Farm Commodity Programs: An Overview


Background

The first farm bill was the Agricultural Adjustment Act of 1933. Congress declared that its policy in passing the legislation, in part, was to create “balance between the production and consumption of agricultural commodities.” In other words, Congress wanted to ensure that farmers could survive challenging market conditions, such as profit loss due to supply and demand changes between planting and harvest.  Maintaining economic stability for agricultural commodity producers has been a policy goal of every farm bill since 1933, up to and including the Agriculture Improvement Act of 2018. Primary support programs for commodity producers under the current law include the Agricultural Risk Coverage (ARC) program, the Price Loss Coverage (PLC) program, and the Marketing Assistance Loan (MAL) program. However, government programs and funding to aid farmers preexisted even the first farm bill in 1933.

Throughout American history, the federal government has used its legislative power to support agricultural production, and commodity programs are one way that such legislation has provided that support. Depending on how the term “farm commodity program” is defined, programs have existed since the 1700s. From that time until the beginning of the 20th century, federal legislation developed that provided free land to anyone willing to settle and farm it, creating an independent family farm system. Although not targeted specifically at commodities, the net result was an increase in commodity production. During the mid-1800s and continuing through the 1920s, federal farm policy focused primarily on education, research, and some marketing assistance. Legislation during this period created the Cooperative Extension Service and exempted farmer cooperatives from antitrust regulation in an effort to improve farm production and marketing. This legislation helped to improve farm productivity, but farm income remained unstable and often low.

The Great Depression prompted the development of modern agricultural programs – crafted in President Franklin Roosevelt’s New Deal legislation – that were designed to support commodity prices and farm income through the use of supply controls. More specifically, the programs included payments to farmers to keep them from planting, which would, in turn, prevent overproduction. This type of program continued up to the 1996 Farm Bill, when commodity programs began evolving to allow for planting flexibility. Under that new bill, acreage reduction was ended, and farmers could agree by contract to utilize a set number of acres which would be used to determine their payment. Those payments were called production flexibility contract payments.

Declining prices for several years after the 1996 Farm Bill resulted in expensive emergency support legislation, and the 2002 Farm Bill was enacted to avoid those expenses. The most important change to commodity programs in the 2002 Farm Bill was the introduction of direct payments in lieu of flexibility contract payments. Direct payments compensated producers according to rates set in the bill and based on individual producers’ historic acreage and yields. In the 2008 Farm Bill, target prices and loan rates were altered, but the framework of the 2002 Farm Bill was generally preserved. To the contrary, the 2014 Farm Bill – the Agricultural Act of 2014 – made a sweeping change by ending the era of direct payments and launching the PLC and ARC programs. These programs persist in the newest farm bill, the Agriculture Improvement Act of 2018, Pub. L. No. 115-334, 132 Stat. 4490 (2018).

The PLC, ARC, and MAL programs that comprise primary modern farm commodity support are administered by the United States Department of Agriculture (USDA) with most financial transactions handled through the Commodity Credit Corporation (CCC), a federally owned and operated corporation within the USDA. While commodity programs were originally authorized by the Agricultural Adjustment Act of 1938, the Agricultural Act of 1949, and the Commodity Credit Corporation Charter Act of 1948, these statutes are modified by the farm bills, which generally guide commodity programs for six years. If existing legislation expires, the law reverts back to the early statutes. For further text, history, analysis, and background information on past and present United States Farm Bills, please visit our United States Farm Bills page.

Enrollment Options

In a sweeping change, the 2014 Farm Bill eliminated the direct payments authorized in the previous two farm bills and replaced those direct payments with two commodity programs: Price Loss Coverage (PLC) and Agricultural Risk Coverage (ARC). The 2018 Farm Bill continues these programs, which are available as a safety net for producers of certain commodities. The PLC and ARC programs provide income support at levels above where regular crop insurance may apply for farmers facing adverse price or yield conditions. Importantly, producers must choose which program to enroll in on a commodity-by-commodity basis. For example, a producer growing corn and soybeans will separately choose whether to enroll corn in PLC or ARC and whether to enroll soybeans in PLC or ARC. Alternatively, producers may forego enrollment in either PLC or ARC, and instead enroll in an individual coverage program known as ARC-IC. If a producer chooses the ARC-IC program, all commodities on the covered farm are included in ARC-IC, and none may be enrolled in ARC or PLC.

