ARC is designed to protect against multi-year revenue declines, as these would not be covered by crop insurance. An example is for lower prices that occur across years. Impacts of lower prices are examined in Table 2 for the Champaign County example. In this example, county ARC payments are calculated for 2013 through 2016 with county yields growing at trend rate of 2 bu./year (180 bu. in 2013, 182 bu. in 2014, etc.). The same price in 2013 through 2016 is used to calculate county ARC payments. For example, Panel A has a $4.50 price in each year from 2013 to 2016. In the examples, the national price for the entire year is assumed to equal the average of the first five months of the marketing year.

A number of studies suggest that corn prices will average $4.50 over time. A $4.50 price is below recent national prices of $5.18 for 2011 and an estimated $6.10 for 2012. A price of $4.50 from 2013 through 2016 would not generate county ARC payments, given that county yields are near expectations (see Panel A of Table 2) Hence, price near long-run prices would not generate ARC payments unless county yields decline by more than 11%. Before an ARC payment would be generated in 2013, price would have to be below $4.12/bu.

A price of $4 generates a county ARC payment of $18/acre in 2013, $14 in 2014, $8 in 2015, and $0 in 2016 (see Panel B). ARC payments decline over time as lower prices enter into the benchmark revenue. The Olympic price declines from $4.82 in 2012 to $4.40 in 2016

A price of $3.75 is a relatively low price. During the late 1990s, actual prices were 15-20% below the long-run average price. A $3.75 price is 16% below the estimated long-run price of $4.50. Hence, this example replicates late 1990 conditions. Historical deviations suggest that this price or lower could occur in roughly 25% of the years. A stable $3.75 price generates a per-acre county payment of $54/acre in 2013, $41 in 2014, $35 in 2015, and $0 in 2015. These payments would partially offset a decline in revenue from lower prices that lasts over multiple years. For example, a $3.75 price would generate $135 lower revenue than if a $4.50 price is realized (-$135 = ($3.75 - $.450) x 180 bu./acre).

In 2009, the national price was $3.55/bu. Historical deviations suggest this price or lower could happen in 10% of years. A price of $3.55 for several years would be rare. Not that this $3.55 price is considerably above the $1.95 loan rate, suggesting that this loan deficiency payments would not occur. A series of $3.55/bu. prices would generate ARC payments of $66/acre in 2013, $65 in 2014, $62 in 2015, and $1 in 2016. Again, county ARC payments would partially cover revenue declines. ARC payments will decline over time as lower prices enter into the calculation of benchmark revenue.

Payments in the above example depend on yields. In Illinois, there is a negative correlation between yields and prices. It could be argued that lower prices in the examples in Panel B through D would be accompanied by much higher yields, as higher yields would lead to more supply and lower prices. Higher yields would lower payments shown in Table 2.

 

Summary

ARC will make payments if revenues reach lower levels. In years in which revenue declines, ARC payments will be useful to farmers.

ARC payments will offset some of the losses in gross revenue. The entire loss will not be covered because:

  • The 0.89 factor used to calculate the guarantee effectively puts an 11% deductible on revenue losses
  • Payments are a factor of the shortfall (0.80 for the county program and 0.65 for the farm program)
  • ARC payments are capped at 10% of benchmark revenue

If prices are persistently low for several years, ARC payments will decline over time as lower prices enter into the calculation of benchmark revenue. Hence, ARC will provide payments in early years of a multi-year price decline, eventually though farmers will need to fully adjust to price declines as ARC payment decline.

 

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