How Might CBO Estimates Change

• October 9, 2014
• Paul Neiffer

The Congressional Budget Office (CBO) did an updated scoring of the new farm bill back in April of this year.   It breaks down the major outlays for all related agricultural farm bill spending including ARC and PLC for all of the major covered commodities. I am assuming that CBO has run numerous calculations at various low prices and then weighted those assumptions to arrive at their final numbers. Therefore, they must internally have many price assumptions lower than the reference price that has some weighting on them. That is the only way there can be any PLC payments for any crops.  Their assumption on corn PLC for the 2014 corn crop is total payments of $1.117 billion.  However, their estimate of the corn MYA for the year is $3.90.  Now the reference price for corn (which does not change for the life of the farm bill) is $3.70.  Therefore, there should be no PLC payments at all for the 2014 crop year using that MYA price.

Since I am not sure how they arrived at their assumptions, I am going to run some of my own assumptions and see how it may affect the payments to be made for the 2014 crop year.  I am going to assume that the final MYA for 2014 will be $3.20.  Here are some facts about corn from the CBO report that will be part of these calculations:

• Total base acres – 90.9 billion acres
• Payment acres – 77.2 billion acres (85%)
• Updated average payment yield – 132.2 bushels per acre (up from the old 114.4)
• ARC participation – 40.6%

Since they indicate that 40.6% of the corn growers will participate in ARC, we can assume the rest will participate in PLC or about 60% time 77.2 billion acres equals 46 million PLC corn acres.  We will reduce this by 20% to account for  some producers not signing up; many producers will have overall payment limitations; and to be conservative.

Therefore, the total PLC payments for corn for the 2014 crop year will be about 37 million payment acres times 132.2 bpa times $.50 per bushel or about $2.5 billion.  This is almost $1.4 billion higher than the CBO estimate (the 2014 payments will not be made until after September 30, 2015 which means they show up in the 2016 federal budget FYE September 30, 2016).

Now for ARC, the calculations are a little tougher, but I will give it a go.  Let’s assume that 40.6% are enrolled, but only 32% will qualify for payments due to payment limitations, etc.  This results in about 25 million payment acres.  If the corn MYA price is $3.20 all growers would get their maximum payment for the year.  Let’s assume that this maximum payment will be about $79 per acre ($5.28 estimated Olympic average price times 150 bushels per acre Olympic yield (this is an estimate, it will vary by county and sign up) times 10%).   Therefore the estimated ARC payment will be about $1.975 billion.  CBO is estimating that 2014 ARC-CO corn payments will be about $835 million.

CBO is estimating total ARC/PLC payments for the 2014 crop year of $1.968 billion.  My calculations indicate that the final number (assuming MYA of $3.20) could be closer to $4.5 billion. Most likely CBO has some advantages over my rough calculations and it is tough to determine the amount of acres that (1) will not sign up, (2) have overall payment limitations, or (3) have other reductions; but it will be interesting to see which number actually ends up being closer, mine or the CBO.

Their MYA price for soybeans is $11.06.  Current prices are in the low $9.  If those prices hold up, ARC-CO should make a maximum payment of about $40 per acre.  The total payment acres for soybeans is 65.3 million acres with about 49% estimated to participate in ARC.  Therefore, we should have about 32 million payment acres in soybeans times $40 per acre equals $1.280 billion.  Lets reduce this by 20% to account for payment limitations, etc. resulting in ARC payments of about $1 billion.  CBO estimates 2014 soybean ARC payments of about $462 million and PLC payments of $123 million.  Again, I do not see how there can be a PLC payments when the CBO estimated MYA price is $11.06 which is $2.66 higher than the $8.40 reference price.  The updated payment yield appears to increase from 34.1 to 38.2.

I will not calculate the estimated wheat payments, but will let you know that the CBO estimates the final payment yield to increase from 36.1 to 42.7 bushels per acre.  The total number of base acres is 57.4 million (down from the old 73.8 billion).   Corn base acres go from 84.1 to 90.9 million acres.  Soybean base acres go from 50.1 million to 76.8 million.  As you can see, most of the 16.4 million base acre reduction in wheat acres will go mostly to soybean base acres and some corn base acres.

I will update these calculations through out the year as we get more information on actual ARC and PLC sign-up, etc.  I personally believe more than 40% of corn acres will enroll in ARC.  It would not surprise me to see this closer to 60%.

Paul Neiffer, CPA

 

 

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