NDSU Agribusiness and Applied Economics Department
North Dakota farmland owners and operators have several decisions to make about the 2014 farm bill legislation that became law this year. These decisions may require more thought and offer more opportunities for North Dakota producers than elsewhere in the country because of the variety of crops grown and the fairly dramatic change in crop rotations and yields in the state.
The main decisions land owners and producers must make are whether or not to reallocate base acres of a farm and update payment yields, and whether to enroll in a revenue protection program, Agricultural Risk Coverage (ARC) at the county or individual farm level, or a price protection program, Price Loss Coverage (PLC). Each decision has its advantages, rules and limitations.
The first decision that probably is due late this fall is to keep the existing base acres of a farm or reallocate base acres according the crop mix in the 2009 to 2012 time period. The difference between the two choices may be greater in North Dakota than in any other state. The existing crop base acres for a farm were determine many years ago and have been fixed. The reallocation choice cannot increase or decrease the total base acres of a farm but can result in a big shift between base acre crops because farmers in many areas of the state increased soybeans and corn acreage at the expense of crops such as wheat, barley and sunflowers.
The landowner must decide which set of base acres provides the best financial safety net. The decision may not be easy. Once it is made the base acres are locked in for the five year duration of the farm bill. Base acres, not current planted acres, are used in payment calculations. Therefore, payments may be received on crops that are no longer grown on the farm. An exception is the ARC individual farm program, where planted acres and total base acres are considered.
The landowner also can update PLC payment yields of the base acre crops. It probably is the easiest farm bill decision. You have a choice between a historic payment yield associated with the now-defunct counter-cyclical payment program or calculating a new one from actual crop yields on the farm from 2008 through 2012. You get the higher of the two. It is a one-time update and a crop-by-crop decision.
For example, you could keep the old payment yield for barley but update the yield for corn. Yields have been trending higher, so in most cases, the farm will end up with higher updated yields for the PLC program.
In some situations, there will be a large increase from updating a yield because a crop was planted only for one or two years during the 2008 through 2012 period but had great yields. For example, a Cass County producer only grew winter wheat in one of the five years and had an 80 bushel-per-acre yield. The 2008 through 2012 average yield per planted acre would be 80 bushels. A factor of 90 percent is used for updating, so the new PLC wheat yield would be 72 bushels, which doubled the old payment yield of 36 bushels. In this example, the high payment yield may affect the decision to keep existing farm base acres, dominated by wheat, versus reallocating base acres and gaining the soybean base.
Landowners should update PLC yields whether or not a base crop is enrolled in the PLC program. The higher yields will go on the books at the Farm Service Agency (FSA) office and may be beneficial in some future farm bill.
The landowner does not have to prove yields to update the PLC yield but will need verification that they are accurate if spot-checked by the FSA. Therefore, landowners should get a yield verification from renters.
The next decision, probably in February or March 2015, will be to choose between the ARC or PLC safety net. It will be made by producers and landowners who rent by crop sharing.
The total annual PLC payment for a base acre crop is the amount that the national marketing year average price is less than the reference price times the payment yield times base acres times 85 percent. Reference prices and payment yields are fixed for the life of the farm bill. Therefore, the only variable to determine a payment is the national marketing year average (MYA) price.
Unless the PLC payment yield is very low, the PLC program looks like the best program choice for barley and minor oilseeds because they have a relatively high reference price. In fact, there would only have been two years in history where canola would not have received a PLC payment under this farm bill.
There are two ARC programs available. The ARC county program uses county yields of base acre crops. The ARC individual program uses farm yields of planted crop acres. An operator can choose between the ARC county or the PLC program going crop by crop within an FSA farm. If the ARC individual program is chosen, it applies to all crops on the FSA farm.
In concept, the ARC program is simple because a revenue shortfall triggers a payment. In reality, it is complicated because there are four moving parts to the equation. Olympic five-year moving averages of yields and MYA prices are used in the calculation of revenue guarantees, while current-year yield and MYA price determine actual revenue. All four of these components can change in direction and intensity from year to year. The combination of these movements makes ARC predictions difficult.
For instance, a corn base acre in Barnes County is expected to provide more than a $50 ARC-county program payment for 2014 (assuming a national marketing year average price of $3.90 per bushel). However, if the county yield for 2014 is strong, say 15 bushels above average, there will be no ARC payment. By comparison, there also would be no PLC payment because the $3.90 MYA price is above the corn reference price of $3.70 per bushel.
ARC payments are capped at 10 percent of the revenue benchmark. PLC payments are not as restricted, but there is the probability that ARC payments may be higher for certain crops. Currently, it looks like ARC payments are more probable with corn and soybeans than with PLC. However, severe price declines during an extended period would favor PLC.
The first decision, whether to reallocate base acres, is intertwined with the later decision of program election. Interestingly, the landowner makes the base reallocation decision and the operator makes the program election (ARC or PLC). Therefore, on cash-rented farms, the owners and operators should coordinate their efforts to improve their chances of getting the best base reallocation and program election combination.
The first step is to determine the best choice (ARC-county or PLC) for each base acre crop under the two scenarios, which are keeping the existing base or reallocating the base. The expected total payments from keeping the existing base or from reallocating base then can be compared.
Lastly, the ARC individual program for the farm can be analyzed to compare it with the winner of the aforementioned contest between keeping the existing base or reallocating the base.
NDSU has an Excel spreadsheet that will provide the user with the optimal decisions on base reallocation, updating yields and program selection (ARC-county versus PLC) to maximize payments under the farm bill given the projected 2014 through 2018 county yields and MYA prices.
Of course, no one will be able to accurately project future yields and prices for five years. Users can enter different price and yield scenarios to help determine the safety net that may be best.
The spreadsheet is available at http://www.ag.ndsu.edu/farmmanagement/farm-bill.
The Farm Service Agency and NDSU Extension Service will be holding 10 public meetings across North Dakota in mid-October for producers and landowners who wish to learn more about the 2014 farm bill.
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