March 27, 2017
UNDERSTANDING THE DIFFERENCE IN ARC-CO PAYMENTS
Fewer farm operators across the United States will be receiving significant 2016 ARC-CO farm program payments from the USDA Farm Service Agency (FSA) in October, 2017, as compared to ARC-CO payments received for the 2014 and 2015 crop years. Most crop producers in Minnesota, Iowa, and other Upper Midwest States are enrolled in the county yield-based Ag Risk Coverage (ARC-CO) farm program choice on their corn base acres. Farm operators in a high percentage of counties in the Upper Midwest earned corn ARC-CO farm program payments for both the 2014 and 2015 crop years. Some producers also earned a soybean ARC-CO payment in one or both of the years.
Many producers are having difficulty understanding why there is such a wide variation in the estimated ARC-CO payments from year-to-year, and from county-to-county in a given year. Some counties may have had similar corn yields in 2016, based on yield estimates from the USDA National Agriculture Statistics Service (NASS); however, the estimated level of 2016 ARC-CO payments may vary considerably from county-to-county. The direct payments that existed under the last Farm Bill, which were in place for nearly two decades, were guaranteed and were paid to producers on the basis of crop base acres, regardless of crop prices or yields. By contrast, the ARC-CO payments in the current Farm Bill vary from year-to-year, and from county-to-county, depending on the national average prices and county yields in a given year.
Overall, 2016 ARC-CO payments for corn and soybeans are likely to much less prevalent in most portions of the Upper Midwest, as compared to 2014 and 2015 ARC-CO payment levels, partially due to a significant decline in the benchmark (BM) price levels. The BM prices are used to calculate the BM revenue for a given crop in a county for a year. A decline in the BM revenue lowers the “threshold level” for earning ARC-CO payments for a crop. In both 2014 and 2015, the BM price for corn was $5.29 per bushel, compared to the final national market year average (MYA) prices of $3.70 per bushel for 2014 and $3.61 per bushel for 2015, which resulted in some significant corn ARC-CO payments in many counties. For 2016, the BM corn price, which is a 5-year (2011-2015) “olympic” average price, dropped to $4.79 per bushel. Similarly, the soybean BM price dropped from $12.27 per bushel for the 2014 and 2015 crop years to $11.79 per bushel for 2016.
The BM prices and actual crop prices for determining ARC-CO payments are based on the actual national market year average (MYA) crop prices. The MYA price is the national average corn or soybean price from September 1 in the year of harvest until August 31 the following year, with MYA prices being finalized on September 30 of the following year. The MYA price is the 12-month national average price for a commodity, based on the average market price received by farm operators across the United States, which is then “weighted” at the end of the year, based on the volume of bushels sold in each month. As of March 1, 2017, USDA estimated the 2016 MYA prices at $3.40 per bushel for corn, and $9.60 per bushel for soybeans.
ARC-CO payments for a given crop are paid when the actual calculated county revenue for the crop falls below 86 percent (.86) of the county benchmark (BM) revenue guarantee for that crop in a given year. The actual County revenue is the final county FSA yield times the final national MYA price for the year. This rather complex calculation formula has resulted in a wide variation in the corn and soybean ARC-CO payments from county-to-county, which is a trend that will continue for the estimated 2016 corn ARC-CO payments, and has resulted in some confusion surrounding the level of the ARC-CO payments.
The national BM price for corn or soybeans for a given year, and the final MYA price for the year, are the same in every county in the U.S., which affects the maximum payment level, and the overall likelihood of ARC-CO payments. The main variable in differences in ARC-CO payments from county-to-county in a given year is the difference in county benchmark (BM) yields and final county crop yields for that year. There was a decline in the county benchmark (BM) corn yields in most counties in Minnesota and adjoining States for 2015, as compared to 2014 BM yields, which resulted from using a different 5-year period for the calculation. Many of the BM corn yields for 2016 stayed the same as 2015 BM yields, except in a few isolated counties in southern Minnesota and Northern Iowa that had a slight increase in their 2016 BM yields. The lower BM yields result in a reduced potential maximum ARC-CO payment for a crop in a given year. The lower BM yields also lower the county BM revenue guarantee for a crop in a given year, which lowers the likelihood of ARC-CO payments for that year. County BM yields for soybeans in most counties have been much more stable from 2014-2016.
The relationship between the final county yield and the county benchmark (BM) yields is extremely important in calculating ARC-CO payments for corn and soybeans. Expressing the county yield as a “% of BM Yield” is actually more important than the actual final county yield in determining estimated ARC-CO payments in a county for a crop in any given year. For example, on estimated 2016 corn ARC-CO payments, any county that has a corn “% of BM yield” of 106% or less will likely realize the maximum estimated 2016 corn ARC-CO payment for that county. Counties with a “% of BM yield” of 107% to 120% will likely receive a partial 2016 corn ARC-CO payment, and counties at 121% or higher will likely not receive a 2016 payment. For soybeans, counties with a “% of BM yield” of 106% or higher will likely not receive a 2016 ARC-CO payment.
There will likely be a large difference in the 2016 corn ARC-CO payments from county-to-county, depending on the final 2016 county yield, expressed as a “% of BM Yield”. It appears that many counties in South Central and Southeastern Minnesota, as well as in Northern Iowa, will get a partial 2016 corn ARC-CO payment; however very few will get the maximum payment. Many counties in this region had 2016 corn yields that were similar or lower than 2015 corn yields. Except for a few counties, most counties in Western Minnesota, as well as many counties in Eastern North and South Dakota, will not receive a 2016 corn ARC-CO payment, due to the very high 2016 corn yields compared to the BM yields in those counties. Almost no counties in the Upper Midwest are expected to receive a 2016 soybean ARC-CO payment, as a result of very strong 2016 soybean yields, and the increase in the estimated soybean 2016 MYA price, as compared to 2015.
The current 2016 corn and soybean ARC-CO payment estimates are based on the 2016 NASS County yields and the current MYA prices; however, the final payments could vary based on changes in the MYA price levels between now and August 31, 2017. If MYA prices decline, the likelihood or the level of ARC-CO payments increases, and vice-versa if the MYA price increases. USDA could also make adjustments in the announced NASS yields to arrive at the final 2016 FSA County yields, which are used to calculate 2016 ARC-CO payments. There will likely be a 6.8 percent Federal sequestration reduction on all 2016 ARC-CO payments that paid in October, 2017, similar to the 2014 and 2015 ARC-CO payments.
Previous county yields for corn, soybeans, and other crops, benchmark yields, FSA yields, 2014 and 2015 ARC-CO payment levels, and other farm program information are available on the FSA ARC-PLC web site, which is at: www.fsa.usda.gov/arc-plc. Kent Thiesse has prepared an Information Sheet titled: “Estimating 2016 Corn and Soybean ARC-CO Payments”, which contains several tables relating to 2016 ARC-CO payments. He has also prepared “2016 ARC-CO Payment Estimate Tables” for most counties in Minnesota, Northern Iowa, and Eastern North and South Dakota. To receive a copy of the Information Sheet and Payment Tables, send an e-mail to: kent.thiesse@minnstarbank.com
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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)