OSU Policy & Outlook Program 10/30/2009 2014 Crop Safety Net Decisions: Corn and Soybeans in the Midwest Carl Zulauf (zulauf.1@osu.edu), Ag. Economist, Ohio State University, Ohio Agricultural Research and Development Center, Ohio State University Extension Presentation at 2014 Farm Bill Education Conference Kansas City September 3, 2014

Overview - Decisions DECISION 1: program (base) yield update option DECISION 2: program (base) acre reallocation option DECISION 3: program choice Agriculture Risk Coverage – individual (ARC-IC) OR Agriculture Risk Coverage – county (ARC-CO) OR Price Loss Coverage (PLC) with option to elect Supplemental (insurance) Coverage Option (SCO) December 1, 2018 Carl Zulauf

Overview – Payment Indicator 2014 December 1, 2018 Carl Zulauf

Overview – Payment Indicator 2014 December 1, 2018 Carl Zulauf

Program Yield Update Decision (every FSA farm owner should actively do) OPTIONS: (1) current countercyclical yield (default) OR (2) 90% of simple 2008-12 average yield ▬ includes all years, including low yield years (2012) ▬ elections on a crop by crop basis by FSA farm ▬ decision straightforward but updated yield may be lower Table 1. Example Calculation of Updated Payment Yield for Corn   2008 2009 2010 2011 2012 Sum of Yields Average Yield (divide by 4) Payment Yield (90%) Yield per planted acre planted: no evidence 154 175 no planted acres 100 Substitute Yield: 75% of 08-12 county average yield 112 Yield used 553 138 124 December 1, 2018 Carl Zulauf

Program Acre Reallocation Decision (every FSA farm owner should actively do) OPTIONS: (1) current program acres by crop (default) OR (2) current total program acres allocated by share of total covered crop acres planted or prevent planted to each covered crop during 2009-12 ▬ elected by FSA farm ▬ important because ARC and PLC pay on base acres Table 1. Example Calculation of Reallocated Base Acres Crop Base Acres 9/30/2013 Crop History 2009 Crop History 2010 Crop History 2011 Crop History 2012 Average Planting 2009-12 Reallocate Percent Reallocated Base Acre Option Alfalfa not covered crop  20 not applicable Corn 50 40 30 40.0 50% Oats 10 0.0 0% Soybeans 32 36.0 45% 45 Wheat 8 4.0 5% 5 Total covered crops 100 80 100% December 1, 2018 Carl Zulauf

Commodity Program Decision (every FSA farm owner must sign up – no default) 1 time, irrevocable choice for 2014-18 OPTIONS by order of discussion: (a) ARC–IC (individual) – sign up by FSA farm (all crops) (b) PLC – sign up by FSA farm by crop plus SCO option (c) ARC–CO (county) – sign up by FSA farm by crop ▬ can mix election of PLC and ARC-CO on FSA farm (for example, PLC for corn; ARC-CO for soybeans) ▬ all FSA farm owners must make same election or potentially lose 2014 payments and in PLC for 2015-18 December 1, 2018 Carl Zulauf

(Agriculture Risk Coverage – Individual) ARC-IC (Agriculture Risk Coverage – Individual) Suggest First Program Decision: Does ARC-IC fit? ▬ don’t ignore ARC-IC even though pays on 65% of program acres (vs. 85% for ARC-CO and PLC) and has complex calculations OVERVIEW: pays if average experience of all covered crops on whole ARC-IC farm unit is between 76% and 86% of ARC-IC farm unit revenue benchmark ▬ portrayed as individual farm but only true if operator has only 1 FSA farm in ARC-IC in state THUMB NAIL ASSESSMENT (9/2/14): Consider ARC-IC if 1. production on FSA farm varies highly ▬ more attractive if only 1 FSA farm and 1 crop per year ▬ has higher probability of payment and no premium 2. fruits/vegetables may be planted on ARC-IC farm ▬ more flexibility to plant these crops than with ARC-CO & PLC December 1, 2018 Carl Zulauf

ACR-CO vs. PLC vs. PLC-SCO Decision “For an FSA farm as a whole over the 5 years, 2014-2018, is expected ARC-CO payments + expected net payments from any insurance chosen greater or less than expected PLC payments + expected net payments from any insurance chosen and SCO if also chosen.” KEY POINTS: ▬ Key driver in phrasing this question: because SCO is an option only with PLC, insurance decisions must be fully considered with the commodity program decision ▬ This is more accurately a multiple year loss and shallow loss management decision. December 1, 2018 Carl Zulauf

Insurance Decision - SCO (Supplemental Coverage Option) SCO covers county loss between individual farm insurance coverage level and 86% (for example, 75% to 86%), but only available if PLC elected and individual farm insurance bought. OVERVIEW: pays on acres planted to crop if county revenue decline between planting and harvest is in SCO coverage zone THUMB NAIL ASSESSMENT (9/2/14): “Does SCO add coverage that is cost competitive with higher individual insurance after difference in farm vs. county revenue changes is considered?” ▬ County insurance rarely provides as good of risk protection at the same coverage level as individual farm insurance because farm and county revenue rarely change the same. Moreover, SCO’s subsidy rate of 65% is higher than enterprise insurance only at 85% coverage and then only by a small margin (65% vs. 53%). Thus, SCO appears to be a clear consideration only (1) if enterprise insurance is not available up to 85% coverage or (2), because SCO is cheaper, when the farm’s cash flow is constrained. December 1, 2018 Carl Zulauf

