December 26, 2016

2015  CORN  ARC-CO  PAYMENTS  HIGHLY  VARIABLE

Many farm operators in the Upper Midwest received a significant 2015 farm program payment on their corn base acres during this past October from the USDA Farm Service Agency (FSA), while other farm operators received much smaller payments, and producers in some counties received no 2015 payment. One of the hardest things for producers to understand is why there is such a large variation in 2015 corn ARC-CO payments from county-to-county, especially in neighboring counties. Most crop producers in Minnesota and surrounding States are enrolled in the county yield-based Ag Risk Coverage (ARC-CO) farm program choice on their corn and soybean base acres.

The ARC-CO program utilizes national average grain prices and average county yields to determine ARC-CO payments. ARC-CO payments for corn, soybeans or any other crop are paid when the actual county revenue for a crop in a crop year falls below the calculated county “revenue guarantee” for that crop. The actual county revenue is the final FSA county yield for a crop for that year times the final national market year average (MYA) price for the year for that crop. If that final county revenue amount is lower than the county “revenue guarantee” for that crop, producers in that county that are enrolled in the ARC-CO farm program would earn an ARC-CO payment for that year. Each county also has a maximum ARC-CO payment for each crop.

The MYA price is the 12-month average price for corn and soybeans from September 1 in the year of production until August 31 the following year, with MYA prices finalized on September 30 of the following year. The final national MYA prices for 2015 were $3.61 per bushel for corn and $8.95 per bushel for soybeans, which were the MYA prices that were used across the United States on a county basis to determine if corn and soybean producers were eligible for a 2015 ARC-CO payment this past October.

The “revenue guarantee” for a given crop is the “benchmark” (BM) revenue times 86% (.86). The BM revenue is the 5-year (previous 5 years) county average yield, dropping the high and low yield, times the BM price, which is the 5-year (previous 5 years) average MYA price, again dropping the high and low price. The national BM prices for both 2014 and 2015 were $5.29 per bushel for corn, and $12.27 per bushel for soybeans. Since these BM prices were considerably higher than the final 2015 MYA prices, the likelihood of 2015 ARC-CO payments was increased in many counties, especially for corn.

The relationship between the final FSA county yields and the county benchmark (BM) yield for a given year, which can be expressed as the “% of BM yield”, is extremely important in calculating the level of ARC-CO payments in a county for the year. For the 2014 corn ARC-CO payments in most of Minnesota, this was not a big factor, as most counties had below average crop yields, and a fairly low “% of BM yield”. The result was that most counties received the maximum 2014 ARC-CO payment for corn, which was paid in October. 2015. However, 2015 corn yields in most counties in Minnesota, Iowa, and other Upper Midwestern States were well above average, resulting in much more variation in the “% of BM yield”, and ultimately in widely variable 2015 corn ARC-CO payment amounts, which were paid in October, 2016.

Counties that had a 2016 corn “% of BM yield” that exceeded 126 percent most likely received a zero 2015 corn ARC-CO payment, while counties that had a “% of BM yield” of 111 percent or lower likely received the maximum 2015 corn ARC-CO payment. Counties with a “% of BM yield” of 112 to 126 percent most likely received a partial 2015 corn ARC-CO payment, depending on where the percentage ended up.

The multiple variables make it very difficult for producers to understand why there was such a large variation in 2015 corn ARC-CO payments in counties in the same relative area, especially when all counties are using the same national average MYA prices. The big difference lies in the dynamics of the final 2015 FSA yields and the 2015 benchmark yield levels, and ultimately in the “% of BM yield”. Following are two examples that demonstrate this contrast :

South Central Minnesota Example :

Southwest Minnesota Example :

Note — All the listed 2014 and 2015 corn ARC-CO payments are per corn base acre, which have been factored

by 85 percent (.85). The Federal sequestration reduction of 6.8 percent has not been factored in to the

listed payments.

Observations from the two Examples :

• All counties listed in both examples received the maximum 2014 ARC-CO payment, due to low 2014 corn yields and a low “% of BM Yield”. The only difference was that the counties with the higher 2014 BM yields had a higher maximum ARC-CO payment rate, based on the pre-set calculation formula.

• All counties listed in both examples, except Watonwan County, had the corn BM yields decline from 2014 to 2015 by 5-12 bushels per acre This decline in the BM yield resulted in lower maximum ARC-CO payment potential in 2015. Counties with greater declines in 2015 BM yields had a lower likelihood of 2015 ARC-CO payments than neighboring counties at comparable final 2015 actual yield levels.

• In South Central Minnesota, the 2015 corn ARC-CO payments ranged from zero in Nicollet County to near $70 per corn base acre in Waseca and Watonwan Counties. The final 2015 corn yields ranged from 186 bushels per acre in Sibley County to 207 bushels per acre in Nicollet County. In Southwest Minnesota, the 2015 corn ARC-CO payments ranged from zero in Lyon and Pipestone County to over $37 per corn base acre in Yellow Medicine County, while 2015 corn yields ranged from 180 bushels per acre in Lincoln County to 199 bushels per acre in Murray and Rock Counties.

