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When to Consider the ARC-IC Farm Bill Option

The most unique and intriguing aspect of ARC-IC is that it is the only program that is not totally decoupled from production.

The Agricultural Revenue Coverage - Individual Coverage (ARC-IC) option under the 2014 Agricultural Act (farm bill) has received little interest, compared with the Agricultural Risk Coverage-County (ARC-CO) and the Price Loss Coverage (PLC) programs. However, it may be the best option in certain instances.

There are several reasons why producers have dismissed ARC-IC from consideration.

“Some are valid and some are not so valid,” says Andy Swenson, North Dakota State University Extension Service farm management specialist. “Yes, it is more complicated and requires more annual paperwork. It is true that it only pays on 65 percent of your base acres instead of 85 percent, but there is more to this story. It also is true that ARC-IC requires the enrollment of the entire Farm Service Agency (FSA) farm, thereby losing the flexibility of choosing between ARC-CO and PLC crop by crop within the FSA farm.”

Because the ARC-IC payment rate is determined by a weighted average of all crops grown instead of on individual crops, it is less likely to trigger a payment because strong revenue of one crop may offset the weak revenue of other crops. Producers should be cautious about enrolling more than one FSA farm in ARC-IC because crop plantings on all enrolled farms are combined to determine the per-acre payment rate.

The most unique and intriguing aspect of ARC-IC is that it is the only program that is not totally decoupled from production, so you must plant at least one covered commodity to be eligible for payment.

Although a producer must have base acres to receive a payment, ARC-IC is the only program where the yields of what you grow each year are considered. The per-acre payment rate is determined by the revenue guarantee and actual farm revenue using the farm’s yield history and current yield of the covered commodities planted. Conversely, ARC-CO uses county yields of crops for which the farm has base acres, not planted acres. All three programs rely on national average marketing year prices in payment calculations.

“Deservedly, ARC-IC is the underdog of farm program options,” Swenson says. “The danger with enrolling in ARC-IC is that you forfeit the potential payments from ARC-CO or PLC, so only consider ARC-IC after careful analysis.”

Why and when might ARC-IC be the preferable choice? Here are some examples:

  • There must be at least one covered commodity planted to be eligible for ARC-IC payment. The only exception to this rule is if weather circumstances prohibited all plantings of covered commodities on the FSA farm (prevented planting). In this instance, there would be a maximum ARC-IC payment determined on the combination of crops that were prevented from being planted. Only consider ARC-IC because of the 100 percent prevented planting rule if this was your farm’s situation in 2014.
  • If there was a general yield shortfall on an FSA farm in 2014, such as from hail, drought or drown-out, there is the likelihood of a strong ARC-IC payment. However, this situation will reduce the possibility of payments in the subsequent four years of the farm bill. The low yields in 2014 will tend to lower your future revenue guarantees, but only if you grow the same crops. Also, the impact may be mitigated because the low and high revenue years of a crop are not used in revenue guarantee calculations.
  • Consider ARC-IC if most of a farm’s base acres are for crops, such as oats, which are unlikely to trigger payments under the ARC-CO or PLC options through the duration of the farm bill. Only the total base of an FSA farm matters with ARC-IC, not the individual crops that have a base. A base acre of corn, oats and field pea are equal under ARC-IC. The ARC-IC payment rate is determined by the crop or crops you grow. Therefore, you could grow corn, trigger a payment and get paid on 65 percent of the total base, even though you have no corn base.
  • If your farm generally is less productive than the county average, ARC-IC may be favorable when farm yield history is lacking for crops currently grown. Yields from the previous five years are used in determining the revenue guarantee. For each year the farm did not grow the crop, 100 percent of the county yield is used. This will provide a strong revenue guarantee relative to the typical yields of your farm. For years the crop was grown, the higher of actual farm yield and 70 percent of the county yield is used.
  • A farm that has high historic yields, but significant yield variability, might consider ARC-IC. The farm yields during the past five years are used in determining the revenue guarantee for the crop grown. ARC-IC could provide additional protection beyond crop insurance for a poor production year on the farm.

ARC-IC payments are made on 65 percent of all the farm’s base acres, whereas ARC-CO and PLC payments are made on 85 percent of the base acres for an individual crop base. This can be an advantage for using ARC-IC.

For example, assume a farm has 1,000 base acres consisting of 300 corn, 300 wheat and 400 soybeans. If only corn triggers an ARC-CO payment, it will be made on 255 acres (300 x 85 percent) of base. However, if ARC-IC triggers a payment, it is made on 650 acres (1,000 times 65 percent). Of course, the probability and amount of the payment rate must be considered.

“In summary, there are some instances where ARC-IC might work, but proceed with caution,” Swenson says. “If an FSA farm has a significant amount of base in crops that project strong ARC-CO payments, such as corn, or PLC payments, such as canola, ARC-IC will rarely be the optimal choice.”

A decision aid to evaluate ARC-IC is available at: http://www.ag.ndsu.edu/farmmanagement/farm-bill.

NDSU Agriculture Communication – Jan. 26, 2015

Source:Andy Swenson, (701) 231-7379, andrew.swenson@ndsu.edu
Editor:Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu
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