ARC-IC Allows for Maximizing Flexibility (Perhaps)
Under the new farm bill, Agricultural Risk Coverage (ARC) has two elective components. You can either elect county coverage on a covered crop by crop basis (ARC-CO) or elect to have ARC apply to all crops grown on your farm (ARC-IC). If you elect county coverage, you will be paid on each covered crop’s base acres and the payment will be 85% of those base acres. Let’s assume we have an Iowa farmer with 1,250 corn base acres and 1,250 soybean base acres. If there is a soybean ARC-CO payment of $10 per acre, the total payment would be $10,625 ($1,250 X 85% X $10). If there is a corn ARC-CO payment of $25 per acre, the total payment would be $26,562.50 (1,250 X 85% X $25).
Now, if the farmer elects ARC-IC, they will be paid on 65% of total base acres (which are the same), however, the ARC-IC payment calculations will be based upon the weighted average of actual planted crops each year. This may actually allow a farmer to take advantage of years where the estimated ARC payment for corn is dramatically higher than soybeans or vice versus.
I ran some sample numbers for an Iowa farmer with the same base acres (1,250 soybeans and 1,250 corn). The Olympic county average for corn was about 172 bushels per acre and the Olympic farm yield was 171 bushels per acre. To be conservative, I assumed the county yield for 2014 would be 175 bushels per acre, but I increased the farm yield to 190 (as yield goes up, the ARC payment goes down). I then ran the numbers assuming an average mid-year price between $3.70 (when PLC kicks in) and $4.10. In my assumption, I assumed the farmer would elect to plant 2,500 acres of corn this year and no soybeans. Under ARC-CO, it does not matter how many acres are planted, but with ARC-IC, it does matter.
The maximum payment allowed for ARC-CO was $97,315 comprised all of corn. I assumed a $10.75 price for soybeans. In order to receive a soybean payment, the price would have to drop to below $10.35. However, the maximum payment for ARC-IC was $150,963 which is about $53,000 higher than ARC-CO even though the payment is based on 65% of base acres, not 85% of base acres. ARC-CO starts to make a small payment at a corn price of $4.50 while ARC-IC does not receive a payment until corn prices drop to about $4.10. At about $3.90, the payment for ARC-CO maxes out at $97,315 and the payment for ARC-IC is about the same. Between $3.90 and $3.71, ARC-IC continues to rise until it maxes out at $150,963. As you can see, even though ARC-IC is making payments based on much lower base acres, the actual payment allowed can be much higher under ARC-IC than ARC-CO if the farmer anticipates the correct crop to plant in its rotation.
If we assumed the farm yield would be the same as the county, ARC-IC makes even more economic sense. In that case, the farm would start collecting a payment at a price of $4.55 of about $4,000. At $4.25 ARC-IC would be paying $89,635 and ARC-CO would only pay $46,708. At $4.03, ARC-IC maxes out at $150,963 and ARC-CO is still only paying $87,614.
Now if we assume that the farmer’s yield is only 160 bushels per acre, the payoff is even quicker. In that case, the farmer would start to get a payment if the average price of corn is at $4.99 (I think most farmers would take $4.99 right now) and would hit its maximum of $150,963 at a corn price of $4.41. At that price, ARC-CO is only making a $16,958 payment.
If the farmer had elected PLC, no payment would be owed until corn drops below $3.70 and soybeans drop below $8.40.
For many farmers, their rotation over the last few years has leaned toward corn-on-corn. Since it is likely that ARC will make larger payments for corn than soybeans, they should consider making the election to update their base acres to the 2009-2013 average . This may allow them to maximize their ARC-CO payments for 2014 and 2015. After those years, the crystal ball is very cloudy.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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