How Does County Yield Affect ARC-CO Payment
FarmDoc Daily issued a report yesterday on the amount of estimated payments for ARC-CO and PLC by covered crop for the 2014 crop year based upon the updated USDA price information from last week. It gives you a good idea of the types of payments for each crop based upon the low, medium or high USDA price ranges. However, it does not give you an idea as to how payments will change due to variability in yields.
I decided to check how these payments may vary based upon an Olympic average yield or a 5% reduction or increase to this Olympic average yield. I used Linn County, Iowa data and its 2014 Olympic average yield is 172 bushels per acre.I estimated the payment yield for PLC purposes as 90% of this number or 155 bpa. For the 5% reduction in yields, I used 163 and for the 5% increase, I used 181 bpa.
Between $3.00 and $3.70, PLC will make a payment. For each 10 cent reduction in price from the $3.70 level, the payment increases by $15.50. At $3, the payment per acre is $108.50 (which would then need to be multiplied by number of base acres times 85% to arrive at actual payment).
For ARC-CO at the Olympic average, the payment maximizes at $90.99 per acre at the $4.02 level. If prices average lower than that, then the payment remains at $90.99 per acre. At $4.55, there is no payment and for each 10 cents change between $4.02 and $4.55, the payment is reduced by about $9 per acre.
When the county yield decreases to 163, the price where the maximum payment level occurs increases to $4.24 and prices would have to exceed $4.80 for there to be no payment. If yields increase to 181, then the maximum payment level is reached much quicker at $3.82 and no payment will be received once the price reaches about $4.32.
Therefore, if your county yield is equal to its county average, the breakeven where PLC equals the payment for ARC-CO is about $3.10, however, if prices are at $4.02 or lower, ARC-CO will pay the same. This gives a $.92 advantage to ARC-CO. If your county yield is 5% less, then the ARC-CO advantage increases to about $1.15 and if your county yield is 5% greater, the ARC-CO advantage is reduced to about 70 cents.
As we know, PLC pays simply if the price is lower. ARC-CO will pay if price is lower, but it will also pay a maximum payment even in yield is higher.
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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