Is a Bird in Hand Worth 4 in the Bush?

• February 10, 2015
• Paul Neiffer

For many of our farmers mulling the decision between ARC and PLC it comes down to is it better to grab the “bird in hand” by electing ARC-CO on all corn acres (and wheat in the Pacifc Northwest) versus electing PLC in case prices go low for several straight years.

I have run numerous calculations on corn and soybeans and unless prices get extremely low AND stay low for all five years of the farm bill, ARC-CO is likely to pay much more than PLC.  However, if you are located in areas where yields are much higher this year (Missouri, Illinois, South-Central Iowa), you are likely to get a smaller or no ARC-CO payment this year and perhaps a small PLC payment.  In this case, your choice is tougher.  You no longer have a bird in hand, you simply have an educated guess.  However, a key thing to remember is if your county yield reverts back to historical averages, you should receive a good size ARC-CO payment for 2015 and no PLC payment based on current estimated prices.

For example, I took Stark County, Illinois and assumed that the current yield for 2014 is at least 200 bushels.  The Olympic average yield for this year is 173 bushels per acre.  Even with a yield of 200 bushels per acre assuming corn MYA price of $3.65, we get an estimated gross per acre ARC-CO payment for this year of $55.54.  Next year, our Olympic average yield actually increases from 172.67 to 178.67 since we don’t get to use the 2014 yield of 200 bushels per acre, but we get to use the old high yield of 190 from 2013 that was not used last year.  This results in a full ARC-CO payment of $94.52 per acre (subject to 85% base acres payment).  Next year’s yield could be as high as 180 and still get a maximum ARC-CO payment.  For this county I would call it 1 1/2 birds in hand.

Not all crops have the built-in advantage that corn ARC-CO has.  For those crops, it may make sense to keep some of the old base acres that were in oats, barley, wheat, etc. and use those acres to elect PLC to hedge your bets.

There is no one right answer and each farmer needs to review their situation to determine what might be best.

We have probably done this analysis for over 50 farmers across a broad section of the country and have at least 7 meetings on Friday of this week and Monday of next week to review the ARC/PLC choice.  If you are having a tough time making up your mind, our firm is able to help you make that decision and the cost for this analysis is probably less than 2 bags of corn seed.  If you are interested in this service, please send me an email at paul.neiffer@claconnect.com and we will help you make your decision.  Remember, you only have until February 27 to reallocate base acres and update payment yields.  Don’t delay.

Paul Neiffer, CPA

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