Q: You say the new farm bill shouldn’t impact crop insurance decisions for 2014 . . . that seems like a bold statement. What does that mean?
A: Basically what it says. Three key factors: (1) Crop insurance products/offerings for 2014 are not impacted by the bill (there will be some new items for ’15, but that is a topic for another day); (2) There is absolutely no interaction between crop insurance and the revised farm program (one does not take from the other); and (3) There is nothing you would want to bank on or rely upon in the new farm program for 2014.
Q: But what little changes are there? Anything in terms of cash flow that should be considered?
A: You’re right. Direct Payments are gone. Therefore no direct payment cash infusion coming in October for ’14 (with the exception of cotton base acres that get a 1 year transition payment since STAX is not available for 2014)
Q: But what about this new “shallow loss” ARC program and other Title 1 options I have heard about . . . won’t those be applicable for this crop year?
A: Yes, sign up will be sometime in the summer or fall, but again, no interaction with crop insurance. You have a new target price option (PLC) or this new so-called “shallow loss” program (ARC) which has a county option and a whole farm option, but each of these options is decoupled from what you plant in the current year and shouldn’t really impact your risk management decisions.
Q: But if I can be covered on “shallow losses” from 86% to 76%, can’t I just buy down my coverage and save some money?
A: That is certainly an option, but you need to know what you are getting. Here are some key things to consider about this FSA “shallow loss” program vs. crop insurance:
• it is county coverage, triggering only when revenue for your crop base in the county falls below 86% of its 5 year average.
• any payment is limited to your base acres, with an 85% factor, and decoupled from what you plant (though you can reallocate (not increase) base to reflect plantings from ’09-’12)
• payments are made based on county yield, not your APH. So if you have a 200 bu APH, and county average is 150, the “10%” covered (15 bu) is actually just 7.5% of your APH
• this ARC program does not have the “Harvest Price Option” features of crop insurance. If yield for the county multiplied by national average price is greater than 86% of previous 5 year average, then no payment.
• any payments for 2014 experience will not be made until “Season Average Price” is finally figured in October 2015.
• the maximum payment per program base acre is 8.5% of previous 5 year revenue (10% window subject to 85% factor), and all payments are subject to typical FSA payment limitations.
• FSA program payments (ARC or PLC) will also still be subject to “sequestration” — and additional 7.2% reduction – where crop insurance claims are not.
* the answers above are based on county ARC option. The whole farm option aggregates all crops across the farm, is still decoupled, and has a factor of 65% such that the maximum any producer could receive is 6.5% of target revenue. Beyond this, there are too many questions that will have to be answered by USDA rule-making.
Q: Okay I see the point. But you are trying to sell me crop insurance ;-). I’ve been told ARC will be a guaranteed payment for 2014 . . . maybe $50 or $75 per acre. Why not just take this shallow loss payment and save some money on insurance too?
A: Most of that talk is around corn. Here’s the deal. The 5 year olympic average price that will set the target revenue for 2014 is $5.27/bu, and we all know current futures prices are well below that. This has got all the economists talking about the prospects for a payment. But here are some other real possibilities to consider.
• Based on 86% loss threshold and $5.27 price, if yields come in at average in the county, prices for the season would need to be below $4.53 to trigger any payment.
• If yields for county are 5% above average (say 157.5 relative to 150), then national prices for the season would need to be below $4.32 to trigger a payment for that county.
• If yields are 10% over average (165 relative to the same 150), then the season average price would have to be below $4.12 to trigger a payment in the county.
• If you have a deep yield loss, but the county has normal yields, you get treated the same as everyone else in the county.
• If another drought creates a short crop and prices rise again (say $5.55/bu – about 5% over $5.27 reference), then you only get any assistance if your county had more than a 19% reduction (the 14% + 5%) relative to its average (<124 bu relative to 150 bu).
• Finally, if all this does compute out and you do get an ARC payment for the 2014 crop year in October of 2015, remember it has no relation or connection to any indemnities you might have received in crop insurance.
Q: So you are saying that I should just make my crop insurance decisions without counting on much from these FSA programs?
A: Exactly! You can decide what to do on ARC vs. PLC later when the rules are clearer, and if it comes that is great. But it should not supplant your true risk management decisions made in crop insurance.
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