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This is the third article in a three part series about the new Farm Bill. The first article gives an overview of the options of price loss coverage or agricultural risk coverage while the second article goes into more depth on price loss coverage.

corn in fieldAgricultural Risk Coverage


What is ARC?



  • Similar to the old ACRE program

  • Is triggered under shallow revenue losses at the county or individual level

  • Pays on base acres if actual revenue in a given year falls below a benchmark guaranteed level of revenue

  • Requires producers to choose whether to enroll in countywide coverage on a commodity-by-commodity basis or individual coverage that applies to all of the commodities on the farm


ARC-COUNTY


The county-level revenue benchmark, in a particular year, for a covered commodity is equal to the previous five-year Olympic average of U.S. marketing year average prices multiplied by the previous five-year Olympic average county yield reported by the National Agricultural Statistics Service (NASS). An Olympic average is calculated by taking the past five years of observations, throwing out the highest and lowest observations, and then averaging the remaining three. However, before the Olympic average is calculated, a minimum plug price and yield are used. The plug price is equal to the PLC reference price, and the plug yield is equal to 70 percent of the county T-yield.

EXAMPLE


Suppose a particular county had a previous five-year history for corn yield along with the marketing year average U.S. price as shown in the accompanying table [assuming the April World Agricultural Supply and Demand Estimates (WASDE) are accurate for 2013/14].

































Marketing YearAverage Corn PriceCounty Yield
2009-10$3.55177.0
2010-11$5.18186.4
2011-12$6.22174.6
2012-13$6.89120.7
2013-14$4.60187.8

The county T-yield is 180 bushels per acre (bpa). Therefore, the plug yield (70 percent of T) is 126 bpa. The plug price is the corn reference price of $3.70 per bushel. On the price side, one year (2009-10) is replaced with the plug price of $3.70/bu. On the yield side, one year (2012-13) is replaced with the plug yield of 126 bpa. For the price Olympic average, we drop the minimum of $3.70 (2009-10) and the maximum of $6.89 (2012-13), and average the remaining three ($5.18, $6.22, $4.60) to get an Olympic average price of $5.33 per bushel. For yield, we drop the minimum of 126 (2012-13) and the maximum of 178.8 (2013-14), and average the remaining three (177.0, 186.4, 174.6) to get an Olympic average yield of 179.3 bpa. Therefore, the county revenue benchmark is equal to $5.33 Olympic average price x 179.3 Olympic average country yield, which equals $955.67 per acre.

ARC-County will provide shallow loss coverage when the actual county revenue falls below 86 percent of the revenue benchmark. The maximum per acre payment is equal to 10 percent of the revenue benchmark, so coverage essentially extends from 86 percent down to 76 percent of the revenue benchmark. Using the above example, ARC-County would trigger program payment when the actual county revenue falls below $821.88 and would pay a maximum of $95.67 per acre (i.e., actual county revenue equals $726.31).

For calculating the actual county revenue, the price cannot be below the loan rate, so the formula is the maximum of the U.S. marketing year average price or the commodity loan rate multiplied by the actual county average yield per acre (as reported by NASS). Note that for counties where both irrigated and non-irrigated yields are reported by the NASS, ARC-County will allow for separate benchmark and actual revenues. Also, the ARC-County program will pay out the payment per base acre for the program crop at an 85 percent rate, or 85 cents on the dollar.

The ARC-County program essentially is a county-level “revenue option” offered to farmers. The program payment basically will be triggered under three possible scenarios:

  • Low U.S. average prices and low county yields

  • Average U.S. prices and low county yields

  • Average county yields and low average U.S. prices


Therefore, the correlation between the county-level yield and the U.S. marketing year average price is a major contributing factor to the frequency of program payments. In cases of a strong negative correlation between price and yield, the odds of a payout will be quite low due to the natural “hedge” effect between the yield and the price. If price and yield have a strong positive correlation, then the odds of a payout will be quite strong, as low prices will correspond to low yields and vice versa. Unfortunately, the laws of supply and demand tend to favor a negative correlation rather than a positive one for most agricultural commodities.

ARC-INDIVIDUAL


ARC-Individual uses farm-level yields instead of county-level for calculating the five-year Olympic average yield in the benchmark revenue and for determining the yield for the actual revenue for each covered crop produced in a particular crop year. Producers can use 70 percent of the county T-yield as a plug in their five-year yield history. The U.S. marketing year average price is still used for the price component of revenue in both calculations and is calculated the same way as for ARC-County. To determine total farm level revenue, a weighted average of the per acre revenues is calculated where the weights are the relative percentages of total planted acres of covered crops allocated to the particular crop.

EXAMPLE


If a producer planted 60 percent of total acres to soybeans (benchmark revenue equals $350 per acre) and 40 percent to corn (benchmark revenue equals $650 per acre), the total farm benchmark revenue would equal (0.6 x $350) + (0.4 x $650), which would equal a farm revenue benchmark of $470 per acre. ARC-Individual would trigger program payments when the producer’s actual revenue fell below 86 percent of $470, or approximately $404, and would pay up to a maximum payment of $47 per base acre (or 76% of $470, which equals $357 per base acre).

If the producer had actual revenue of $300 for soybeans and $400 for corn, the farm actual revenue would equal (0.6 x $300) + (0.4 x $400), or $340 per acre. In this case, it fell below the 76 percent threshold, so the producer would receive the maximum payment of $47 per base acre of all covered crops. However, ARC-Individual pays out at a 65 percent rate (or 65 cents on the dollar), so the producer would receive a net payment of 0.65 x $47, or $30.55 per base acre.

Information in this post was provided by AgriBank. AgriBank is FCS Financial’s funding source. It is one of the largest banks within the national Farm Credit System, with more than $80 billion in total assets. Under the Farm Credit System’s cooperative structure, AgriBank is owned by 17 affiliated Farm Credit Associations. The AgriBank District covers America’s Midwest, a 15-state area from Wyoming to Ohio and Minnesota to Arkansas. More than half of the nation’s cropland is located within the AgriBank District, providing the Bank and its Association owners with exceptional expertise in production agriculture. For more information, visit www.AgriBank.com.

 
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