PLC/ARC Updates
One of the questions we are getting is “When would individual ARC make more sense than county ARC?”. As most of our readers know, ARC and PLC makes payments based upon base acres. In the case of county ARC, the payment is based upon 85% of base acres. In the case of individual farm ARC, the payment is based upon 65% of base acres. This difference equates about a 30% advantage to county, therefore, the assumption is that most farmers would pick county ARC.
However, we have come up with at least one example where individual ARC will most likely pay much higher than county ARC and that is in regards to farmers who have high individual yields primarily due to irrigation versus a county that has very low county yields. For example, lets suppose we have a farmer in Kansas who grows irrigated corn. His APH for this corn is 245 bushels per acre. The county average for all corn is only 115 bushels per acre. He is one of only a handful of farmers who irrigate in his county. Let’s assume that there is a 75 cent per bushel payment for corn during the 2014 and 2015 crop year (the price is not dependent on county or farm). Going through the number crunching yields about a $125 payment per acre for individual farm and about a $60 payment for county (both payments are limited to 10% of benchmark revenue). Let’s assume he has 1,000 base acres. The total county payment is 1,000 times $60 times 85% or $51,000. The total payment for individual ARC is 1,000 times $125 times 65% or $81,250. In this case, the farmer would elect individual farm coverage since his payment for each year would be about $30,000 higher.
The farm bill does not split irrigated from non-irrigated crops in arriving at county ARC numbers. Therefore, any farmer whose APH is at least 50% higher than the average county yield may tend toward electing individual farm coverage. However, if the farm’s APH does not change much due to irrigation and the county ends up with a much lower yield, then the gain from using individual farm ARC may be much lower.
Now for farmers who have high yields and a county with low yields, PLC may make even more sense. For example, let’s assume we have a county with average wheat yields of 35 bushels per acre. There are a few farmers in the county who grow irrigated wheat that averages 145 bushels per acre. PLC makes a payment based upon payment yield times 85% of base acres. Let’s assume that the PLC payment for the year is $1 per bushel and the ARC payment is the same. The ARC payment for county coverage is 1,000 acres times $1 times 35 bushels per acre times 85% or $29,750. For individual ARC the payment would be 1,000 times 145 times $1 times 65% or $94,250. The PLC payment would be 1,000 times 145 times $1 times 85% or $123,250. In this case, the PLC payment would be about $100,000 higher than county averages and at least $30,000 higher than individual ARC. Actually the difference would most likely be much higher since ARC would be limited to 10% of benchmark revenue and in this case that would probably limit the payment to about 70 cents instead of the $1 assumed. This would result in PLC being closer to a $60,000 higher payment than individual ARC.
As with all ARC/PLC calculations, you must run the numbers. Let us know if you have any questions on whether ARC or PLC is better for your farm and we will help you run the numbers.
Paul Neiffer, CPA
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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