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Common Ground
Farm Credit Services of America Blog

How Agriculture Risk Coverage (ARC) Protects Your Operation

by AgriBank, funding bank for FCSAmerica | Jul 10, 2014

In this second installment of our two-part blog on the commodity programs offered under the 2014 Farm Bill, we offer a primer on Agriculture Risk Coverage (ARC). The alternative commodity program is Price Loss Coverage (PLC).

No matter how it is presented, ARC is complicated. In this FCSAmerica video - 2014 Farm Bill: Commodity and Crop Insurance Programs – G. Art Barnaby, a Kansas State agriculture economist, predicts some producers will choose PLC because it is easier to understand. But, he advises, producers need to study both programs to ensure they choose the best risk management tool for their operation. If you need further assistance in understanding your options, contact an insurance specialist at your local FCSAmerica office.

What is ARC?
  • Similar to the old ACRE program;
  • Triggered by shallow revenue losses at the county or individual level;
  • Pays on base acres if actual revenue in a given year falls below a benchmark guaranteed level of revenue;
  • Requires producers to choose between countywide coverage on a commodity-by-commodity basis and individual coverage that applies to all of the commodities on the farm.
ARC-County
Payments under ARC-County basically will be triggered under three scenarios:
  • low U.S. average prices and low county yields;
  • average U.S. prices and low county yields;
  • average county yields and low average U.S. prices.

Actual county revenue must fall below 86 percent of the revenue benchmark before ARC-County provides coverage. The maximum per acre payment is equal to 10 percent of the revenue benchmark, so coverage essentially extends from 86 percent down to 76 percent of the revenue benchmark.

The county-level revenue benchmark is equal to the previous five-year Olympic average of U.S. marketing year average prices multiplied by the previous five-year Olympic average county yield reported by the National Agricultural Statistics Service (NASS). An Olympic average is calculated by taking the past five years of observations, throwing out the highest and lowest observations, and then averaging the remaining three. However, before the Olympic average is calculated, a minimum plug price and yield are used. The plug price is equal to the PLC reference price, and the plug yield is equal to 70 percent of the county T-yield.

EXAMPLE
U.S. Average Corn Price and Hypothetical County Yield

MARKETING YEAR      CORN PRICE              COUNTY YIELD
2009-10                         $3.55                           177.0
2010-11                         $5.18                           186.4
2011-12                         $6.22                           174.6
2012-13                         $6.89                           120.7
2013-14**                      $4.60                           187.8
**Assumes accuracy of the April World Agricultural Supply and Demand Estimates.

The county T-yield is 180 bushels per acre (bpa). Therefore, the plug yield (70 percent of T) is 126 bpa. The plug price is the corn reference price of $3.70 per bushel. On the price side, one year (2009-10) is replaced with the plug price of $3.70/bu. On the yield side, one year (2012-13) is replaced with the plug yield of 126 bpa. For the price Olympic average, we drop the minimum of $3.70 (2009-10) and the maximum of $6.89 (2012-13), and average the remaining three ($5.18, $6.22, $4.60) to get an Olympic average price of $5.33 per bushel. For yield, we drop the minimum of 126 (2012-13) and the maximum of 178.8 (2013-14), and average the remaining three (177.0, 186.4, 174.6) to get an Olympic average yield of 179.3 bpa. Therefore, the county revenue benchmark is equal to $5.33 Olympic average price x 179.3 Olympic average country yield, which equals $955.67 per acre.

Under this example, ARC-County would trigger program payment when the actual county revenue falls below $821.88 and would pay a maximum of $95.67 per acre (i.e., actual county revenue equals $726.31).

ARC-Individual
ARC-Individual uses farm-level yields instead of county-level for calculating the five-year Olympic average yield in the benchmark revenue and for determining the yield for the actual revenue for each covered crop produced in a particular crop year. Producers can use 70 percent of the county T-yield as a plug in their five-year yield history. The U.S. marketing year average price is still used for the price component of revenue in both calculations and is calculated the same way as for ARC-County. To determine total farm level revenue, a weighted average of the per acre revenues is calculated where the weights are the relative percentages of total planted acres of covered crops allocated to the particular crop.

EXAMPLE
If a producer planted 60 percent of total acres to soybeans (benchmark revenue equals $350 per acre) and 40 percent to corn (benchmark revenue equals $650 per acre), the total farm benchmark revenue would equal (0.6 x $350) + (0.4 x $650), which would equal a farm revenue benchmark of $470 per acre. ARC-Individual would trigger program payments when the producer’s actual revenue fell below 86 percent of $470, or approximately $404, and would pay up to a maximum payment of $47 per base acre (or 76% of $470, which equals $357 per base acre).

If the producer had actual revenue of $300 for soybeans and $400 for corn, the farm actual revenue would equal (0.6 x $300) + (0.4 x $400), or $340 per acre. In this case, it fell below the 76 percent threshold, so the producer would receive the maximum payment of $47 per base acre of all covered crops. However, ARC-Individual pays out at a 65 percent rate (or 65 cents on the dollar), so the producer would receive a net payment of 0.65 x $47, or $30.55 per base acre.

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