Dee Vaughan knows he has two emergency defenses against low revenues on his dryland crops near Dumas, Texas: crop insurance and the 2014 Farm Act’s safety nets. After years of severe drought, farmers across the southwest and Great Plains may face big gaps in the first.
All U.S. growers will likely face crop insurance guarantees for 2015 far below corn’s 2011-13 glory days, since planting guarantees are based on current futures prices. But drought worse than the Dust Bowl has repeatedly whittled Moore County’s dryland yields on wheat and grain sorghum: the Texas Panhandle county suffered non-irrigated wheat yield losses 50% or more below their long-term average in 2006, 2007, 2011, 2012, 2013 and 2014, he said. On his personal dryland wheat operation, he suffered severe yield losses in 2006, 2007 and 2011. Both Vaughan and the county averaged abnormally low sorghum yields 2011 to 2013.
“About 80% of my ground is irrigated, so I personally did not have the losses to the degree producers who are 100% non-irrigated did,” he said. With so many wipeouts lowering 10-year Actual Production History (APH), conventional crop insurance won’t come close to protecting what locals would consider a sustainable revenue, he noted. “In Texas, because of higher losses, we already have higher rates,” Vaughan said. “It’s pretty rare to see insurance coverage above 60% to 65% because it’s so expensive.”
His worry about unrealistically low APHs is compounded by the fact that USDA was authorized to allow an APH fix for those wipeout years under the new farm law, but elected not to implement the change until the 2016 crop due to manpower shortages.
“Now we’re hearing some Texas farm lenders say they’d be hard pressed to advance operating credit for some growers next season,” a frustrated Vaughan said. He questioned why USDA is getting a pass and believes it still could hire outside contractors to implement rules in time for 2015.
“The current APH rules and yield plugs were not written to deal with drought situations which occur only every few decades,” he said. So until the issue is resolved, farm programs will be vital to his risk management strategies.
MORE VARIABLE ASSISTANCE
Welcome to the 21st century farm safety net: Growers must commit to a five-year farm program option later this winter. But whether grain producers receive more farm program assistance through the Agriculture Revenue Coverage Program (ARC) or the Production Loss Coverage Program (PLC) depends on how long and how severely low prices last. ARC assistance also varies depending on a county’s average yield from year to year.
So many variables are a sharp departure from past counter-cyclical farm programs and raise the possibility that farm supports will be difficult to predict.
Except for the 1970s, growers could count on government programs activating some kind of federal support nearly every year in the last century, Ohio State University economist Carl Zulauf said. But with the death of direct payments and recalibration of trigger prices in the 2014 Farm Act’s commodity supports, future federal aid won’t likely activate as often, he said. However, 2014’s steep price collapse could be one of those exceptions.
Using USDA’s August mid-price $3.90 per bushel season-average price corn forecasts, the most likely 2014-crop payments could run $41 per acre for corn covered by the county ARC-CO, but $79 per acre should season-average prices plunge to the $3.55 low-side of USDA’s range, said Zulauf. Those forecasts are preliminary, assume counties show an average yield and only cover the first year of a five-year farm program signup. Should corn prices hover in this depressed zone for several years, however, ARC guarantees will also tumble, making the prospect of big supports in later years more remote.
At this stage, Zulauf expects ARC-CO payments for soybeans and wheat only in counties with steep yield losses.
Using those same mid-price forecasts and PLC coverage, sorghum would be eligible for a $15 per acre support. Should prices hit the low-side of USDA’s forecasts, however, the same program could pay $32 per acre.
CORN’S PAYMENTS COULD BE KING
But given the size of the coming corn crop — and the $3 per bushel drop since 2012 — corn stands to be a big beneficiary of the ARC assistance for the 2014 crop.
“Especially in corn states like Iowa, Illinois and Indiana, it’s our belief that farmers will need to be much more astute about farm program details than in the past,” said Jerry Lehnertz, vice president of lending for AgriBank, which serves Farm Credit associations in 15 states.
“Running the same plays on crop insurance, being compliant on farm program rules — and expecting a check every year” — just won’t be adequate preparation, given new farm policy nuances, he said. Plus, growers will need to understand how their revenue-based crop insurance coverage can overlap farm program coverage and vice versa.
Vaughan has studied his farm program options in depth and is leaning toward PLC for most of his acreage. He hopes the new Supplement Coverage Option (SCO) available to producers with PLC coverage will fill some of the 35% deductible in his insurance. In effect, SCO is like an insurance rider that shrinks that deductible to 14%, but he isn’t sure how much it will cost. It may not be available in all counties nationwide either.
Still, whether this PLC-SCO election protects him better than ARC on his irrigated corn is yet to be determined. He’s tested the preliminary farm program calculator offered by Texas A&M’s Agricultural and Food Policy Center.
“It tells me ARC will pay more in the first year, but if low prices last three or four years, PLC may pay more,” Vaughan said. Unfortunately, there are no one-size-fits-all answers to 21st century risk management.