Agricultural Policy and Risk Management Brief

Transcription

1 Department of Agricultural and Resource Economics Campus Box 8109 Raleigh, North Carolina C O L L E G E O F A G R I C U L T U R E & L I F E S C I E N C E S Agricultural Policy and Risk Management Brief April 26, 2016 Tight Margins and Farm Program Payments in North Carolina Rod M. Rejesus, Associate Professor and Extension Specialist After several years of high commodity prices and strong profitability, the financial landscape in the US row crop sector has shifted dramatically in recent years. Today, US row crop producers are expected to face tighter margins given that declines in commodity prices in recent years have not been met with subsequent reduction in inputs costs. Based on USDA statistics, Patrick, Kuhns, and Borchers (2016) anticipate net farm income to decline by 38% from 2014 to 2015, which would be the largest year-over-year decrease since Moreover, net farm income is also expected to further decline by about 2.5% in North Carolina (NC) farmers are also expected to face this tight margin environment in the next few years. For example, the 2016 corn enterprise budgets for the NC Coastal Plains indicate that income above variable costs (or gross margins) in 2016 would be 30.4% lower than 2012 levels. Moreover, the 2016 soybean enterprise budget for the NC Coastal Plains also shows a 32.7% reduction in gross margin for 2016 as compared to With this expected tight margin environment in 2016, it is important for our NC row crop producers to get a sense of whether the commodity programs they signed up for as part of the 2014 Farm Bill Agricultural Risk Coverage (ARC) or Price Loss Coverage (PLC) can help their bottom line in the next two years. The objective of this article, therefore, is to provide information about potential payments that NC row crop growers can expect if they signed up for the county ARC program (ARC- CO) or the PLC program. Recall that the ARC-CO program is a revenue-based commodity program that triggers when realized county-level revenues (based on estimated NASS or FSA yields multiplied by the national marketing year average (MYA) price) falls between 86% and 76% of the county ARC benchmark revenue (i.e., a five-year Olympic average of county yields times a five-year Olympic average of national MYA prices). On the other hand, the PLC program is a pricebased program where payments are made when the effective price of a covered commodity is less than the respective reference price for that commodity as established in the 2014 Farm Bill (i.e., $3.70/bu for corn, $8.40/bu for soybeans, and $5.50/bu for wheat). The payment is equal to 85% of the base acres of the covered commodity times the difference between the reference price and the actual MYA price times the program payment yield for the covered commodity. One key feature of the ARC-CO and PLC programs is that payments will not come until the end of the marketing year, so they will be of little assistance in meeting cash flow needs on the crop that they are paid for. For example, the 2015 corn payments will not arrive until harvest time in 2016, meaning that these payments will help the farm s cash flow in 2016, but will be of little aid in Therefore, it will be useful for NC row crop growers to have information about potential 2015 payments for cash flow planning and budgeting in The FAST ARC-CO PLC Payment Estimator developed by the University of Illinois is used in this article to show the projected ARC-CO and PLC payments for NC corn, soybeans, and wheat producers in crop years 2015 and 2016 (See Schnitkey et al., 2016). Note that updated 2015

