The new commodity title: It’s complicated…..or not?

By Sarah Gonzalez

© Copyright Agri-Pulse Communications, Inc.



WASHINGTON, March 12 2014 - Less than 30 days after President Obama's ink started to dry after signing the 2014 Agricultural Act, farm organizations and land grant universities are already rolling out some key decision making tools to help farmers and landowners understand their new options. And there are plenty.

Gone are the days you could rely on direct payments on your base acres - whether or not a crop was planted or not. Only cotton growers will still enjoy a basic “transition” payment (based on a portion of the direct payment) this year - as USDA tries to develop the new Stacked Income Protection (STAX) program for 2015. (For a new USDA Farm Bill fact sheet, click here.)

The 2014 Farm Bill's commodity title presents myriad decisions for farm owners and operators, and will largely depend on their expectations for prices over the next five years, coupled with decisions on other risk management tools like crop insurance and the new Supplemental Coverage Option (SCO).

Two new programs in the commodity title, Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC), offer a choice between revenue protection or price protection for each crop on each farm. Growers can select the ARC on a county or individual field level. If no selection is made in 2014, growers will not be eligible for either ARC or PLC for the 2014 crop year but will be automatically enrolled in PLC as the “default” choice for subsequent years. Decisions made at signup - which USDA expects to start this fall - are irrevocable and will apply for the five-year life of the farm bill.

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During the farm bill debate, it was widely anticipated that Midwestern corn and soybean growers - who lobbied hard for this revenue option - would likely select county-level ARC as the option most likely to make payments. At the same time, some of the wheat growers who wanted individual level ARC thought they would find this field-level option most attractive. But some analysts suggest that these assumptions may not hold true.

“When humans are given a lot of complicated choices, they tend not to choose, but to accept the default choice,” points out Kansas State Ag Economist Art Barnaby in a recent blog post. “The default choice is PLC and PLC is the simple solution. PLC is nearly the same as the counter-cyclical program but with updated target prices that have been renamed reference prices.”

Barnaby says that, looking at the prior Average Crop Revenue Election (ACRE) program, you might expect farmers to go with the simpler solution. When the prior ACRE program - which also  required a one-time irrevocable signup - opened for signup, it was clear that Texas and Oklahoma wheat growers were going to get the maximum ACRE payment.

“It was a much larger payment than the reduction in the five years of direct payments that would have been given up,” he explains. However, only about 25 percent of Oklahoma farmers signed up and very few in Texas.

Brad Lubben, University of Nebraska-Lincoln Extension public policy specialist, argues that the county ARC is really not that complicated. “Some specialists are saying the revenue program is complicated, while the price program is simple,” he said. “The price program and ARC at the county level are both very simple.”

The county ARC program requires the producer to have base acreage, and then the payment is calculated according to the county yield and national market price.  “It actually requires less producer information than the price program,” he added.  However, ARC at the individual level is complicated enough that signup might be limited, but “it's not overly complex, given that producers have the data for their base acreage update.”

Along with these commodity program decisions, growers can also decide whether or not to reallocate their base acres. Cotton base acres are now called "generic base acres" and do not count in the reallocation calculation. However, it those generic base acres are planted to a program crop in a given year, then those acres are considered base acres for that program crop in that crop year for purposes of calculating payments for the program elected on the farm. 

The decision is a one-time option based on planted acreage from 2009 to 2012. During a farm bill webinar last week, Jonathan Coppess - a former FSA Administrator and member of the Senate Ag Committee staff - who is now at the University of Illinois, said owners can choose to retain their current base acre allocation or reallocate their base acres, and if nothing is done they will retain their current acres. He said reallocation decisions depend on the farm owners' and operators' commodity program choices and intentions for future plantings.

“If had you had a different planting than when you made your base acres, you can reallocate to better reflect what you planted,” Coppess said. “You cannot increase the number of base acres.”

So, if the farm had 100 base acres, it would continue to have 100 base acres. For example, the base acres might be allocated this way: 50 corn acres, 25 soybean acres and 25 wheat acres. However, if the farm changed its wheat plantings, the owner could reallocate base acres to 50 corn and 50 soybean acres. For a report by Coppess and Nick Paulson on base acres, click here.

Coppess also said that for acres prevented from being planted, but then planted with a different crop, the owner can pick which commodity to use for that crop year in the four-year average calculation. In his blog, Coppess gave the following example: If the farm had prevented planting corn acres but then planted soybeans in a given crop year during the 2009 to 2012 period, the farmer could choose whether to use corn or soybeans for that year in the reallocation calculations.

Brad Lubben, University of Nebraska-Lincoln Extension public policy specialist, said most producers choosing the revenue protection policy of the ARC program would want to update their base acres to more accurately reflect what is planted.  However, those more concerned with target prices choosing PLC may, in some cases, find that keeping their current base acres is more appealing. “There are some that might choose to keep their old base acres, although I'd guess it will be a relatively small number,” he added. 

For example, total payments could be greater for certain crops over others, because some crops may be closer to the target price listed in PLC. In that case, the producer might choose to stick with current base acres rather than incorporate planted acres with a different crop farther from the target price. Lubben noted that overall price protection might not be as comprehensive with this strategy, but “total expected payments could be greater.” 

Farm owners must also decide whether or not to update their payment yields - an option authorized for the PLC program in the farm bill but not ARC. Still, USDA staff are signaling that they may also allow yield updates for the ARC program. A grower can update yields to 90 percent of their average yields from 2008-2012. Otherwise, they can keep their current payment yields at the same levels used in the 2008 Farm Bill's counter cyclical program.

“I think almost everyone would want to update yields,” Lubben said, noting that payment yields haven't been updated since 1985, or for some, since 2002. However, it may not be beneficial to update yield if the farm was stuck in drought years for several years in a row-enough to influence the average.  Although payment yields may only be relevant for the PLC program, producers “don't know when they'll get another chance,” Lubben said, so they might as well update now. 

Agricultural economists studying the 2014 Farm Bill noted that several questions must wait for FSA to finalize the rules later this year.

How will county yield be determined? Barnaby says county yield could be: 1. Harvested NASS yields; 2. Planted NASS yields; 3. Harvested NASS yields plus RMA failed acres; 4. RMA T-yields; or FSA “mathematical estimates.

“The Secretary will make the decision on the definition of a county yield, and few decisions will be more important in the new law,” Barnaby adds.

Will the farm owner or operator make the decision to reallocate base acres?  Coppess makes the assumption that the landowner would make those decisions. 

While the farm bill language says USDA should calculate separate revenue numbers for irrigated and nonirrigated crops, Lubben said FSA must find how they will be allocated over base acres.

The old ACRE program treated irrigated and nonirrigated crops separately, but it used planted acres instead of base acres. Historically, base acres do not acknowledge the same irrigated and nonirrigated commodities as separate program crops. However, ARC program language asks that USDA calculate irrigated and nonirrigated crops differently. 

Revenue risk, which is best absorbed by ARC, is greater on dry land crops, Lubben noted.

“The county ARC program would trigger on irrigated and nonirrigated substantially differently than on the overall commodity,” Lubben said. “So splitting them is important.”

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