K-State's Barnaby Answers Questions about New Farm Bill
Posted on Apr. 4th, 2014
Mary Lou Peter
K-State Research and Extension
MANHATTAN, Kan. – As a professor in Kansas State University's Department of Agricultural Economics, Art Barnaby has given countless presentations and fielded even more questions about managing risk over the years. And the questions continue as details of the new farm bill unfold.
It's clear that farmers have important choices to make in the coming months, not the least of which is the decision to choose one of two safety net programs, the Agriculture Risk Coverage or Price Loss Coverage. That is what Barnaby has been asked most – which is the best option?
Agriculture Risk Coverage covers what farmers would lose before their regular crop insurance kicks in. It provides protection when crop revenue falls 14 percent below a five-year rolling Olympic (high and low removed) average benchmark. The producer chooses whether the benchmark is based on county yield X crop year average prices or his or her individual crop yield X price.
With Price Loss Coverage, farmers will receive payments if the crop price falls below certain "reference" prices.
"ARC is effectively a free revenue insurance guarantee and the PLC is a free put, with the government paying the entire premium costs," said Barnaby, who is a risk management specialist with K-State Research and Extension. "At current crop prices, the market is saying the ARC has more value than PLC, but that does not guarantee that ARC will pay more than PLC on corn and soybeans."
He acknowledged, however, that it's unclear if there is a best plan – ARC or PLC – because producers will not sign up until this fall or later: "The program that will pay the most will be determined by price and yield. By sign-up, we will know the wheat yield and half of the marketing year average wheat price on the 2014 crop. We will also have a good estimate of the yields for spring-planted crops, so all this could change."
Barnaby said if long-term price forecasts by the University of Missouri's Food and Agricultural Policy Research Institute (FAPRI) hold true for the 2014 and 2015 crops, payments would be generated under the county-ARC program compared to PLC, but that trend reverses in the later years of the five years that the new law is in effect.
Higher yields reduce or eliminate ARC payments, and most estimates are based on long-run average trend yields, he said.
"So a very risk averse person might be willing to forego county-ARC payments in the early years to avoid a catastrophic price decline in the years 2017 and 2018 when PLC might generate higher payments than county-ARC," he said. "Most farmers are accustomed to risk and I doubt that catastrophic price protection will be the deciding factor."