2 NASS yields are used for the 2015 projected payments (when available). While trend estimates of yields (i.e., predicted yields from the NASS county yield series) are used for the 2016 projected payments (since there is no NASS yields yet for the 2016 crop year, where payments will be given in the Fall of 2017). The 2015 MYA prices for corn, soybeans, and wheat have not been established at the time of writing this article (i.e., it will be established by Aug 2016), as such the current midpoint of the price forecasts for each crop from the USDA World Agricultural Supply and Demand Estimates (WASDE) is used in the calculations: $3.60/bu for corn, $8.80/bu for soybeans, and $5/bu for wheat. For 2016, the assumed MYA price estimates are based on the following prices: $3.80/bu for corn, $9.20/bu for soybeans, and $5.50/bu for wheat. Since the assumed 2016 prices in the analysis are equal to or above the reference prices for each crop, there are no expected PLC payments in 2016 for corn, soybeans, and wheat. Moreover, there is also no expected PLC payment for soybeans in 2015 because the estimated USDA WASDE price for soybeans ($8.80/bu) is above the $8.40/bu reference price. In general, NC producers of corn, soybeans, and wheat who signed-up for ARC-CO are likely to have 2015 ARC-CO payments in the Fall of 2016(See Figures 1 to 8 below). Corn, soybeans, and wheat farmers who signed up for ARC-CO payments are also likely to received larger payments compared to those who signed for PLC (with zero payments for soybean farmers who signed up for PLC). There is also variation in the amount of ARC-CO payments across counties in 2015, with some counties receiving zero payments and some counties receiving payments as large as $79/acre (for corn). In contrast, the PLC payment variation across counties is smaller than ARC-CO, with maximum payments only reaching $23 (for wheat). On average, corn producers in NC are expected to receive larger 2015 ARC-CO payments ($43/acre) relative to soybeans ($32/acre) and wheat producers ($20/acre). For the 2016 crop year (where payments are to be received in 2017), the estimated 2016 ARC-CO payments are expected to be lower than the 2015 payments for NC producers of corn, soybeans, and wheat (See Figures 3, 5, and 8). But note that little is yet known about the 2016 growing conditions; as such, yields and prices used in the current analysis are likely to change (which will also change the estimated 2016 ARC-CO and PLC payments). In summary, NC corn, soybean, and wheat producers who signed up for the ARC-CO commodity program are likely to received 2015 payments, which can aid them in the expected tight margin environment in the 2016 cropping season. Corn and wheat producers who signed up under the PLC program are also expected to receive some payments but at lower values as compared to ARC-CO recipients. For the 2016 payments (to be received in 2017), there is still a large amount of uncertainty in the yields and prices, but the analysis suggests that payments from the ARC-CO program are also likely. References: Patrick, K., R. Kuhns, & A. Borchers (2016). Recent Trends in U.S. Farm Income, Wealth, and Financial Health. Choices. 31(1): 1-8. Schnitkey, G., N. Paulson, J. Coppess, & C. Zulauf. (2016) and 2016 ARC-CO Payment Estimates using the ARC-CO PLC Payment Estimator. farmdoc daily. (6):45, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, March 8, Author Contact Information: Rod M. Rejesus Office Phone: rod_rejesus@ncsu.edu Note: This publication and the supplementary tables for the NC ARC-CO and PLC payments can be downloaded at the NC State Agricultural Policy and Crop Insurance Webpage: rance_extension_page.htm 2

3 Mean = Median = St. Dev. = Max = Figure 1. Estimated 2015 ARC-CO Payments (in $/acre) for Corn in NC Mean = 7.43 Median = 7.00 St. Dev. = 1.87 Min. = 4.00 Max = Figure 2. Estimated 2015 PLC Payments (in $/acre) for Corn in NC 3

4 Mean = Median = St. Dev. = Max = Figure 3. Estimated 2016 ARC-CO Payments (in $/acre) for Corn in NC Mean = Median = St. Dev. = Max = Figure 4. Estimated 2015 ARC-CO Payments (in $/acre) for Soybeans in NC 4

5 Mean = Median = St. Dev. = Max = Figure 5. Estimated 2016 ARC-CO Payments (in $/acre) for Soybeans in NC Mean = Median = St. Dev. = Max = Figure 6. Estimated 2015 ARC-CO Payments (in $/acre) for Wheat in NC 5

6 Mean = Median = St. Dev. = 1.88 Min. = Max = Figure 7. Estimated 2015 PLC Payments (in $/acre) for Wheat in NC Mean = Median = St. Dev. = 8.48 Min. = 0.45 Max = Figure 8. Estimated 2016 ARC-CO Payments (in $/acre) for Wheat in NC 6