On Sept. 1, you have a big deadline. For the first time since the programs were created by the 2014 farm bill, you can switch your elections for Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC).
Under the new farm bill, farmers will decide between ARC or PLC for each of their eligible commodities and that decision will remain in effect for the 2019 and 2020 crop years. After that, it’s an annual election through 2023.
ARC is both a price and yield payment similar to revenue crop insurance, while PLC is strictly a price payment, says Paul Neiffer, principal and CPA with CliftonLarsonAllen.
PLC make payments when the crop year price is below reference prices. The reference prices for corn and soybeans were set for 2014-2018 by statute at $3.70 and $8.40 per bushel, respectively.
Meanwhile, ARC makes payments when crop year county revenue is below the county’s reference revenue. A county’s reference revenue equals 86% times the Olympic average price for the last five crop years times the Olympic average county yield for the last five crop years. (The reference revenue has a floor since the price used to calculate it cannot decline below the PLC reference prices.)
More than 90% of all corn and soybeans growers choose ARC over PLC in 2014. “From a historical standpoint for corn and soybeans, ARC was almost a slam dunk,” Neiffer says. “Back then, you had to select one program for five years. We knew ARC was going to make a good payment in most of those years.”
Listen to Neiffer discuss the ARC and PLC decision with Andrew McCrea on the Farming the Countryside podcast:
After running some numbers, Neiffer says for some farmers PLC looks to be a clear winner. But neither option will pay like ARC did under the 2014 farm bill, he says.
“For the next couple of years, PLC is likely going to make a payment more often than ARC because the only way ARC is going to make a payment is if yields for the county drop by 15% to 20% or the actual ending price is 15% or 20% lower than then the reference price,” Neiffer says.
For example, assume a farmer has county average corn yields of 175 bu. per acre and county average soybean yields of 50 bu. per acre.
For corn, if yields remain average, no ARC payment is made until the price drops close to $3, Neiffer says. At that price level, ARC pays $31.85 per acre and PLC pays $110 per acre (PLC yield equal to 90% of average). If yields drop by 7% (to about 163 bu. per acre), ARC would then pay $69.35 per acre at the $3 price and if yields drop all the way to 150 bu. per acre, then ARC pays $106.85.
“Yields would really need to drop, and prices would need to be at the $3 level for ARC to even equal PLC,” Neiffer says. “It is still likely that changing to PLC is the prudent option for corn. Only if yields look really low around the end of August would you want to consider switching back to ARC.”
For soybeans, Neiffer looked at Marketing Year Average (MYA) prices of $8, $8.40, $8.80, $9.20 and $9.60. “PLC does not make any payment until the MYA price drops below $8.40,” he says.
At $8, PLC pays $18 per acre (PLC yield of 90% of average). ARC makes no payment if yields remain average. If the county yield drops to 45 bu. per acre, then ARC will pay $38 at the same $8 MYA price and will pay $2 if the price is at $8.80. If yields drop to 40 bu. per acre, then ARC will pay $78 per acre at the $8 price.
“PLC is probably going to be what most people are going to be choosing just because it looks like it's going to pay more in this this two-year window for corn,” Neiffer says.
However, Neiffer says, soybeans are a trickier equation. “When I was doing my calculations on soybeans it's almost like we're flipping a coin,” he says. “If you don't think prices are going to drop below $8.40, then you might as well sign up for ARC, but if you think there's a substantial chance it will drop below $8.40, then I’d probably lean toward PLC.”
Since signup is on Sept. 1, Neiffer assumes most farmers will wait until July or August to gauge the trend in the futures market.
Find more tax tips and financial analysis on Neiffer's The Farm CPA blog.