The 2014 Farm Bill was signed into law in February of 2014 providing a valuable safety net for Indiana farmers. In late September, USDA completed the definitions, de-tails, and schedules for the commodity programs. While the program choices seem complicated at first, most farmers will find it beneficial to learn about the programs and make their “best” choices. The USDA-FSA offices, Purdue Extension and other organizations are all helping farmers and land owners understand and evaluate their alternatives.

Four Steps

There are four steps that will eventually lead to being eligible for commodity program payments under the 2014 Farm Bill: 1) Payment Yield Updates, 2) Base Acre Real-location, 3) Commodity Program Election, and 4) Annual Commodity Program Enrollment. The first two steps set the farm payment definitions, are the responsibility of the farm owner, and must be completed by the February 27, 2015 deadline. Payment yields are the fixed yield values for each crop that are used in calculating price based payments. Every farm has an established payment yield from their participation in the counter cyclical program. Program participants received letters from USDA-FSA advising them of these counter cyclical yields for each crop and FSA farm they operate or own. The decision before farmers is to either keep these counter cyclical yields or exercise an update option which allows them to replace those yields with ninety percent of the average of their 2008-2012 yields for each crop.

Every farm has an allotment of base acres that determines their total payment eligibility. That total will not change as part of the base acre reallocation process. What farmers can adjust is how those base acres are distributed among the covered commodities raised on the farm. As with yields, the August letter from USDA-FSA provides the current assignment of base acres to different crops. In addition, that letter provides information on reported crop planting from 2009-2012. Farm owners have the option to either maintain their existing allocation of base acres or use the average plantings from the four year 2009-2012 period to “reallocate” their base to reflect what was planted in the more recent period.

Step 3 is the process of electing the commodity programs that will control how payments on the farm are made for the 2014 through 2018 crop years. The program election is the responsibility of the current farm operator and must be completed by March 31, 2015. The decision on program election is a one-time process that locks the farm into that particular program over the next five years. Farmers have three program options, and for two of these offer the flexibility to enroll on a crop by crop basis.

The first program is called Price Loss Coverage (PLC) and provides payments when the national marketing year average price falls below a given reference price. Reference prices are set at $3.70 for corn, $8.40 for soybeans, and $5.50 for wheat and will remain at those levels through the 2018 crop year. In any year where the marketing year average price falls below a given reference price a payment is made based on the payment yield established in step 1 and for base acres of that crop established in step 2.

In addition to the PLC program, farmers have two revenue based program options as part of the Agricultural Risk Coverage (ARC) program. One of these operates by track-ing the county revenue (ARC-CO) while the other tracks individual (ARC-IC) revenue in determining payments. In both programs, a benchmark is set using information from the most recent five years and payments are initiated when actual revenues fall below 86% of that bench-mark. These ARC payments are limited to ten percent of the benchmark revenue, meaning that once losses take revenue below 76% of benchmark revenue no additional support is forthcoming through this program.

Election of ARC-IC, the individual option requires that a farmer only make use of that program for subsidy sup-port. ARC-CO and PLC may be elected on a crop by crop basis allowing e.g. a farmer to elect to have their corn subsidies received through ARC-CO while the wheat subsidies are provided through PLC. Both ARC-CO and PLC pay farmers for 85% of base acres while ARC-IC covers only 65% of base acres. Thus, in addition to the loss of flexibility that comes with ARC-IC, farmers face an additional cost for having subsidy protection at the individual farm level.

Step 4 is the annual enrollment. This is merely the requirement that farms maintain their program enrollment on an annual basis with their FSA office. No program decisions can be made or altered during the annual enrollments. Program enrollment for the 2014 and 2015 crop years will happen simultaneously starting sometime in April of 2015 and continuing into the summer of 2015.

Guidelines for Farmers

The overhaul of the farm bill has certainly placed a large number of options in front of farmers. Just as with other farm management decisions there is no substitute for gathering information and analyzing options at the individual level to see which choices provide the best pro-gram safety net in concert with family objectives. Despite the complexity we can make some general statements about which decisions are most likely to provide the largest program payouts in the Corn Belt. In summary:

1) If the yield update provides a higher PLC program yield, then that option should be exercised. This is a straightforward conclusion resulting from the fact that higher program yields will increase payments in the PLC program. Even though these yields are only used in the PLC program, every farm owner should make the effort to analyze this decision and establish the higher PLC yield for their farms. Future farm programs may use these same PLC program yields and higher yields could result in higher total payments.

2) Many farmers will opt for the base acre allocation that assigns the most base to corn, due to the higher likelihood of payments in that crop over the next five years. Five year forecasts from all sources show corn prices having the largest percentage drop relative to the most recent five year period. This increases the potential for payments made to corn base acres relative to other crops. Farmers and land owners would like to have the most base acres in the crop that is expected to make the highest expected payments over the life of the bill. Right now that appears to strongly favor corn acres in the Midwest.

3) Many farmers will elect the ARC-CO program for corn and soybeans, due to the high revenue benchmarks that are already established for 2014 and 2015.

The past five years of high prices means that the ARC-CO program begins with high revenue benchmarks for most counties. For counties where the yield is near the same level as the past five years, there is implied price protection in the ARC-CO program for corn of around $4.50. This same value for soybeans is $10.50. These are much higher than the fixed reference prices of $3.70 and $8.40 for corn and soybeans respectively. Moreover the ARC-CO price protection of 2014 is essentially repeated in 2015 because of the Olympic moving average nature of that program and the fact that the lowest prices of the 2009-2013 period occurred in the first year which is dropped for purposes of 2015 benchmark calculations. The ARC-CO program has the feature that as prices fall so too does future protection via a decline in the benchmark but the fact that the program starts from such a high level offers significant inducement to farm operators trying to capture the potentially large payments that could be de-livered in the early years of the program as markets adjust downward from the recent highs of the past five years.