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May 04, 2023
By Scott Gerlt • ASA Chief Economist
Title I of the farm bill provides the portion of the farm safety net that assists farmers through major market shocks. This requires program trigger levels be high enough to provide benefits when needed and that payment rates are sufficient to enable solvency. The effective reference price (ERP) and Agriculture Risk Coverage-County (ARC-CO) program currently contain arbitrary calculation limits that impact the ability of Title I to fully realize these objectives.
The two largest programs in Title I, ARC-CO and Price Loss Coverage (PLC), both utilize price and fixed, historical acreage in determining farmer benefits, but the programs have important differences. Producers cannot be simultaneously enrolled in these ARC-CO and PLC programs but can make a crop-by-crop enrollment election.
PLC benefits are determined by the difference between the ERP and the national marketing year average price for a commodity. This amount is multiplied by the PLC yield and base acres for a farm, as well as a few other factors. The PLC yield and base acres are determined by historical production on a farm to decouple current planting decisions from program benefits. The effective reference price is the higher of the statutory reference price set in the farm bill or 85% of the five-year Olympic average farm price. An Olympic average discards the high and low values and averages the remaining observations. The ERP cannot exceed 115% of the statutory reference price. Soybeans have a statutory reference price of $8.40 per bushel, which results in an ERP that is bounded between $8.40 and $9.66 for the commodity.
While PLC provides a safety net based on prices, ARC-CO provides a safety net based on revenue. A benchmark is determined by multiplying an Olympic average county yield by the Olympic average national price. The county yields are adjusted for historical trend increases, and the national prices use the ERP if it is higher than the national price in any of the five years. As a result, the ERP is used in both PLC and ARC. If the current year national price multiplied by the current year county yield is less than 86% of the benchmark, the payment rate is equal to the difference. However, the payment rate cannot exceed 10% of the benchmark. As a result, ARC-CO covers losses between 76% and 86% of the benchmark. The payment rate is multiplied by base acres and a few other factors.
The Title I programs contain many moving parts, but the caps in the ERP and ARC-CO limit necessary responsiveness to market conditions. The effective reference price calculation was added in the 2018 Farm Bill to provide a degree of flexibility. Prior to that, reference prices could not move, as only the statutory reference price was used. The ability of the effective price to adjust creates flexibility but is limited due to the relatively narrow range that the ERP can move.
Removing the 115% cap in the ERP calculation offers several advantages to farm policy. First, the safety net can more easily keep up with price and cost inflation, which has caused deterioration of the safety net. As detailed recently in another Economist’s Angle, farm program benefits have been shrinking over the past 20 years. A substantial reason for this is that farm prices and costs have continually increased while coverage levels have largely been fixed in legislation. For instance, the statutory reference price (“target prices” before the 2014 Farm Bill) for soybeans has only increased twice in over 20 years. Since the 2002/2003 crop marketing year to the 2022/2023 marketing year, soybean market prices have increased by 157% and soybean variable costs have increased by 220%, but the reference price has only increased by 45%[i]. The effective reference price provides a built-in inflation adjustment mechanism, as it adapts to price increases. However, the 115% cap negates much of the effect. Removing the arbitrary cap would allow programs to adapt to higher prices and farm input costs throughout the life of the new farm bill.
Another benefit of removing the cap on the ERP is that programs can better adapt to unforeseen circumstances. Farm bills are designed to provide coverage for the next five years. Forecasting market conditions five years out is difficult and full of uncertainty, which makes crafting appropriate, sufficient statutory reference prices for the farm bill’s term challenging. If prices and costs increase faster than projected, the ERP allows the safety net to adapt to conditions that would have been unforeseen during the writing of the farm bill. Removing the ERP cap enables greater responsiveness and functionality of the built-in flexibility it is intended to provide.
The arbitrary cap in per-base acre ARC-CO benefits produces a different challenge than the ERP cap. It does not limit the ability of the program to adapt so much, as it prevents sufficient payments. By not covering losses greater than 24%, ARC-CO leaves a gap in the safety net when deep losses occur.
Consider the U.S.’ trade war with China. In 2019, 80% of soybean base acres were in ARC-CO, while 14% were in PLC and the remainder in ARC Individual. Most soybean base acres were enrolled in ARC-CO because PLC benefits were not expected for the commodity, which proved prescient, as soybean PLC benefits were not triggered despite the trade war.
Despite the lowest national soybean yield in five years (47.4 bushels per acre) and a low marketing year average price ($8.57 per bushel), only slightly more than half (57%) of eligible counties[ii] triggered ARC-CO benefits (Figure 1). Of those that received ARC-CO benefits, 43% hit the 10% cap on ARC-CO amounts per base acre. In other words, nearly half of the counties that had losses beyond the initial 14% threshold had deep losses not covered by the program.
Both the effective reference price and ARC-CO have important mechanisms that allow them to adapt to market conditions. This helps provide benefits when needed and adapt to maintain the safety net through inflation. However, the arbitrary caps within the program limit these benefits. Removing them would allow the programs to better adapt to price inflation, respond to farmer needs and provide a more effective safety net throughout the life of the new legislation.
[i] ASA calculations based upon FAPRI-MU data.
[ii] Counties where irrigated and non-irrigated are split for soybeans in ARC-CO are recorded twice- once for each practice.
