What is in this article?:
- Agricultural Risk Coverage Program and Multi-Year Price Declines
- Lower Prices and County ARC Payments
The Senate Agriculture Committee recently passed a version of the farm bill that now moves for debate in the entire Senate. This bill replaces direct, counter-cyclical and SURE payments with Agricultural Risk Coverage (ARC), a revenue-based program that is further described in yesterday’s post by Carl Zulauf. Here, ARC payments are computed for cases in which prices are low for several years. This emphasis is taken as ARC is specifically designed to provide protection in cases of multi-year revenue losses, cases in which crop insurance often provides limited protection. ARC payments are computed for corn in Champaign County, Illinois, as further described in the next section.
County ARC Example
If ARC comes into existence, farmers will make a choice between using either county yields or individual farm yields. This selection is made at the beginning of the Farm Bill and is scheduled to be applicable for marketing years 2013 through 2017. Calculations for county ARC are illustrated below. Difference between the county and farm program then are outlined in the following subsection.
ARC’s guarantee is based on benchmark revenue. Benchmark revenue equals the five-year Olympic average of county yields times the five-year Olympic average of national, crop marketing year prices. An example of benchmark revenue calculation is shown in Table 1 for corn in Champaign County, Illinois. In this example, 2013 benchmark revenue is calculated with estimates of 2012 county yield and 2102 national price.
Based on historical yields, the 2013 Olympic average yield is 173 bu./acre (see Table 1). An Olympic average is found by eliminating the highest and lowest yields, and averaging the remaining yields. The 173-bu. average results from averaging the 2008 yield of 174 bu., the 2010 yield of 168 bu. and the 2012 estimated yield of 178 bu./acre. The 2013 Olympic average price is $4.82/bu. Multiplying 173 bu. by the $4.82 price gives benchmark revenue of $834/acre.
Payments will occur when 2013 actual revenue is below 0.89 times benchmark revenue. Effectively, ARC offers an 89% coverage level on benchmark revenue. For the Champaign County example, payments will occur when actual revenue is below $742/acre (0.89 x $834 benchmark revenue). Actual revenue is calculated by multiplying county yield times the first five months of national prices. If 2013 actual revenue is $700, an ARC payment is based on a $42 shortfall ($742 - $700 actual revenue). The maximum shortfall that can be paid on is 10% of benchmark revenue. Effectively, ARC provides protection for a band between 89% and 79% of benchmark revenue. In the Champaign County example, the maximum shortfall is $83/acre (0.10 x $834 benchmark revenue).
Per-acre payments are based on the shortfall times a factor. The factor is 0.80 for planted acres and 0.45 for prevented-planted acres. Use of these factors effectively causes ARC to only cover a portion of losses between 0.89 and 0.79 of benchmark revenue. For a planted acre, the ARC payment on a $42/acre shortfall is $34/acre (0.8 x $42). Payments would be received on planted acres, with a limit that planted acres for all crops cannot exceed average plantings from 2008 through 2012.
Individual ARC functions like county ARC except:
- Farm yields are used in calculating benchmark and actual revenue
- The planted acre factor used to multiply a shortfall is 0.65 rather than 0.8 for county ARC
The lower payment factor is designed to equalize payment of county ARC and farm ARC across the U.S. At the same payment rate, farm ARC would make more payments than county ARC because farm yields are more variable than county yields.