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How Price Loss Coverage Protects Your Operation

While producers still don’t know when signup for commodity programs under the 2014 Farm Bill will begin, they know one thing: They get one shot at electing which commodity is the best risk management decision for their operation. This one-time decision will remain in place through 2018, when the Farm Bill expires.

What follows is a primer – based on available details – on the Price Loss Coverage (PLC) commodity program and the new insurance product, referred to as the Supplemental Coverage Option (SCO). A future blog will look at Agriculture Risk Coverage (ARC), the alternative commodity program.

G. Art Barnaby, a Kansas State agriculture economist, offers additional information in this FCSAmerica video - 2014 Farm Bill: Commodity and Crop Insurance Programs. Dr. Barnaby advises producers to carefully analyze how each commodity program applies to their operation.

What is PLC?
  • Similar to traditional counter-cyclical programs; price only protection
  • Triggered under conditions of low national average prices
  • Pays if crop prices fall below set “reference prices” (new term for target price)
  • Raises the floor price for all the crops it covers, including corn, soybeans and wheat, so payments will be made much sooner than under the previous Farm Bill.

How it works
A PLC payment to a producer is triggered when the U.S. marketing year average price falls below a reference price specified in the Farm Bill. The payment, when triggered, will equal the maximum of either the reference price minus the average marketing year price or the reference price minus the loan rate. The payment is on 85 percent of base production (i.e., base acres multiplied by program yield) for the particular crop.

The table below shows the reference price and loan rate for major crops grown in FCSAmerica’s four-state territory that are covered under the program.

CROP REFERENCE PRICE LOAN RATE
Corn $3.70 / bu $1.95 / bu
Soybeans $8.40 / bu $5.00 / bu
Wheat $5.50 / bu $2.94 / bu
Barley $4.95 / bu $1.95 / bu
Oats $2.40 / bu $1.33 / bu
Minor Oilseeds $20.15 / cwt $10.09 / cwt

 

Example
A producer has 100 base acres of soybeans, with a program yield of 25 bushels per acre. The marketing year average price has fallen to $4.50 per bushel. What would be the total PLC payment for this producer?

First, since the marketing year price is below the loan rate of $5.00/bu, the payment would equal the difference between the reference price and loan rate, or $8.40 - $5.00 = $3.40 per bu.

The producer’s base production is 100 base acres x 25 bu program yield = 2,500 bu. The payment rate is 85 percent, or 85 cents on the dollar. Therefore, the total payment would be 0.85 x $3.40 x 2,500, which would equal $7,225.

But what if the marketing year average price for U.S. soybeans was $7.00 per bu? Now the PLC payment would equal the reference price minus the marketing year price, or $8.40 - $7.00 or $1.40 per bu. The producer payment would equal 0.85 x $1.40 x 2,500, or $2,975.

Adding SCO
Beginning with the 2015 crop year, producers who choose PLC will be able to purchase the new SCO through a crop insurance agent as an add-on to existing crop insurance coverage; SCO is not an option for those who choose ARC.

The SCO essentially will allow producers to insure their remaining insurance deductible (up to a maximum 86 percent coverage level) using a county-level yield coverage that mimics the type of individual coverage that is in place (Yield Protection, Revenue Protection, or Revenue Protection – Harvest Price Excluded). The premium for SCO will be subsidized at the 65 percent level. SCO will not be subject to payment limitations.

View more resources on the 2014 Farm Bill.

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