When to do Individual ARC May Be Tough to Decide

I originally thought that most farmers would want to pick county ARC since it makes a payment on 85% of base acres versus picking individual farm ARC since it only makes a payment based on 65% of base acres.  However, in running some scenarios through the ARC analysis, it may be tougher to choose than I thought.

For example, I ran some numbers assuming a county Olympic average of 172 bushels per acre.  The key assumption for 2014 crop was that the Olympic corn price would be $5.35 and the actual price received for corn would be $3.80, $4.05 and $4.30.  I then compared these county ARC payments to a farmer who elected individual ARC with an 185 APH.  The total payments (rounded) received are as follows:

Price                     County                 Individual

$3.80                 $53,000                    $45,000

$4.05                 $26,000                    $35,000

$4.30                     Zero                       $14,000

I originally thought the key driver for picking individual ARC would be the amount of yield difference, however, it appears the key driver is the increased price revenue guarantee from the higher yields times the Olympic price.   With higher yields a farmer electing individual ARC will get a payment sooner since their benchmark revenue is greater than the county benchmark.  However, as the price starts to drop for corn, the gap between the two ARC calculations narrows and once they each get closer to the 10% of benchmark revenue ARC limit, county coverage will usually result in greater payments since the two limit amounts are about equal, however, county ARC pays on 85% of base acres versus 65% for individual ARC.

In our example, the crossover point is at a price of about $3.88.  Individual ARC had reached its 10% benchmark revenue limit at about  $3.95.  It took from $3.95 to $3.88 for the extra base acres at the county level to catch up and county ARC continues to outpace individual ARC until about $3.78 when county ARC hits its 10% benchmark limit.  It is at this price when county ARC reaches it maximum payment of $55,000 and individual ARC remains at its maximum $45,000.  Therefore, in this example, the maximum that county ARC can exceed individual ARC is only $10,000 while the individual ARC payment may exceed county ARC by more than this amount when prices were higher.

Any farmer who has APH substantially higher than county yields will almost always elect individual ARC.  However, when the gap between county yields and farm yields are in the 10-20% range, it may be much tougher to pick the right election.

Paul Neiffer, CPA