the 2014 crop year, but payments have quickly become important as prices for wheat, grain sorghum, and even corn dropped below reference price levels. Using average program yields across the state, Table 2 presents average PLC payment rates per base acre for the 2014-2018 crop years, based on official FSA data through the 2016 crop year and current price projections as noted in the table for the 2017 and 2018 crop years.

Table 2. Form Program Outlook Average PLC Payment Rates in Nebraska*

Commodity	Average PLC Payment Yield (bushels/acre)	Average PLC Payment Rates per Base Acre ($/base acre)
		2014	2015	2016	2017	2018
Corn	150	0.00	11.47	43.31	63.70	14.01
Grain Sorghum	77	0.00	41.95	76.04	68.83	37.36
Soybeans	45	0.00	0.00	0.00	0.00	0.00
Wheat	41	0.00	21.19	55.93	31.26	22.93

* PLC payments and payment projections based on weighted average PLC payment yields in Nebraska. Payments based on prices for 2014-2016 from USDA-NASS, price projections for 2017 from USDA-WAOB and USDA-FSA as of October 2017 and price projections for 2018 from CBO as of June 2017.
Sources: USDA-FSA, USDA-NASS, USDA-OCE, USDA-WAOB, and CBO.

As prices have fallen, PLC payment rates have substantially increased. However, total PLC payments to Nebraska remain relatively small. While producers with base acres of wheat and grain sorghum and some minor crops enrolled a substantial portion of the acreage in PLC, corn and soybean base acres were overwhelmingly enrolled in the ARC program, given the projections of substantially more support from ARC at the time for those crops. Thus, while PLC payment rates have increased with lower price levels, the total amount of PLC payments in Nebraska still amounts to less than $100 million of the more than $600 million in payments currently being distributed for the 2016 crop.

While the PLC program started small, it is becoming more significant over the life of the 2014 Farm Bill. Conversely, the ARC program started off with substantial payments to producers, but is expected to shrink quickly through 2018. Unlike PLC payments that are tied to a fixed reference price set in legislation, ARC-CO payments are tied to revenue (price times yield) results for the crop year compared to a benchmark revenue based on the five-year Olympic average price and yield for each crop by county and by practice for those crops where county-level irrigated and nonirrigated yields are calculated separately. ARC-IC is calculated similarly but on farm-level yield averages and results. The ARC program protects producers when revenue drops below a guarantee equal to 86% of the benchmark revenue based on the average prices and yields.

ARC payments are based on the same national marketing year average prices as used with PLC. ARC-CO payments are additionally based on county-level crop yields as estimated from USDA National Agricultural Statistics Service (NASS) data where available or from USDA Risk Management Agency (RMA) data or other procedures as necessary. Yields per harvested acre are adjusted by FSA for unharvested acreage to generate yields per planted acre used in the ARC formula. ARC-IC payments are based on actual farm-level yields per planted acre and add to total ARC payments, but are an insignificant part of the total payment amounts due to limited enrollment.

Table 3 shows the average ARC-CO payment rates for the 2014-2016 crop years for major Nebraska crops along with projections for the 2017 through 2018 crop years. As with PLC, the total payment is limited by producer payment limit and eligibility rules and is reduced according to the rules of budget sequestration.

Table 3. Farm Program Outlook Average ARC-CO Payment Rates in Nebraska*

Commodity	County/Practice Combinations	Average ARC-CO Payment Rates per Base Acre
		($/base acre)
		2014	2015	2016	2017	2018
Corn	131	53.31	52.36	52.89	12.62	0.00
Grain Sorghum	103	18.44	21.54	29.25	8.01	3.43
Soybeans	112	15.56	28.46	5.65	0.12	0.00
Wheat	113	9.28	24.24	8.27	11.46	1.05

* ARC-CO payments and payment projections averaged across all counties and practices in Nebraska where data is available. Payments for 2014-2016 from USDA-FSA. Payment projections for 2017 based on yield and price projections from USDA-NASS, USDA-WAOB, and USDA-FSA as of October 2017. Payment projections for 2018 based on Olympic average yields and price projections from CBO as of June 2017.
Sources: USDA-FSA, USDA-NASS, USDA-OCE, USDA-WAOB, and CBO.

