Should you reallocate bases and update program yields?
Although the 2014 farm bill allows producers to reallocate crop bases and update program yields, everyone may not be better off making these changes.
The decision to update program yields is straightforward, according to North Dakota State University Extension Service farm management specialist Dwight Aakre.
“Higher yields are better than lower yields,” he says.
Program yields will be used as part of the calculation to determine Price LossCoverage (PLC) payments for those crops enrolled in the PLC program.
“It is very simple: A higher yield results in a larger payment,” Aakre says. “It doesn’t change the probability of receiving a payment, but it increases the payment if the national average price falls below the reference price, triggering a PLC payment. There is no reason not to update program yields by individual crop when the 2008 through 2012 average yield on your farm is at least 10 percent higher than your 2013 counter-cyclical yield. The updated yield is 90 percent of the average yield in 2008-2012.”
Reallocating program crop bases is a more difficult decision to make. In fact, it may turn out to be the most important decision with the new farm program, Aakre believes.
Base acres are used in the calculation of payments for PLC as well as the county and farm options with the Agricultural Risk Coverage (ARC) programs. More importantly, payments are determined on base acres exclusively. Planted acres are used only with the ARC-farm option to calculate the payment rate. This rate then is applied to base acres to determine the total payment.
One assumption is that having crop bases be closely aligned with the more current crop mix on the farm unit is preferable. Reallocating bases on the basis of the percentage of covered commodities planted from 2009 through 2012 would accomplish this. For those who view the farm program as a safety net for current farm operations, this may be the preferred choice. However, your crop rotation during the life of this farm bill may change from what was planted in 2009-2012.
In the heart of the Corn Belt, this is not a big issue because that region has had a two-crop rotation for years. However, on the northern and western fringes of the Corn Belt, a wide variety of covered commodities has been grown in the past and likely will continue to be grown in the future. Acreage of corn and soybeans has increased significantly during the past few years in this region, largely due to price leadership by these two commodities. Producers have no assurance that this will continue during the next few years, though.
Because base acres, not planted acres, are used to determine the payments, another way to view this decision is as a separate revenue source, rather than a safety net, Aakre says.
One revenue source is market income from farm production, and another revenue source is potential farm program payments from program crop bases. These are separate decisions that depend on what one’s expectation for crop prices for the next few years may be. While planting the crops with the strongest market price outlook almost always is preferable, having crop bases with the weakest market price outlook may be preferable.
“This will not be an easy decision for many,” Aakre says. “Everyone needs to make his or her base reallocation decision on a farm-by-farm basis. Just because your neighbor is making a certain election doesn’t mean you should do the same.” F