How To Make an Extra $100 Per Acre!
- By: Paul Neiffer
- January 29th, 2014
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I spent part of today reviewing the new Farm Bill that was signed by the House today and most likely law by next week. I spent most of the time reviewing the Agricultural Risk Coverage (ARC) which is one option that farmers can sign up for. The other option is the Price Loss Coverage which most growers in the Southern states raising peanuts, rice and other related crops will most likely opt for. Most farmers growing corn, beans and wheat will opt for ARC.
The ARC provides payments to farmers if the “Benchmark” revenue is greater than the “actual” revenue received by the farmer for the year. The farmer is allowed to elect either coverage based upon County yields or individual farm yields. However, the County program will make payments using 85% of base acres, while the individual farm will only pay on 65% of base acres. We can see that Congress does not want to add extra work to the local FSA office. The farmer is also allowed to make an one-time election to reorganize their base acres.
Benchmark calculations use Olympic averages for both yield and price calculations. The previous five years for both yield and average US prices for each commodity is determined. They then throw out the highest and lowest for each and take the average of the remaining three numbers. These averages are multiplied together to arrive at the benchmark revenue for the current year. This number is then multiplied by 86% to arrive at the benchmark revenue guarantee amount. If actual revenue for the current year is less than this guarantee amount, then a claim will be made. The claim will be the lesser of the difference between benchmark guarantee and actual revenue or 10% of the guarantee amount. The Farm Bill is essentially providing protection for crop losses between 76% and 86% of benchmark revenues.
To determine actual revenue for the year, the grower takes their actual yield (or the county yield) and multiply it by the final US average price for that crop marketing year. This number is then compared to the benchmark guarantee.
I ran some numbers for Buchanan County, Iowa based upon the county yields for the last five years and arrived at the following conclusion:
- The Olympic average yield for the last five years for the county is about 169 bpa.
- The Olympic average corn price over the last five years is $5.15 (this is for the whole US, not just the county).
- A claim would be paid if the actual revenue was less than $748.
- The maximum claim is about $75 and if the yield was 160 bpa and the average corn price was less than $4.25, then the full claim of $75 would be paid. The average price would have to rise to almost $4.75 to have no claim.
- If the yield was 170 bpa, then a full claim would happen at about $4.10. At about $4.40, no claim would be owed.
- If the yield rises to 180 bpa, then a full claim is allowed if the average price falls below $3.70 and no claim is allowed if the price goes over $4.15.
Let’s assume we have a Buchanan farmer with 1,000 corn base acres in 2014 and the county yield ends up at 170 bushels per acre and the final corn price for the year is $4. In this case, he would receive the maximum $75 per acre on 850 acres (1,000 times 85%) or $63,750. Since the payment limit is now $125,000 per person ($250,000 for married couples), the farmer will get the full amount. In fact, the farmer, if married he could farm 4,000 acres and collect full ARC payments. Under the old law, this most likely would be limited. If these numbers were based on his actual yields, then the payment would be reduced to 650 acres times $75 or $48,750. Using this coverage, the farmer could farm 6,000 acres and collect full ARC payments.
ARC is not crop insurance but rather a replacement for ACRE/DCP, etc. For counties with high average bpa, I expect that in a year of low prices, the amount of ARC allowed per acre could easily approach $100. I also ran the numbers for soybeans and it appears that it will be much tougher for farmers to collect much for the current year. To get a full claim of about $47, the yield would most likely have to drop by about 10% and the average price per bushel would be in the $9 range.
I did not run numbers for wheat, but my educated guess is that based on current price trends, there is a excellent chance that full claims will be made for wheat growers for the 2014 crop year. I could easily see a $50 or more payment per acre for wheat farmers with higher yields.
For farmers facing lower revenues for their 2014 crop, the new Farm bill may actually provide more revenue than the old farm bill and it will be based upon the price and yield risk borne by the farmer, rather than the simply collecting a check for being a farmer. We will be doing additional posts on the farm bill over the next few weeks, but I wanted to provide guidance to our farmers now. There is over 900 pages to the new farm bill and the ARC section only covers about 20 or so pages.
We will keep you posted.
Paul Neiffer, CPA