2016 Iowa Farmland Leasing – Farm Bill – Crop Insurance Payments

Hello, this is Kelvin Leibold, area Farm
Management Field Specialist in North Central Iowa, with our fourth in the
series of programs on farm leasing arrangements in Iowa. Today we’re going
to talk about the Farm Program Payments and how those programs impact rents.
That’s been a topic that is of interest to many people. We take a look at the
farm bill came out in 2014. In Iowa there was three different choices but the most
popular one was ARC-County. Over ninety eight percent of the producers in the
state selected the ARC-County program. These program payments have been
capitalized into the rents under the old program of direct payments. It was pretty
easy to go in and find out the corn base or bean based on the old farm, and yields
that they had, and then one could just simply dumped on the formula and
calculate the payment rates. If that farm had a hundred percent corn base, that
typical farm in Franklin or Hardin County, might receive maybe thirty four dollars
in base payments. If they only had a 50-percent corn base then a farm might
only receive twenty four dollars in payments. So if you had two identical
farms, one getting a payment for twenty four dollars an acre from the government,
the other farm getting a payment for thirty four dollars an acre, the landlord
owned the farm that got thirty four dollars an acre, you should do what? Well,
he should charge ten dollars an acre more rent, because well the producer
really wasn’t paying that. So historically those prices have been
captured into the rents and so the government program payments have really
been a land subsidy program, much more so than a producer subsidy program. Well the
same thing is continued on here from 2014. Then that when we went to sign up
for the 2014 farm bill, we were pretty comfortable in thinking that we were
going to get some significant payments out of the ARC-
County program for 2014 and 2015 crop years. A little bit of history on how
these programs are calculated, you start off with an Olympic yield, so for the
2014 crop year, which was the first of the farm program, we went back and looked
at the five previous years. So we would take and throw out the low yield. Low
yield looked like for Hardin County was 156 bushels. We throw out the high yield
like that’s 187, we would use the other three in average them, come up with 169.
We do the same thing on the marketing year price. Now the marketing year price
is a cash price, but it’s a cash price for the whole nation, and it runs the
marketing year. So for the 2014 crop that we harvested in the Fall here, a crop of
corn or soybeans, we would start September one of 2014 and keep track of
the price of corn for the next 12 months until the end of August of 2015. Then in
October of 2015 we would make the 2014 payment. So it’s always a year behind. So
to come up with the the 2014 Olympic price of 529, we threw out the 2009 year,
we threw out the 689 for 2012, used the 518- 622 in the 446. Well and then in
2015 we just moved back one year so we use, oh we got a 370 for the 2014-2015, so
we throw that one out, use the same three years so we ended up with the same
Olympic price. Okay so once we’ve established the Olympic yield and Olympic
price then we can get to the gross revenue guarantee. So by multiplying
those two numbers together. Now the government didn’t want to ensure a
hundred percent of the risk, so there’s a 14-percent deductible. That gets us down
to our net revenue guarantee. So instead of having eight hundred ninety-four
dollars of gross revenue guarantee in 2014, we only had 768. The other thing the
government didn’t want to do is, it didn’t want to pay for all the loss,
so not only you have a deductible but you also have a cap on the amount of
payment that they would make. So you’re capped out at ten percent of your gross
revenue. So if you took ten percent of eight hundred ninety-four dollars you
come up with about eighty nine dollars. That’s the maximum payment the
government was going to make no matter how much your loss was. Well how did you
determine your loss? Well you take a look at your actual revenue. So we wait till
after the year is over and we get a county yield established. So we ended up
with 163 bushels being the county yield for 2014, and we’ve got the national
marketing average price of 370, multiply those together, that gets you your actual
revenue. So then you take your actual revenue against your net revenue
guarantee and you find out yet 165 dollar loss. Well you gonna get paid on all
that? Nope, we capped out. We capped out at that 89. Do you get paid on every corn base
acre? No, you only get paid on eighty-five percent of your corn base acres. So we
got to multiply eighty-five percent times $89 to come up with the $75
payment. Well then we also have sequestration, which is a requirement
that the government cut their budget. So we lose another seven percent so we
ended up with a final payment of about seventy dollars per corn base acre. Okay, so
in 2015 we’re going to do the same thing. It’s almost the end of August here when
I’m recording this, so we don’t quite know the 2015 marketing year price, but