Price Loss Coverage (PLC)

Under the PLC program in the 2018 Farm Bill, producers generally receive payments when the actual price, or effective price, for a commodity falls below its statutorily determined reference price. Both PLC and ARC provide support to producers contingent upon market conditions, and assist producers when earnings are less than anticipated. To provide an extremely oversimplified example for the PLC program, if the reference price for corn is set by statute at $3.70/bushel, and the effective price – also a value determined by statute – is $3.00/bushel, a producer would likely receive a payment to help compensate for the difference. While one may logically deduce that the PLC payment in this simple example would be $0.70/bushel, the computation of a producer’s payment is much more complicated. Importantly, the formula used to determine PLC payments changed in the 2018 bill from what it was in the 2014 bill. Additionally, a notable feature of the PLC program is its use of historical acreage. The number of acres used in the calculating the payment does not necessarily reflect the number of acres of the particular commodity planted in that year, but rather, is determined using historical “patterns of production.” A producer’s PLC payment for crop years 2019 through 2023 could be computed as follows:

  • Calculate the payment rate:
  1. Determine the “effective reference price” (reference price) for the commodity at issue. This value will be the lesser of the following:
    1. 115% of the reference price for the commodity defined in 7 U.S.C. § 9011; OR
    2. The greater of:
      1. The reference price for the commodity defined in 7 U.S.C. § 9011; OR
      2. 85% of the average of the market year average (MYA) price of the covered commodity for each of the most recent 5 crop years, excluding years with the highest and lowest MYA price. MYA prices are published by United States Department of Agriculture (USDA) Office of the Chief Economist in World Agricultural Supply and Demand Estimates reports, available online here.
    3. Determine the “effective price” (effective price) for the commodity at issue. This value will be the higher of the following:
      • The national average market price received by producers during the 12-month marketing year for the commodity; OR
      • The national average loan rate for a marketing assistance loan for the commodity for the crop year.
  • 4.   Subtract the (b) value from the (a) value. This is the payment rate.
    • Determine the payment yield for the commodity in accordance with 7 U.S.C. § 9013. This value is farm-specific and crop-specific.
    • Determine the payment acres – or 85% of base acres – for the commodity in accordance with 7 U.S.C. § 9014.
    • Multiply the values obtained under (1), (2), and (3) – the payment rate, payment yield, and payment acres. The product is the PLC payment for the given commodity.

While determining a PLC payment seems daunting, the Farm Service Agency (FSA) assists producers in navigating the program through standard forms and optional online services.

 

 

Agricultural Risk Coverage – County Option (ARC-CO)

Under the ARC-County (ARC-CO) option, payments are made when the actual revenue for a commodity across a county falls below the revenue benchmark for the county. In contrast to PLC payments, the ARC-CO program uses county yields and prices in calculating producers’ payments, and thus, farm-specific, commodity-specific figures are not required. In simple terms, the revenue benchmark is a value that producers expect to earn, generally on a per acre basis, based upon prices and yields in their county over the last several years. When the revenue actually generated falls below the expected revenue for a county, ARC-CO payments are triggered.

The county benchmark revenue is calculated by multiplying the county benchmark price – which is an average of the MYA price for one unit of the commodity over the last 5 years, excluding the highest and lowest years – by the county benchmark yield. Like the benchmark price, the benchmark yield is an average of county yields over the last 5 years, excluding years with highest and lowest yields. The maximum ARC-CO payment producers can receive is 10% of the benchmark revenue. To determine whether the payment will be 10% of benchmark revenue, or a lower value, the “payment rate” must be determined.

Payment rate under ARC-CO is the difference between 86% of the county benchmark revenue and the actual crop revenue. While this value could be greater than 10% of the benchmark revenue, payments to producers are capped at 10% of the benchmark revenue. The payment rate is then multiplied by 85% of the number of base acres for the commodity, and the product is the ARC-CO payment. If the payment rate is equal to or greater than 10% of the benchmark revenue, then the figure that represents 10% of the benchmark revenue is multiplied by 85% of the number of base acres for the commodity, and the product is the ARC-CO payment.

