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WestBred

FARMER'S TOOLBOX

Narrowing down the options

Data indicates PLC will likely be the better option for crop years 2019, 2020

February 2020
By Trista Crossley


The take away from last month’s farm bill education workshops was that the Price Loss Coverage (PLC) program looks to be the most attractive option for the next two years, but that growers should run the numbers for themselves to make sure.

Sponsored by the Agricultural Marketing and Management Organization in conjunction with Washington State University (WSU) Extension, three workshops were held in Davenport, Walla Walla and Colfax. More than 155 growers and landlords braved snowy weather to attend the sessions.

Copies of the workshop presentations can be found here, here and here. A livestream of the Colfax session can be found online.

This article reviews the Colfax session.

How did we get here?

Shannon Neibergs, WSU ag economist and director of WSU Extension’s Western Center for Risk Management Education, kicked off the workshop by reviewing the timeline of the 2018 Farm Bill and some of the changes made to the Agriculture Risk Coverage (ARC) and PLC programs. Growers could begin signing up for ARC or PLC on Sept. 1, 2019. Growers have to make a program election for crop years 2019 and 2020 by March 15, 2020, but actual enrollment deadline for 2019 is March 15, and for 2020, it’s June 30. Growers will be able to change their program election yearly beginning with the 2021 crop year. If growers don’t make a program election for 2019 and 2020 by the March 15 deadline, they will default to the program chosen in 2014 and will be ineligible for payments for the 2019 crop year.

Meeting that deadline is important, because, as Neibergs explained, in 2014, most farmers selected the ARC county option (ARC-CO), and if they don’t make a choice, they will default back to that program. Based on the available data, it appears that for the next two years, at least, PLC is more likely to generate larger payments. Neibergs added that while crop insurance is the bulk of a grower’s risk management plan, ARC and PLC are critical on a cash flow basis.

Neibergs also pointed out other ARC/PLC changes made in the 2018 Farm Bill, including:

• Base acres will not change from 2014 Farm Bill enrollment;

• ARC-CO yields are based on data from the Risk Management Agency rather than data from the National Agricultural Statistics Service;

• ARC-CO yields are trend adjusted; and

• There’s a one-time opportunity to update PLC program payment yields that takes effect beginning with the 2020 crop year.

Regarding the decision to use RMA versus NASS data, Neibergs said that when he compared the two, he didn’t see much difference in yield data in most of Eastern Washington’s wheat-producing counties. In Whitman and Spokane counties, for example, there’s expected to be a change of less than two bushels either way.

“Not much changed in yield by changing the data source, so its not going to be all of sudden ARC-CO is going to be more beneficial because the yield factor data changed,” he said. “It’s not going to be a critical factor in evaluating the difference between the two programs.”

Using Whitman County as an example, Neibergs said average yields have moved slightly downward, from 75 bushels per acre in 2014 to 70 in 2018. Prices are also moving downward.

“What that does to revenue, when you multiply yield by price, is to trend it down as well,” he said. Because ARC-CO averages are based on Olympic year averages (meaning you throw out the high and low in a five-year spread), it will take at least two years of high prices to make ARC-CO reverse that downward trend, another reason PLC is a more attractive option for at least the next two years.

Neibergs wrapped up his portion of the workshop by touching on the Conservation Reserve Program (CRP), which opened a general sign-up in December. He explained that it’s challenging to discuss the program because of the unique attributes of each CRP contract. Some of the changes producers will see in the program under the 2018 Farm Bill include increasing the acreage cap from 24 to 27 million acres; upper limits on the county average soil rental rates used to set field-specific maximum annual payment rates; tighter restrictions on maximum payment rates for re-enrollments; and expanded opportunities for CRP land management. The general CRP enrollment period ends Feb. 28.

Why PLC?

WSU Ag Economist Randy Fortenbery addressed the market outlook and why PLC is likely to be the more attractive option for growers for 2019 and 2020.

