Although there will not be a large number of changes incorporated into the new farm bill, Trent Milacek, northwest Oklahoma area agricultural economy specialist, says farmers will need to focus on some key decisions and departures from the 2014 farm bill.
Milacek says the biggest question is whether to elect Price Loss Coverage or Agricultural Risk Coverage Program. He says in the last farm bill, 37% elected for PLC with wheat and 63% for ARC-CO with wheat. Percentage of bases electing were essentially the same.
“ARC-CO was the most popular option in the last farm bill because of guaranteed money,” Milacek said. “It’s a shallow loss revenue protection program, so it will protect if prices go down or yield comes down. If you were upset with ARC-CO in the last farm bill it was probably because the size of the payments weren’t as high. With shallow loss revenue protection program, 10% of the benchmark guarantee is not going to be a very big payment.
PLC as opposed to ARC-CO is just a price protection program. It doesn’t have a revenue portion to it.”
The negative part of PLC is if that prices are good and yields are bad, it cannot make payments according to Milacek.
“Prices were low in the last farm bill, so PLC turned out to be a good option,” Milacek said. “If it was such a good option, then why didn’t we pick it? The likelihood that wheat prices would fall below the reference price of $5.50 was not very good. We were coming off very high commodity prices from 2011 to 2013, corn farmers set records on their land values, cash rents were high and we thought if wheat prices went below $5.50, we couldn’t afford to produce it.”
Milacek says the reference price for wheat is one of elements that will stay the same in the new farm bill.
Marketing year average
The marketing year average price for June of this year was $4.81. Milacek says the MYA is established by when wheat is sold in this country and the weight.
“Oklahoma and surrounding areas are at a disadvantage because we are based on Kansas City wheat. KC is quite a bit lower than Chicago and all classes of wheat are lumped together, so that creates the MYA prices we are seeing,” Milacek explained.
According to Milacek, July was $4.52 and August was $4.35. For October 2019 through May 2020, we only have forecasts, but less wheat is sold during that time period, therefore prices will be relatively low during that time.
“Prices would have to increase a lot to make up for low prices set on high weights,” he added. “We have an estimated 2019/2020 MYA of $4.58, which is lower that the PLC reference price of $5.50. A PLC payment is in the forecast for the first year of the next farm bill.”
Another change Milacek notes is in the previous farm bill, farmers had to sign up for the whole farm bill in one program, but this time users will sign up for the first two years and sign up for the rest later.
“The first decision is based on what wheat prices are going to do in the next two years,” Milacek said. “But ask yourself what maximizes my risk protection. That’s what these programs are supposed to do.”
Payments, payments, payments
Milacek admits total ARC-CO payments for wheat in the 2014 Farm Bill were kind of all over the place. For Alfalfa County, Oklahoma, the payment was $67.84, Ford County, Kansas, was $27.87, Sedgwick County, Kansas was $117.22 and Kingfisher, County, Oklahoma was $94.06. He believes some of the spatial noise will go away in the new farm bill because more Risk Management Data will be used for yields and that will make some of this blend a little bit better.
A lot of the counties border each other, yet their payments are $10 to $30 apart, which really adds up. If a grower lives in Major County, Oklahoma, which had a payment of $56.48, but had land next door in Garfield County, Oklahoma, which has a payment of $81.90, then the payments would be based on what happened in Major County. Milacek says in the new farm bill, the payment will be based on the county the farm is located in.
As far as PLC program yields, PLC makes payments based on how far the MYA price is below $5.50 multiplied by the PLC program yield on your farm. It makes sense that if your PLC program yield is high, PLC is going to pay more on your farm. If your PLC program yield is low, the payments will be lower. For ARC-CO, it is just based on the benchmark revenue for that county, and it does not necessarily matter what your farm does.
According to Milacek, the circumstances to go with ARC-CO are when you want protection from low yield and low prices, you have a diversified cropping operation and you ultimately believe prices will rise in 2019/2020. Go with PLC if you are mainly worried about protection against prices under the reference price for wheat of $5.50, you believe prices will stay low or only slightly improve in 2019/2020 or you want to purchase SCO insurance.
Unsure of what to expect with wheat prices in the next two years? Milacek says he sees signs we could be enjoying higher wheat commodity prices in the future.
“Russia and Ukraine have been exporting wheat like crazy and they have higher quality wheat, but they’re running out of ending stocks because they’ve been exporting so much,” he said. “If they do not have an average or above year next year, they will not be able to keep up with their exports so we could become a bigger player on the world market.”
Lacey Newlin can be reached at 580-748-1892 or firstname.lastname@example.org.