USDA Safety Net Programs

USDA Safety Net Programs
Created by rrummel on 8/5/2014 5:15:41 PM

Choosing the Right One

Farmers already seeing cornand soybeans prices plummet as the markets expect bountiful harvests have somepotential safety nets that might help protect them financially, two PurdueUniversity agricultural economists say.

Corn and soybeans futuresprices have dropped to their lowest levels since 2010 - corn below $4 perbushel and soybeans under $11. That is partly because of higher yields expectedfor many farms this fall. Although high yields result in more bushels forfamers to sell, the abundant supply leads to much lower prices, erodingprofits.

 "Midwest cropproducers have been shocked by the sharp drop in corn and soybean prices asfavorable weather has increased yield prospects this summer," Michael Langemeier and Chris Hurt said in a reviewof crop insurance and a new government program. "Such large decreases inprices are raising anxieties among producers and their lenders regarding weakmargins and the potential for tight cash flows."

Langemeier and Hurt saidproducers should evaluate how two safety-net programs might help protect them:

* Crop insurance: Revenuepolicies - those that consider both yield and price - are the most popular. Theeconomists said that even with above-normal yields, prices could drop lowenough to trigger insurance payouts on some high-coverage policies. As anexample, a farm with an 85 percent policy and yields this year 10 percent aboveits base actual production history of 170 bushels per acre might trigger aninsurance payment if December corn futures in October average below $3.57 a bushel,a level the market is approaching.

The same farm with an 80percent policy, however, would not trigger an insurance payout until theDecember corn futures average in October drops below $3.36 a bushel. Langemeierand Hurt said that is a less likely situation but still one that provides someprotection against catastrophic low prices.

Soybean insurance payoutsbecause of low prices seem much less likely for all coverage levels.

* Agricultural RiskCoverage-County Option: This new government program, also referred to asARC-CO, currently has a higher probability of adding support to corn andsoybean farmers, the economists said. They explained that under the currentprojections of above-normal yields, the program would begin making paymentswhen the marketing year average of corn drops below about $4 per bushel. Thepayments would increase as prices drop to about $3.50 a bushel.

At $3.75 a bushel, estimatedIndiana average payments would be about $25 to $40 per acre of corn base, andat a $3.50 marketing year average price they would grow to the maximum of about$55 to $80 per acre.

For soybeans withabove-normal yields, ARC-CO payments might begin with a marketing year averageprice below about $10.60, with maximum payments occurring at a price of about$9.40. As an example, a $10 per-bushel marketing year average price wouldresult in payments of about $20 to $30 per acre of soybean base. If prices fellto about $9.40, the payments would range from about $40 to $60 per acre.

Langemeier and Hurt noted thatthe U.S. Department of Agriculture's Farm Service Agency is still working outdetails of the program and that payments will vary from county to county.

"The important point forproducers is that the new government program now appears to have a high potentialof providing some protection against low revenues for corn and maybe someassistance with low soybean revenues," they said. "However, 2014 cornand soybean government payments will not be available until the fall of 2015and thus will not be available to meet more immediate cash-flow needs.

"Crop insurancecurrently appears less likely to be of assistance for producers with strongyields, although those with high corn coverage levels have some chance oftriggering crop insurance payouts."

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