PLC/ARC Refresher

By now you’ve probably read in the ag news media or talked with some other farmers about the potential for a cottonseed PLC/ARC program. If you haven’t heard about this, click here to read a quick story from GFB about it.

Hopefully everyone is familiar with the way the PLC and ARC programs work per the 2014 Farm Bill. If not, here is a quick refresher. Since there are no details yet on how a cottonseed program would work, let’s use peanuts as an example of how the PLC and ARC program calculations are done.

PLC (Price Loss Coverage) is very similar to the old Counter-Cyclical Program from the 2002 and 2008 Farm Bills. Replace “target” price from the old program with the new “reference” price and you basically have the same program. PLC payments are triggered when the marketing year average (MYA) price for a commodity falls below the reference price. For peanuts the reference price is $535 per ton. Let’s assume the MYA for 2015 will be $400 per ton. The PLC payment rate is the reference price minus the MYA, but if the MYA price falls below the loan rate ($355 for peanuts) then the loan rate is used to calculate the maximum PLC. To find the PLC payment you multiply the PLC rate times 85% of base acres times your PLC yield per acre. Assuming a 1.5 ton PLC yield, then the calculation is as follows:

PLC Rate = $535-$400 = $135;

PLC Payment = $135 x 85% x 1.5 tons/acre = $172.13 per acre

ARC (Agriculture Risk Coverage) is a little more complicated and can be referred to as a “shallow loss” program since it covers a 10% revenue band from 86% down to 76% of expected revenue. ARC is also different in that it is an area program, with the area being defined as a single county. Therefore payments may be triggered on your farm even though you had a good year, and vice-versa. The ARC benchmark revenue is calculated as your county’s 5 year olympic average yield (drop highest and lowest) multiplied by the the 5 year MYA price. The “ARC guarantee” is 86% of benchmark revenue. The ARC payment rate is calculated as the ARC guarantee minus the actual county revenue (MYA price x county yield). The ARC payment rate is capped at 10% (86%-76% band) of benchmark revenue. The ARC payment is the ARC payment rate times 85% of base acres. Using the same peanut data from above, an ARC payment would be as follows (with the 5 year county yield and the actual county yield being 1.5 tons):

Benchmark Revenue = $535 x 1.5 tons/acre = $802.50 per acre

ARC Guarantee = $802.50 x 86% = $690.15 per acre

ARC Max Payment Rate = $802.50 x 10% = $80.25 per acre

Actual Revenue = $400 x 1.5 tons = $600 per acre

ARC Payment Rate = Benchmark Rev – Actual Rev = $802.50 – $600 = $202.50

Since $202.50 > $80.25 (max pmt rate), the $80.25 per acre is the ARC payment rate.

ARC Payment = ARC Pmt Rate x 85% base = $80.25 x 85% base = $68.21 per acre

Again, these are made up yield and MYA prices. The above numbers are meant to just show how the PLC and ARC programs work.

Photo blog: GCC Congressional Staff Tour

On October 12-14, 2015, the Georgia Cotton Commission (GCC) hosted nine congressional staffers from Washington, DC. Both U.S. Senate offices of Isakson and Perdue were represented as well as staffers from the offices of Congressmen Austin Scott, Rick Allen, Sanford Bishop, Buddy Carter, Lynn Westmoreland, and Jody Hice. The tour allowed each staffer to get hands-on experience with agricultural issues that they deal with on a daily basis. The tour also allowed for direct interaction with Georgia farmers and agricultural industry professionals.

Below are some photos from the tour. Visit our Facebook page (https://www.facebook.com/GeorgiaCottonCommission) for a full photo album of the event.

Scott Gunn tours the group through Swift Spinning in Columbus.

Ronnie Lee explains cotton harvesting.

Ronnie Lee’s 3 6-row cotton pickers make fast work of a field. Each staffer also got to ride along to experience harvesting cotton.

Bill Brim of Lewis Taylor Farms discusses the vegetable industry with the staffers.

Andy Borem of Chickasha of Georgia explains the cottonseed industry.

