Cushioning Corn: US Farm Policy Kicks in to Support Producers

- Rabobank’s O’Brien County Iowa model farm shows that Price Loss Coverage (PLC) will provide a higher financial support to corn producers in 2020/21 than Agricultural Risk Coverage (ARC). Based on a USD 2.90 national average farmgate price and trend yield, PLC payouts will be approximately USD 0.57 per bushel versus ARC at USD 0.39 per bushel.

- Additional financial support for farmers will come from crop insurance income protection, as futures have declined since February 2020 when the reference price of USD 3.88 per bushel was determined.

- In a corn-soybean rotation like our model farm, participation in PLC, combined with crop insurance income protection at 80% coverage, would potentially cover the cost of production. The same would not be true for a corn-following-corn production model.

- However, regional differences will exist and the core corn belt especially should benefit more from these additional payments than the outskirts.

- Government support for producers is not based on the cost of production but Farm Bill legislation is intended to be a safety net that provides financial assistance to enable farmers to farm another year.

Farm Programs Provide Cushion Against Low Prices

US Farm Bills were written to provide producers with support during low commodity prices, like those recently experienced. Given the very low prices, the PLC, ARC and crop insurance’s income protection provisions will contribute more in 2020/21 to US corn farmers’ income than in the past several years.

Recognizing the higher potential for below-breakeven corn prices in 2020/21, Rabobank conducted an analysis on potential program (ARC or PLC) payouts under varying yield, price and demand scenarios. With declining prices, the simulations reveal significant program payouts for corn in the upcoming crop year, with the payout from PLC greater than ARC.

The simulations were created using Rabobank’s interactive baseline model. Therefore, as corn yields were adjusted in the model, prices and demand moved accordingly. In other words, as corn yields increased, prices decreased and demand moved higher and vice versa. For each scenario, we assigned a potential 2020/21 average corn farmgate marketing year average price (MYAP). Potential payouts were determined using various MYAP, corresponding trend yield, after which we applied yield deviations from trend. Every farm is unique and individual farm results will differ from these projections.

Higher Pre-Covid Prices Result in Favorable Crop Insurance Revenue Protection Payouts for Corn in 2020

The crop insurance projected price for 2020 was set at USD 3.88 per bushel, which is determined by the average December 2020 corn futures price in February. Since February, the December 2020 corn futures has declined further due to bearish market fundamentals based on forecast record US and global corn crop. US corn producers, who purchased crop insurance’s revenue protection (RP), are set up to receive payouts depending upon their coverage election (80% is most common for corn). Consequently, corn crop insurance RP will add to expected payments from PLC/ARC.

PLC and ARC: Different Programs Yield Different Payouts

In the Farm Bill, the PLC and ARC programs were designed for low-price environments, like the current one for corn. The PLC program is attractive if market prices are expected to drop below the USD 3.70 per bushel reference price (set by the Farm Bill) for an extended period, while ARC is for producers concerned about declines in crop revenue. For example, using a USD 2.90 per bushel MYAP, payouts under PLC exceeded those of ARC due to ARC’s dependence on county benchmark revenue versus individual farm performance as in PLC (see Figures 1 and 2). As prices and yields change, so do the payments from both programs – higher yields and/or lower prices drive increasing payouts and vice versa.

20201307_cushioning_corn_figure1and2

Lower 2020 Price Increases Payments to Producers

To determine the impact of PLC and crop insurance payouts for 2020/21, Rabobank explored two additional different price scenarios. A high price scenario of a 2020/21 MYAP of USD 3.35 per bushel, based on trend line yield, driven by a slightly higher demand, results in the simulated farm receiving a PLC payment of approximately USD 0.30 per bushel with little pay-out from crop insurance’s income protection provision (see Figure 3). Conversely, the low price scenario of a MYAP of USD 2.45 per bushel, based on trend line yield and low demand environment, shows a PLC payment of approximately USD 0.75 per bushel, plus a crop insurance payout of nearly USD 0.75 per bushel (see Figure 4). The higher payout from crop insurance in the low price scenario results from the wider spread between crop insurance’s high reference price (USD 3.88 per bushel) and a low MYAP.

20201307_cushioning_corn_figure3and4

Core Corn Belt Farms to Benefit Most From PLC

PLC payments to Corn Belt producers will not be uniform (see Figure 5). Payments are heavily influenced by farm yield, which results in varying payments per acre.

20200713_Figure 5_Scenario PLC corn payment

Low Prices Translate to Higher Farm Program Payments for Foreseeable Future

As outlined in Rabobank’s Ten-Year Grain Baseline in October 2019, stocks of corn are expected to increase over the outlook period and continue the downward pressure on corn prices. This outlook has not changed. Based on the price outlook and the current safety net in the 2018 Farm Bill, the simulations show producers will be receiving PLC or ARC payments at least through the expiration of this Farm Bill in 2023. However, crop insurance income protection will be less, as low prices are expected to carry into February 2021, when the crop insurance reference price for 2021/22 will be determined.

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