• In South Central Minnesota, it is interesting to note that the neighboring counties of Nicollet, Brown, and Sibley Counties all had a 2015 BM yield of 162 bushels per acre, with final 2015 corn yields of 207, 188, and 186 bushels per acre, respectively. The “% of BM Yield” was 128% in Nicollet County, 116% in Brown County, and 115% in Sibley County, resulting in 2015 corn ARC-CO payments per base acre of zero in Nicollet County, over $48 in Brown County, and over $55 in Sibley County.

• In Southwest Minnesota, Lyon County had a 2015 BM yield of 147 bushels per acre, Pipestone and Lincoln Counties had 2015 BM yields of 149 bushels per acre. Lyon and Pipestone County both had a final 2015 corn yield of 192 bushels per acre, while Lincoln County had 180 bushels per acre. The calculated “% of BM Yield” was 131% in Lyon County, 129% in Pipestone County, and 121% in Lincoln County which resulted in a zero 2015 corn ARC-CO payment in Lyon and Pipestone Counties, and nearly $24 per corn base acre in Lincoln County.

Another factor that could lead to variations in 2015 Corn ARC-CO payments

Another factor that may have impacted the 2015 corn ARC-CO payments in neighboring counties involves situations where a producer has land in two or more counties. In that situation, the producer could have chosen to do their FSA administrative work in each individual county, and any ARC-CO payments are based on where the FSA farm unit is located. However, the producer could also have chosen to combine their farm units and do all their FSA work in one county, in which case any ARC-CO payments are based on the county chosen as the FSA administrative county, regardless of where the land is located.

From our earlier examples, let’s assume that a producer had 2015 corn aces in both Lyon and Yellow Medicine County, and had combined all acres under the same FSA administrative county. If the producer had chosen Yellow Medicine County as the FSA administrative county, the 2015 corn ARC-CO payment would about $37 per base acre on all corn base acres in both counties. However, if the producer had chosen Lyon County as the administrative county, the 2015 corn ARC-CO payment would be zero on all corn base acres in both counties.

Looking ahead to 2016 Corn ARC-CO payments

The national BM prices for the 2016 crop year will be $4.79 per bushel for corn and $11.87 per bushel for soybeans. The lower 2016 BM prices for corn and soybeans will likely lower the likelihood of potential 2016 ARC-CO payments in many instances. Many counties in Minnesota and Iowa will have the same county corn BM yield for 2016 as existed for 2015, due to a high yield year in 2010 being dropped from the 5-year BM yield calculation and being replaced by another high yield year in 2015. Soybean county BM yields are also likely to be similar for 2016 as the previous year. The result will be very similar ARC-CO payment calculations for the 2016 crop year that existed for 2015, with the biggest variable being the final 2016 MYA price.

As of December 1, 2016, USDA is projecting a 2016 MYA prices at $3.35 per bushel for corn and $9.45 per bushel for soybeans. These MYA price estimates will continue to be adjusted by USDA in the monthly World Supply and Demand Report (WSDE), which is usually released around the 10^th of each month. The final 2016 MYA corn price will be the based on the adjusted national average price from September 1, 2016 through August 31, 2017, with the MYA price being finalized on September 30, 2017.

Assuming a $3.35 per bushel corn MYA price level, 2016 corn ARC-CO payments would begin at approximately 122 percent of the county BM yield, and counties that were at 108 percent of the county BM yield or lower would receive the maximum 2016 ARC-CO payment. This means that for counties with a BM yield of 160 bushels per acre, 2015 corn ARC-CO payments would be initiated at a final 2016 county yield of approximately 195 bushels per acre, and the maximum payment would occur at a final county yield of about 172 bushels per acre. If the 2016 county BM yield is 175 bushels per acre, 2016 corn ARC-CO payments would be initiated at a final county yield of approximately 213 bushels per acre, and the maximum payment would happen at a final county yield of about 189 bushels per acre.

Resources available on Estimating 2015 ARC-CO Payments :

• Kent Thiesse has developed and updated an information sheet titled : “Final 2015 Corn and Soybean ARC-CO Payments”, which looks at the final 2015 ARC-CO payments for corn and soybeans, as well as other useful information on ARC-CO payments. To receive a copy of this information sheet please send an e-mail to :  kent.thiesse@minnstarbank.com

• The USDA FSA ARC/PLC web site contains 2014 and 2015 ARC-CO payment maps, as well as a spreadsheet with actual yields, benchmark yields, and payment rates for all crops for every county in the U.S., and other farm program information. It should be noted that the payment rates listed on this web site have not been factored by 85 percent (.85) to arrive at an ARC-CO payment per base acre, and 6.8 percent Federal sequestration reduction has been applied to the listed payment rates. The FSA ARC/PLC web site can be found at :  http://www.fsa.usda.gov/programs-and-services/arcplc_program/

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Note — For additional information contact Kent Thiesse, Farm Management Analyst and

Vice President, MinnStar Bank, Lake Crystal, MN.  (Phone — (507) 381-7960);

E-mail — kent.thiesse@minnstarbank.com)