Payne Hughes walks the group through Thrush Aircraft in Albany. Thrush manufactures agricultural planes.

The staff tour participants visited with UGA scientists at the Stripling Irrigation Research Park in Camilla

Participants met with Kent Fountain at Southeastern Gin and Peanut

GCC board member Steven Meeks (center) discusses tobacco farming

Foreign Cotton Policies Finally Getting Attention

Much has been written about the cotton market this year with its slight ups and what seems like big downs. While many growers and cotton industry professionals understand how foreign government policies are affecting the cotton market, there hasn’t been much reporting on these topics this year. While we have written on this subject several times in this space, we will again re-visit the effects that foreign (non-US) government policies have on the world cotton market.

Recently Dr. Gary Adams, President of the National Cotton Council (NCC) testified before the House Ag Committee to discuss how foreign subsidies harm American farmers. Dr. Adams cited a recent report by the International Cotton Advisory Committee that direct assistance to cotton farmers across all countries was $0.26 per pound but only a $0.07 per pound average support for US cotton production. That means that foreign governments subsidize cotton production at a rate almost four times higher than the US does. Much of that $0.07 per pound US assistance came in the form of the old direct payment program, which was roughly $0.06 per pound for US cotton producers. Since direct payments were “politically toxic” they were not supported or renewed in the 2014 Farm Bill (even though they were WTO compliant). Therefore we can assume that for the 2015 season and thereafter, the US cotton program provides about $0.01 per pound direct assistance to its growers. We could easily argue that there is $0.00 direct assistance since cotton is on a pure insurance basis of support. Crop insurance premiums are paid for by producers and therefore is not direct assistance.

Other countries such as China and India do provide very high market distorting assistance to their producers. China instituted a cotton policy in 2011 that roughly equated to $1.47 per pound guarantee for its domestic producers. The Chinese government basically bought and stored Chinese farmers cotton at $1.47. This was different than the old counter-cyclical program in the US in that the US program only paid on 85% of base acres and the historical farm yield, not what was planted that year. In 2014 China instituted a new target price style policy with a target price set around $1.40 for growers in western part of China. To the best of our knowledge, the Chinese program now pays a straight difference on $1.40 and the internal market price of cotton in China. This means that the government payment to the grower incentivises more production since the more cotton a Chinese grower takes to the market the more government assistance the grower receives. Again, this is very different from the old counter-cyclical program in the US that paid a deficiency from a target price of about $0.72 per pound on 85% of base acres (historical acreage held by producer) and historical yield. US producers had no incentive to plant more cotton when market prices were low because the program did not pay on that year’s planted acreage.

India instituted a Minimum Support Price (MSP) program that equates to roughly $0.70 – $0.80 per pound for the Indian grower. The MSP program allows the Indian government to buy cotton from Indian farmers when the price Indian farmers receive falls below the MSP. Therefore, much like the Chinese program, Indian farmers do not respond to low market prices by planting less cotton. They plant the same amount or even more because they know the government will buy their cotton at the MSP.

We mention these two foreign cotton programs to hopefully shed light on the fact that it is absurd for any foreign government to continue to point to US cotton policy as trade distorting or harmful to farmers around the world. Quite to opposite is the case now as it could easily be argued that all cotton farmers around the world are suffering because of the distorting policy instituted in China and India. Senator Johnny Isakson addressed this issue this past January when he questioned USTR Michael Froman about the Chinese cotton program. As the US continues to be a partner in the World Trade Organization (WTO), the cotton industry must continue to re-iterate that our programs work and allow producers to respond to market situations. Because of the WTO Brazil ruling, the US cotton industry took a new course in the 2014 Farm Bill by going with a pure insurance cotton program. Insurance products are bought by producers on a farm-by-farm basis and allow the farmer to be very flexible in their planting decisions. Insurance products are not direct payments to the producers nor are they deficiency payments (the issue in the WTO Brazil case) and therefore cannot be argued as being market or trade distorting. The US never had (despite the WTO Brazil ruling) or now has a cotton policy that is trade distorting or harmful to producers outside of the US.