Insurance Decision – individual farm ARC-CO and PLC could alter individual farm insurance choices. ARC-CO is a county loss program with a coverage range limited to 76% to 86%. If the ARC benchmark revenue is reasonably close to the insurance guarantee, a farmer, particularly if cash flow is constrained, may purchase individual insurance at 75% coverage and use ARC-CO to provide partial coverage at the 76% to 86% coverage levels. If prices are below the reference price, farms may use PLC to provide downside price protection and thus purchase the cheaper yield insurance to cover yield risk. Both impacts occur only in limited circumstances. In terms of making a forward-looking 5-year decision, these circumstances have to be forecast accurately. Given the difficulty of such forecasting, many FSA farm owners may choose to relegate the individual insurance choice to secondary importance when making the choice of commodity programs. December 1, 2018 Carl Zulauf

PLC (Price Loss Coverage) PLC is a Slightly Revised Target Price Program ▬ higher target price (now called reference price) ▬ Corn Reference Price = $3.70 ▬ Soybean Reference Price = $8.40 ▬ Wheat Reference Price = $5.50 ▬ pays on 85% of program, not planted, acres, if U.S. crop year price less than reference price OVERVIEW: pays if price is below reference price on 85% of program, not planted, acres THUMB NAIL ASSESSMENT (9/2/14): effective multiple year price risk option if prices stay below reference price for multiple years but beware of price decline from 2013 level that last multiple years and price stays above reference price December 1, 2018 Carl Zulauf

(Agriculture Risk Coverage – County) ARC-CO (Agriculture Risk Coverage – County) Substantively Revised ACRE Revenue Program ▬ elected by crop, not by farm ▬ county instead of state yield ▬ minimum price exists (= reference price) ▬ no 10% limit on up/down change in revenue benchmark ▬ coverage level is 76% to 86%, not 67.5% to 90% ▬ continues 5-year Olympic average of yield & U.S. price OVERVIEW: pays on 85% of program, not planted, acres if county revenue is between 76% and 86% of 5 prior year’s Olympic average county revenue THUMB NAIL ASSESSMENT (9/2/14): effective multiple and shallow revenue loss option if prices do not stay below reference price for multiple years but beware disaster price risk scenario December 1, 2018 Carl Zulauf

Summary Thoughts ► U.S. farmers are rediscovering the crop safety net has 2 pillars: commodity programs and insurance. The risk of multiple year losses is real in farming. ► ARC-CO’s strength is assistance for shallow multiple year losses, but ARC-CO also provides some disaster price assistance since it has a minimum price, the PLC reference price. PLC’s strength is assistance for multiple years of disaster prices, but SCO or high individual farm coverage can provide some assistance with cumulative shallow losses. Which of these combinations is preferred will help guide the shallow loss – multiple year loss program choice. ▬ Key operational features to consider: (1) ARC pays on price declines; PLC pays if price is below the reference price. (2) ARC pays on yield declines; PLC does not --- PLC uses the fixed payment yield. December 1, 2018 Carl Zulauf

Summary Thoughts ► Economics says wait to make a decision: (1) reasonably well-known 2014 payments; (2) some but limited insight on 2015 payments; (3) then depends on forecast ability. Do FSA farm owners want to weight years differently ▬ higher weight on 2014 because more is known? ► An FSA farm owner with more than 1 FSA farm and more than 1 covered crop can mix ARC-CO and PLC-SCO. ► My current thinking (9/2/2014) is that Midwest corn and soybean farmers need to ask (1) if SCO is a cost competitive option relative to higher individual farm coverage, (2) if their program choice will influence their insurance decision, (3) how much weight they want to put on the reasonably well known 2014 crop year payments vs. the more uncertain payments for the other years, and (4) if they want to diversify their program choice. Once these big picture considerations are assessed, the farm program calculators can help with the decision. December 1, 2018 Carl Zulauf

Appendix: ARC-CO and PLC Calculations ARC-CO payment/acre = maximum (MAX) (0, ((86% times ARC revenue benchmark) – MAX(ARC actual revenue, 76% times ARC revenue benchmark))) ● ARC revenue benchmark = (Olympic average of county yield for 5 previous crop years times Olympic average of 5 previous U.S. crop year prices) ● Olympic average discards high and low values. ● ARC actual revenue = county yield/planted acre times U.S. crop year price ● ARC price for each year = MAX(crop year price, PLC reference price) PLC payment/acre = (PLC payment yield times MAX(0, reference price – MAX(U.S. crop year price, loan rate)) ● PLC payment yield = (90% times program payment yield) ● PLC reference prices and loan rates are specified in 2014 farm bill. NOTE: Maximum (MAX) operation means higher/highest of options separated by a comma is selected. Thus, for example, 0 is selected for ARC-CO payment/acre if calculated payment per acre is negative.  December 1, 2018 Carl Zulauf