A look at farm safety net for 2023

With the 2023 growing season coming soon, producers may be looking ahead to their crop production plans and final decisions about inputs and practices. At the same time, producers would benefit from assessing the risks they face in the crop year ahead, and the support provided by various parts of the farm income safety net.

Producers have multiple tools to manage production and marketing risk, including farm bill commodity programs, crop insurance policies and, of course, marketing tools to build their risk management strategies.

Recently announced disaster assistance programs also will help address risks and losses, although they come after the fact.

Commodity programs

The Price Loss Coverage and Agricultural Risk Coverage programs are still in place, pending any new developments in the 2023 Farm Bill debate. The programs haven’t changed since 2018, and with higher market prices at present, they offer relatively little expected payout or risk support.

Looking back at the 2022 crop, any PLC and ARC payments would be paid to producers in October 2023 after the marketing year is complete. However, given current marketing year average price expectations, there are no PLC payments projected for any program crop.

For major Nebraska crops, the current marketing year average price projections from USDA supply and demand reports (as of late 2022) are $6.70 per bushel for both corn and sorghum, $14 per bushel for soybeans and $9.10 per bushel for wheat.

Prices would have to drop 40% or more from those levels to trigger PLC payments, something that generally can’t happen at this point given more than half the crop that might typically be sold or priced by this point in the marketing year.

For ARC, revenue would have to drop even more from expected prices and benchmark yields to trigger payments. That won’t happen either, except in some extreme pockets of drought where final county-level yields could fall by 50% or more for nonirrigated practices.

Note, however, that for individual producers, the ARC guarantee is a blend of irrigated and nonirrigated practices on the farm, so even in drought-affected counties, the potential payments to producers could be mitigated by the share, if any, of irrigated production on the farm.

Looking ahead, 2023 crop marketing year price projections from advance USDA agricultural outlook estimates (released in late 2022) are lower than those for 2022, but would still be far above safety net levels with corn, sorghum, soybeans and wheat projected at $5.70, $5.60, $13, and $8 per bushel, respectively.

Prices would have to drop by 30% or more from these early projections to trigger PLC payments. Revenue would have to fall by even more from the same price projections and benchmark yields to trigger ARC payments, although any lingering drought conditions and concerns that might reduce yield expectations would actually increase the effective price protection from ARC.

Crop insurance

The established crop insurance options of Yield Protection (YP), Revenue Protection (RP) with the harvest price component, and Revenue Protection with the Harvest Price Exclusion (RP-HPE) remain in place, as do the area yield and revenue plans and the Whole Farm Revenue Protection plan.

The Supplemental Coverage Option (SCO) and the Enhanced Coverage Option (ECO) add more county-level coverage on top of a farm-level policy if desired.

With most producers using RP and most choosing the trend-adjusted yield option, producers are effectively protecting their crop from revenue losses below a given percentage of trend yield times the higher of the base or harvesttime futures price.

As of late 2022, new-crop futures contract prices for the 2023 crop were above $6 per bushel for corn and $14 per bushel for soybeans, and with the $8.77-per-bushel base price for wheat established in fall 2022, the crop insurance prices and protection levels far exceed what the commodity program can provide for support.

Disaster assistance

In addition to the established commodity program and crop insurance policies, disaster assistance provides an important component of the federal safety net. A limited set of disaster assistance programs have been permanently authorized and funded through farm bill legislation, including the Livestock Forage Disaster Program (LFP), the Livestock Indemnity Program (LIP), and the Emergency Assistance for Livestock, Honeybees, and Farm-Raised Fish Program (ELAP).

These programs offer assistance for grazing losses because of drought, as well as death losses and other losses because of various ag disasters.

In the past few years, ad hoc disaster assistance programs have provided substantially more help for various losses ranging from trade and COVID-19-related problems to ongoing drought, wildfire, hurricane, flood and other ag losses.

In May 2022, USDA rolled out the first phase of Emergency Relief Program (ERP) assistance to crop and livestock producers for disaster losses dating to 2020 and 2021. While the first phase of ERP has paid out more than $7 billion in assistance to producers thus far, USDA extended the ERP to a second phase in November to reach producers not covered by the initial support. Details and implementation of Phase 2 are expected in early 2023.

While these assistance programs were funded through COVID pandemic-related support, the omnibus appropriations bill enacted in December includes a new round of ag disaster assistance funding for 2022 losses for crop and livestock producers. A total of $3.7 billion was authorized for this new assistance that should roll out in 2023 with more details to come.

Making safety net decisions

The above discussion may help explain the various parts of the safety net, but the decision about safety net tools remains complicated. Comparing effective price protection levels across programs and tools can provide one means of analysis, recognizing that the programs pay on unique factors. The table below offers a comparison of PLC, ARC and crop insurance tools.

For corn, the effective reference price for PLC for 2023 remains at the legislated reference price of $3.70 per bushel. In fact, the effective reference prices remain at the legislated levels set under the 2018 Farm Bill for all four of the major Nebraska commodities.

While the effective reference price can increase under the existing formula based on 85% of the five-year Olympic average price, it takes multiple years of higher prices to move the formula higher, something that could happen for some commodities by 2024, but not yet for 2023.

* Effective price for ARC based on 86% of benchmark price that would trigger ARC payments assuming no yield loss.

** Projected prices for crop insurance are tied to futures price averages before the crop insurance purchase period. The projected price for wheat is set, and the expected projected prices for other commodities are based on futures price quotes for corn and soybeans as of late December. The projected price for grain sorghum is a function of corn and is estimated at 98% for 2023 based on the current ratio of 2023 crop price projections from USDA.

*** Effective price for crop insurance based on selected coverage level times insurance price that would trigger indemnity payments assuming no yield loss.

Comparing PLC to ARC, the effective benchmark price for corn for ARC is at $3.42. While the benchmark price based on the five-year Olympic average price is higher at $3.98, the ARC protection kicks in at 86% of the benchmark price, or $3.42 assuming benchmark yields.

While that is a discount to the PLC protection level, the combination of price and yield protection in ARC may offer more immediate support than PLC to producers in the case of 2023 crop losses. ARC does remain limited to a payout of no more than 10% of revenue, so while it may kick in on initial losses, it does also cap out relatively quickly.

Comparing both to crop insurance, the price projections in crop insurance simply offer much higher levels of support. Based on current futures prices as of late 2022, the projected price or base price for corn would be $6.11 per bushel.

Depending on the level of coverage selected, a revenue policy would provide substantial price protection far above what the commodity program safety net tools would provide. A producer buying 75% coverage would effectively be protecting $4.58-per-bushel corn assuming proven yield production, while 85% coverage would effectively protect $5.19 per bushel.

Like ARC, these effective price protection levels would move higher if yields fall below proven levels. But, unlike ARC, the crop insurance protection is not capped and provides complete downside risk protection. Of course, crop insurance also costs the producer a substantial premium, so there are benefit-cost factors to consider.

Laying out the safety net tools and options provides the foundation for making an informed decision for 2023. The decision deadlines will come up quickly in the spring for producers with farm program enrollment at FSA due by March 15, and crop insurance decisions for spring-planted crops also due by March 15 with crop insurance agents.

Beyond that, we know that additional ad hoc disaster assistance for past losses is coming to producers in 2023 with details awaiting. While the ad hoc disaster assistance could benefit cash flow in 2023, it is never there prospectively and shouldn’t affect 2023 production, marketing or risk management decisions.

Lubben is the Extension policy specialist at the University of Nebraska-Lincoln.

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