The payment rates in Table 3 were calculated per base acre, taking into account that payments are made on only 85% of base acres. The payment rates also represent a simple average of all calculated payment rates in Nebraska for each crop, including all irrigated, nonirrigated, and blended practices by county. Thus, the rates do not reflect any single payment rate and do not illustrate the wide variability in payment rates due to variable yield results, but they do demonstrate the general level of payments for each crop over the life of the 2014 Farm Bill.

As the table illustrates, ARC payment rates were large in the first years of the 2014 Farm Bill as the 5-year Olympic average prices carried into the program incorporated the high price years prior to 2014. For example, the ARC benchmark price for corn was $5.29 for both the 2014 and 2015 crop year, meaning ARC payments generally kicked in at prices below $4.55 ($5.29 times 86%) based on average yields. While better than average yields reduced the effective price trigger, it was still substantially higher than the 

$3.60 and $3.61 prices per bushel for 2014 and 2015 crop years respectively. The ARC benchmark price for corn for 2016 had fallen to $4.79 per bushel as more lower-price years counted in the average, suggesting a trigger for ARC support at $4.12 ($4.79 times 86%) at average yields. But as market prices fell even further to a final estimate of $3.36 per bushel, ARC payments continued to remain substantial.

With continued lower prices projected ahead for 2017 and only modest improvement currently projected for 2018, crop revenue levels are not expected to substantially improve. However, the moving average price will continue to trend lower and as a result, the ARC protection will also trend lower, eventually leading to estimates of negligible ARC payments on the 2018 crop.

Detailed payment estimates and analysis are available on the Nebraska Extension farm bill website at http://farmbill.unl.edu. Full tables of all counties, crops, and practices under the ARC‑CO program in Nebraska are posted online for the 2014-2016 crop years along with current projections for the 2017-2018 crop years. Additionally, the website contains a link to an ARC-CO payment mapping tool for Nebraska to allow a visual comparison of payment rates across counties across the state. This data will be continually updated for the 2017 and 2018 crop years remaining under the 2014 Farm Bill.

Outlook

With lower crop prices and lower farm income projections, cash flow is an important consideration for producers now and in the coming year. Farm program payments have been substantial for the 2014-2016 crop years in Nebraska under both the ARC and PLC programs. But, as noted, ARC support is projected to drop substantially through the 2018 crop year. While total farm program payments in Nebraska exceeded $600 million per year for the 2014-2016 crop years, they are projected to fall to around $200 million for the 2017 crop year and to less than $50 million for the 2018 crop year as ARC payments all but disappear

Beyond 2018, producers can also look to potential changes in farm programs under a new or extended farm bill. While there are substantial budget challenges and concerns over the direction of a new farm bill, there are widespread expectations that the crop commodity programs will largely maintain the current portfolio of ARC and PLC programs. Within the programs, there are various proposals for addressing issues and concerns in the ARC program as well as overall support levels. Discrepancies in ARC-CO payment rates between counties has led to calls for a change to the yield data and/or formula used in the program. Recognition that ARC protection going forward would be based on substantially lower prices than comparable PLC protection, there are also calls for adjusting the ARC reference price or protection level. Whether these issues can be addressed, particularly with a tight budget situation that promises no new funding to revise existing programs, remains a question

The single biggest question for commodity programs, however, may be whether producers will have a new enrollment decision in 2019 between ARC and PLC. Whether a new farm bill is completed or the current legislation is simply extended, the widespread expectation here too is that producers will have a new decision. If so, that decision could be substantially different than in 2014 given the changing price outlook and expectations for support from either the ARC or PLC programs.

In summary, farm program payments have helped crop producers withstand the dramatic drop in prices thus far, but the support will trend down and push producers under ARC to adapt to market conditions by 2018 and likely consider new program enrollment decisions in 2019. Even recognizing the limitations of commodity programs, it is obvious that ARC and PLC have been important parts of a producer's risk management strategy and bottom line. It is just as important to remember that the bottom line is also affected by all of the other risk management decisions, including production, insurance, and marketing decisions that all contribute to a portfolio approach to risk management.

Updated information, detail, and analysis is available at farmbill.unl.edu.

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Bradley D. Lubben
Extension Associate Professor, Policy Specialist
Department of Agricultural Economics
University of Nebraska-Lincoln
blubben2@unl.edu