The market year average price (MYAP), as determined by USDA, is what determines whether or not there’ll be a PLC payment. That price is also used to calculate the Olympic average prices for the ARC program.

“To get a PLC payment, the MYAP has to be below $5.50 a bushel. When we signed up for the 2014 Farm Bill, just like this year, one crop year was already gone and the other one we were pretty far into. When we looked at that, we could project no PLC payments whatsoever and that ARC-CO was going to pay for most of us for the next two years. We got those first two payments, prices deteriorated, and suddenly, PLC was paying much more than ARC-CO as we went forward,” Fortenbery explained.

USDA’s current MYAP forecast is $4.55. Fortenbery said that even though over the last several weeks there’s been some price improvement in the futures market and cash market in Washington, the MYAP is based on all wheat classes across the U.S. It’s also weighted each month by how much wheat is sold, meaning if a lot of wheat is sold early in the marketing year at relatively low prices, even with a price rally later in the marketing year, the average price won’t move much because less wheat is being sold at the higher price.

That matters, he went on, because growers need to use the MYAP as their reference price, not whatever is currently happening in the market. Even with a price rally, because so much wheat has already been sold at a lower price, that MYAP probably won’t move much.

“It is highly unlikely, in my opinion, that next year, the 2020 crop we harvest and the 2021 price will be high enough that we will not get a PLC payment, and it will probably be low enough that the ARC payment isn’t going to change much relative to the projections you’ll figure out when you use the tool before you do your sign-up,” he said, adding that even if there’s a huge rally, because of the Olympic year average, that high price would be thrown out. “And it would take a hell of a rally, frankly, to get us above the $5.50 reference price for the marketing year next year. So probably, for the next two years, PLC will be your most attractive alternative, although you’ll want to go through the tool to verify that for wheat.”

The tool, Fortenbery was talking about, refers to the ARC/PLC online tools that can help growers calculate which program is more attractive to them.

Fortenbery also took a look at what he sees happening to wheat prices in the future. The key, he said, is not U.S. stocks, but the world’s stocks. Even though globally, wheat consumption has been growing, it hasn’t grown as fast as production, so the world’s stock is increasing even as U.S. stocks are decreasing. Looking ahead 10 years, the picture doesn’t get much better for several reasons, including increasing world stocks, decreasing U.S. acreage and other countries starting to compete with U.S. wheat exports on quality.

“The smaller amount we represent of the world market, the less what happens here matters to the price,” he explained.

The online tools

Before tackling the online tools, Aaron Esser, WSU Extension Adams County director, cautioned growers to coordinate their program choice with their crop-share landlords and to make sure to have all the necessary signatures.

While there are two online tools available to growers, one by Texas A&M and the other by the University of Illinois, Esser showed only the Texas A&M tool. He recommended that growers have their FSA-156EZ form with them that shows farm and crop data, as well as something that shows their yields, such as their crop insurance APH database form. Growers will need to figure out their yearly all-wheat average before using the tools.

Using the Texas A&M tool, once you’ve logged in, you need to set up your farm units (or edit existing farm units if you logged in under the same user/password from 2014). From the home screen, you can see if you are eligible for a payment yield update and then compare possible payments from PLC versus ARC-CO.

“The tool isn’t designed to tell you the exact number,” Esser said, telling growers not to count on the payment figures the tool shows you. “The tool is simply to help you make the decision on what is the best choice between ARC-CO and PLC. Don’t get caught up in the numbers.”

Esser said he has run different, plausible scenarios through the tool, but hasn’t “found a scenario where ARC-CO is better than PLC.” Growers can also enroll in the ARC Individual option, but Esser said circumstances would have to be pretty unique for that program to be more attractive than the other options.

The Texas A&M tool can be found at afpc.tamu.edu/tools/farm/farmbill/2018/, and the University of Illinois tool can be found at fd-tools.ncsa.illinois.edu. There will also be a link to the tools at smallgrains.wsu.edu.