Likely Only 3 Increases in Reference Price
The new Farm Bill (assuming it passes) uses the old reference prices for PLC payments. However, it now adds a new term called the effective reference price. This price will be calculated each year and used in determining if there will be a PLC payment.
The effective reference price will never be lower than the current reference price and can never be higher than 115% of the current reference price (from the 2014 Farm Bill).
It will be calculated each year based upon 85% of the Olympic Average of the MYA prices for the last five crop years (eliminates the high and low prices). This is compared to the current reference price (from the 2014 Farm Bill). If this number is higher it is then compared to 115% of the current reference price and if lower, that will be the effective reference price for that crop year. If it is higher than the 115%, it will be limited to 115%.
I worked up the estimated numbers assuming that the current USDA MYA projections for the 2018 crop were to be the final numbers. For almost all crops, the current reference price will be the effective reference price. Only the pulse crops of lentils and chickpeas will be adjusted and in the case of large chickpeas it will hit the maximum 115% level and may stay at that level for several years since their prices have been fairly high over the last few years.
The chart below shows this 85% of Olympic Price and how it compares to the minimum current reference price and the maximum allowed reference price. As you can see, most of the major crops are a long ways away from any adjustment to the reference price. For example, the 85% of wheat Olympic Average Price would have to rally at least 24% before there would be any adjustment.
Unless prices substantially rally and for at least 2-3 years, I do not see much of a chance for any adjustment to these reference prices. Again, this is an estimate and based on our current reading of the farm bill. If it changes, we will let you know.
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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