we’re pretty sure it’ll be within a nickel of that three dollars and
sixty-five cents. We don’t know the county yield yet because that’s the
official USDA yield but there’s some adjustments for prevented planning or non-
harvested acres, so again that’s an estimate there but by in large you can
see that first three years of this program, based on our current estimates,
that we’re going to have some pretty substantial payments, and then we’re
going to have payments drop off. Okay so they could have signed up for
the PLC program but you know the idea that I’ve got a payment today rather
than one maybe in the future a bird in hand is worth more than two in the
bush. So we were faced with this challenge of declining government
payments, declining government prices, so when a tenant gets his rent reduced by
thirty dollars and his government payment declines by forty dollars, they
really haven’t made much progress towards profitability. There is a URL
link at the bottom of the page there that you can go to get more background
information on how this program is calculated. Taking a look at 2016
estimated payments, you can go across and look at Wright county at $27, Franklin
county at 46, and Butler at 73. People are looking at this going now how can that
happen, how can we have that much variability, within 30 miles of each
other, and the answer is as well this is a county based program, based off of
those historical yields and so it doesn’t matter what the yield is on your
farm, doesn’t matter how productive your farm is, everybody gets paid the same in
that County. Now if you’re farming in two counties then you can pick your County,
that’s your priority County, where your county of record is and maybe get a
higher payment rate. Another thing you notice that is in Southern Iowa, some of
those areas of the state that traditionally need more help than others,
had large yields in 2015, wiping out all their farm program payments. As a matter
of fact there may be some counties in Iowa that don’t get a farm program
payment for the whole life of the farm bill. If we take a look at beans 2016
will probably not treat North Central very well. We’re going to have a lot of
farms that have low bean basis and that will help as compared to having higher
corn base so their payments will be based on their ratio of corn to beans,
but nonetheless beans are not going to pay very well in 2016 the way it looks. So
here’s the URL if you want to download this spread
sheet. There’s the county tab you can go up here and click on the yellow box. A
drop-down menu will appear and you can pick one of the other ninety eight counties,
and work your way through. We’ll update this periodically so that we
finish out here by October. We’ll have the 2015 year finished out and we’ll start
to make some estimates on prices on 2016 as well. Like talk briefly about crop
insurance, tool to manage risk, most of the crop insurance sold in Iowa was a
revenue insurance so it’s based both off of a yield and a price. I just grabbed
some typical we call actual production history numbers, so the nass says the
Hardin County five year yields about 175. These are based off of 10 years worth of
yield data to get sure what we refer to as APH. So maybe we use 180 bushel farm,
we take a look at the 2016 spring price. I referred to here is the March price
but it’s really the average for the month of February for the December
2016’s futures contract. So this is a futures price, not a cash price, comes out
in March but it’s based off of the February average for the December
futures. Anyhow, if you took that price times you’re APH, you’d come up with
some potential insurance revenue level. The highest level coverage that I can
buy is eighty-five percent, so if I bought the eighty-five percent I’d have
about five hundred ninety dollars worth of coverage. Back in 2012, when you look
at those priority prices, you can see that I could get up to eight hundred
dollars worth of coverage. So if I went out and had five hundred dollars in
expenses and paid three hundred dollars in rent ,I really didn’t have any risk
okay. So as a matter of fact if I paid 350 dollars, I maybe only had to assume
fifty dollars of risk, and if I was at a top producing farm over here, why that
was even less. Taking a look at what 2017 looks
like, looks like we’re going to have some lower prices. This is the price of the
December 2017 futures contract. Have no idea what will be when we actually get
there, but just if this is turns out to be the case you’ll see that I have lower
dollars of coverage. So again, looking at five hundred ninety dollars of coverage,
dropping down to five hundred twenty seven dollars of coverage, my producers
are going to assume more downside risk they can’t pass that off to anybody else.
That’ll be another cause for concern. Another factor in driving rents lower.
well, that concludes our little bit on the Farm Program Payments. Again on the
Ag Decision Maker website there’s a lot more information, along with several
other sites. So we’ll be back with our ongoing program in our series here with
session 5, which will be on the cost of production. Thank you.

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