A closer look at the new farm bill
A big change in the new farm bill is the elimination of direct payments. This change does not surprise anyone; it has been one provision that has been agreed upon by almost all policymakers since the discussions about the farm bill began. However, the change will probably have an impact.
In past years, direct payments totaled between $4.5 billion and $5 billion per year, and it was money that fell through to the bottom line with no offsetting costs. At least in years when farmers don’t see a big drop in revenue due to low prices, low yields or any other combination, the loss of direct payments will reduce net cash farm income.
But policymakers have added provisions to help farmers deal with low prices or low revenue. Farmers will make a one-time choice between a policy that protects against falling revenue (Agricultural Risk Coverage—ARC) and one that provides payments when crop prices fall below levels set in the farm bill (Price Loss Coverage—PLC). The PLC is the default option if the farmer fails to make a choice. These two programs—ARC and PLC—are totally separate from the crop insurance programs, which essentially continue unchanged from previous years.
The ARC is sometimes called the Shallow Loss program because payments start when crop revenue falls just 14 percent below a five year rolling Olympic average benchmark. A farmer will chose whether the benchmark is based on county yield times crop year average prices or his individual crop yield times the price. The payment is based on 85 percent of the farmer’s base acres planted to the crop.
The program provides protection down to a 24 percent loss. Below that crop insurance provides revenue protection. Payments large enough to offset the loss of direct payments could be triggered with corn prices near $4.25 per bushel for 2014/15. But over time the payments could disappear if corn prices stay low, causing the benchmark revenue to erode.
The Price Loss Coverage program is very close to the counter-cyclical program that was in operation in the 2008 Farm Bill. Reference prices are set at $3.70 per bushel for corn, $8.40 for soybeans, $5.50 for wheat, $14 per hundredweight for rice, and $535 per ton for peanuts. These prices are significantly higher than the Target Prices used in the last farm bill. Once prices fall below the reference price, payments are triggered, again using 85 percent of a farmer’s base acres.
A third program—called the Supplemental Coverage Option (SCO)—is an insurance coverage that farmers choosing the PLC can buy. Except for the fact that there is a cost for farmers, this program acts essentially like the ARC program previously discussed. Farmers will pay 35 percent of the premium cost while the other 65 percent is subsidized by the government. The SCO program will not be available until the 2015 crop year.
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