Net returns for $4.50/bu. corn

At a $4.50 price, ARC does not make payments (see Panel A of Table 1). A $4.50 price results in net returns of $43/acre in 2013, $52 in 2014, $61 in 2015, and $70 in 2016 (see Panel A). All net returns are positive. These returns are close to those generated in the early to mid-2000s, when corn prices were much lower. Since 2006, costs have increased such that a $4.50 price would generate sufficient profits to assure that all obligations are met on most farms, but would not result in buildup of financial reserves.

Net returns for $4/bu. corn

At a $4 corn price, ARC makes a payment of $18/acre in 2013, $14 in 2014, and $8 in 2015 (see Panel B of Table 1). Net returns will be negative: -$29/acre in 2013, -$25 in 2014, -$23 in 2015, and -$23 in 2016. ARC payments would cushion losses from lower prices; however, net returns would be negative.

Net returns for $3.75/bu. corn

At a $3.75 corn price, ARC makes payments of $54/acre in 2013, $41 in 2014, $35 in 2015, and $0 in 2016 (see Panel C of Table 1). These ARC payments reduce losses faced by farmers. For example, the net return of -$38/acre in 2013 would be $54 lower, or -$92 per acre, if ARC payments are not made. With ARC payments, net returns are projected at -$38/acre in 2013, -$43 in 2014, -$42 in 2015, and -$69 in 2016.

Net returns for $3.55/bu. corn

At a $3.55 corn price, ARC makes payments of $83/acre in 2012, $77 in 2014, $70 in 2015, and $0 in 2016 (see Panel D of Table 1). Net returns are -$45/acre in 2013, -$44 in 2014, -$44 in 2015, and -$107 in 2016.

Commentary

In general, returns to corn and soybean farms have been above average in recent years because of relatively high corn prices. USDA reports average national prices at $5.24/bu. for the 2010 marketing year and projected $6.10 for the 2011 market year. Given recent increases in production and land costs, a $4.50 corn price will result in much lower returns than 2010 and 2011 prices. Prices below $4 will result in losses for corn production.

ARC will provide payments that cushion low revenues. ARC payments will not cover the entire decline in revenue because of the structure of the ARC program; hence, losses are possible with ARC. This occurs because ARC will not make payments until revenue has declined 11% from its benchmark revenue, then only a portion of the losses will be covered for the next 10% decline in revenue.

If a string of low prices over several years occurs, ARC will make larger payments in the beginning years. These payments then will decline through time. These payments will allow farmers to adjust to lower prices. Moreover, costs likely would adjust down to a lower price. For example, cash rents likely would decline in an extended period of low prices occur. Hence, ARC can be viewed as a transition program designed to aid farmers by cushioning revenue from market changes, ARC will not establish a permanent level of support around a specific price or revenue.

 

Read the article at farmdocDaily.