Agricultural Risk Coverage – Individual Option (ARC-IC)

Historically, less than 1% of acreage covered under PLC, ARC-CO, and ARC-IC have elected the ARC-IC program, so it is treated here briefly. Unlike PLC and ARC-CO, if a producer enrolls in ARC-IC, the producer uses the ARC-IC program for all covered commodities on the farm. ARC-IC operates similarly to ARC-CO, but uses individual farm yields instead of county-level yields to calculate the benchmark revenue for each covered crop in a particular crop year. As with ARC-IC, the maximum payment rate under ARC-CO is 10% of the benchmark revenue. However, the payment rate may be less than the 10% of benchmark revenue cap. Actual revenue for the farm is subtracted from the benchmark revenue, and the difference is the payment rate, capped at 10% of the benchmark revenue. The payment rate is multiplied by 65% of the base acres for the farm, and the product is the ARC-IC payment.

Marketing Assistance Loans (MALs)

Marketing assistance loans (MALs) are short-term, nonrecourse loans to producers which provide them with cash flow at harvest time. Because commodity supply is typically highest at harvest times, prices are typically lowest at harvest times, and thus, producers may wish to store their crop, wait until a later time, and sell the crop when prices have risen. To prevent a total lack of cash flow at harvest time, MALs provide producers with cash at harvest, using the commodity as the security on the loan. Producers are then able to market the commodities throughout the year. At the end of the loan term, producers can forfeit the commodity to USDA and keep the entire MAL payment, or the producer can sell the commodity and repay the loan. These options are referred to as “forfeiture” and “marketing loan gain” (MLG), respectively. Logically, a producer will not choose to forfeit the commodity and keep the MAL payment unless the crop’s value at sale is less than the loan amount. Conversely, a producer will not logically choose to repay the loan unless the amount earned from selling the commodity is greater than the loan repayment amount.

Producers also have the option to receive a loan deficiency payment (LDP). LDPs provide the same benefit to producers as marketing loan gains without the burden of storing the commodities and the paperwork associated with receiving the marketing loan. Producers who agree not to acquire marketing loans are eligible for LDPs. The LDP is calculated as the difference between the loan rate and the alternative repayment rate. Finally, producers may also elect to participate in a commodity certificate exchange. If chosen, a producer will use commodity certificates with dollar values to repay their loans and retain any gain earned from sale of the commodity.

 

Dairy

Dairy farmers are eligible for assistance under several programs authorized in the 2018 farm bill. Perhaps the most well-known of the dairy assistance programs under the 2014 Farm Bill was the Margin Protection Program (MPP). Dairy producers raised concerns during the years that MPP was operable that it was insufficient as a safety net, given falling milk prices and the high premium rates program participants were charged. Congress revised and renamed MPP, and in the 2018 Farm Bill it created the Dairy Margin Coverage (DMC) program in its stead.

DMC operates as the MPP did by providing payments to dairy producers when the margin between the price of milk and the cost of feed falls below a certain level. In other words, if dairy producers’ profit is too low, as measured by the difference between milk prices and feed costs, DMC program payments are triggered. The rates that producers are charged to participate depends on the level of margin protection they desire and the amount of milk they produce. Notably, margin protection levels increased up to $9.50 per hundredweight under DMC.

Other dairy assistance options include the Dairy Forward Pricing Program (DFPP), the Dairy Indemnity Program (DIP), and the Dairy Promotion and Research Program (DPRP), which offer facilitation of contract negotiations between producers and processors, insurance in the case milk needs to be discarded, and generic marketing services, respectively.

Discretionary Spending

Farm bills authorize two types of spending – mandatory and discretionary. While most funding for commodity programs discussed here is mandatory, the farm bill also includes discretionary programs for which funding must be authorized in separate legislation. The majority of discretionary funding in the 2018 farm bill supports programs related to rural development, trade, and research.

Eligibility and Payment Limitations

Under the 2018 Farm Bill, as with previous bills, individuals are eligible for safety net program payments if they are deemed to be “actively engaged in farming” (AEF). The three criteria used to determine whether an individual is actively engaged in farming, as set out in 7 U.S.C. § 1308-1, include (1) the individual makes a significant contribution of labor, management, capital, land, or equipment relative to the total value of the farming operation, (2) the individual’s share of profit and loss is commensurate with their contributions to the operation, and (3) the individual shares in the risk of the operation. The amount of coverage an entity is entitled to depends on its business classification. In sole proprietorships and family operations, every family member who meets AEF criteria is program eligible. In joint operations, every individual who meets the AEF criteria qualifies for program coverage. However, individuals in any business entity are subject to various payment limitations. For example, individuals are limited to $125,000 in ARC or PLC payments for all commodities except for peanuts. Additional limitations and eligibility rules may apply under other safety net programs or business structures.