Farm Credit Administration 1 3/5/2018

 Economics Report 

Farm Credit Administration 

Office of Regulatory Policy 

Agricultural and Economic Policy Team

March 5, 2018

Price Triggers for Farm Programs

Summary

Farm bill deliberations in 2018 may

leave farm programs largely intact for 

crop years 2019 and beyond. If so, 

reference prices, including a new one 

for seed cotton, will continue to 

provide some support for producers. 

Farm payments are made under 

either the Agriculture Risk Coverage 

(ARC) program or the Price Loss 

Coverage (PLC) program, depending 

on which program each farmer

selected in 2015. Under PLC, a 

payment is issued if the seasonaverage farm price falls below the 

reference price. 

Under ARC, the reference price 

serves as a minimum price in the 

calculation of a revenue guarantee. 

The price portion of the guarantee 

equals 86 percent of the five-year 

rolling average price (excluding the 

high and low years, with the 

reference price replacing any annual 

price that is lower than it). 

For each of the major program crops 

in 2018, the PLC price trigger 

(reference price) is greater than the 

price portion of the ARC revenue 

trigger. However, PLC uses historical 

yields (not current yields as in ARC), 

which can lower the payment

amount. 

Reference prices are important 

because, across the seven crops 

considered in this report, annual farm 

prices since the 2000 crop year have 

been lower than today’s reference 

prices for these crops two-thirds of 

the time. 

Author 

Dennis A. Shields, Senior Economist, 

(703) 883-4056 

Farm programs are designed to assist farmers when crop prices drop below 

trigger levels. Program payments vary inversely with season-average farm 

prices, declining when the prices go up and increasing when they go down. 

For crop years 2014 to 2018, payments are made under either Agriculture 

Risk Coverage (ARC) or Price Loss Coverage (PLC), depending on the 

program farmers selected in 2015. 

Congressional debate on reauthorizing commodity programs is pending. 

Many policy observers expect that farm programs will be largely unchanged 

in the next farm bill and farmers will be able to reselect their program. If 

so, the current reference prices used in farm programs could determine 

when farm payments are triggered for the foreseeable future. 

To examine the program trigger levels, this report compares current 

reference prices with historical and projected farm prices.

Reference prices and program payment triggers 

The 2014 farm bill established reference prices for crop years 2014 through 

2018. Selected crops are in table 1 (cotton was added this year). 

Under PLC, a payment is issued if the season-average farm price falls 

below the reference price. In other words, the reference price serves as 

the program trigger.

Under ARC, the reference price serves as a minimum in the revenue 

guarantee, with the price portion equal to 86 percent of the five-year 

rolling average price (excluding the high and low years, with the 

reference price replacing any annual price that is lower than it). For 

ARC, the reference price is just one component of the trigger.

Table 1. Season-average farm prices and program triggers for 2018 

Crop

Price 

2018/19 

Forecast

PLC 

Reference 

Price

ARC 

Price Portion of Trigger

86% x 5-year avg.

(excludes high and low; 

reference is minimum)

Corn, $/bu. 3.40 3.70 3.18

Soybeans, $/bu. 9.25 8.40 8.28

Wheat, $/bu. 4.70 5.50 4.87

Sorghum, $/bu. 3.30 3.95 3.42

Seed cotton, $/lb. 0.3177 0.3670 0.3156

L.G. rice, $/cwt 11.20 14.00 12.04

Peanuts, $/lb. Not avail. 0.2675 0.2301

Sources: Farm prices from USDA; for cotton, Univ. of Georgia and author. Reference

prices from 2014 farm bill; for seed cotton, Bipartisan Budget Act of 2018. 
 

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Because the ARC trigger also depends on yields, ARC payments are less likely than PLC payments to 

be issued when the farm price falls below the reference price. An advantage of ARC is that it uses 

current yields rather than historical yields, which can result in a larger payment. Because of ARC and 

PLC program design, plus payment and income limits, farmers do not receive a penny-for-penny 

reimbursement under either program when the farm price drops.

Price gap to generate Price Loss Coverage payments for most 2018 crops

The gap between the season-average farm price and reference price approximates the price protection 

afforded to a program crop. In the case of the 2018 corn crop, the reference price is $3.70 per bushel 

and USDA’s price forecast is $3.40 (see far left panel of figure 1). If the forecast is realized, the simple

PLC payment rate would be 30 cents per bushel ($3.70 minus $3.40) before accounting for other 

factors that reduce the total payment (e.g., 85 percent payment factor on base acreage). If the actual 

farm price turns out to be at least as high as the reference price, the gap is zero, so the simple rate 

would be zero. For ARC in 2018, the price portion of the revenue trigger is $3.18 per bushel (table 1). 

(Note that the ARC revenue trigger also depends on county yields.) 

In contrast to a relatively small prospective price gap for 2018 corn, larger PLC per-bushel rates are 

projected for wheat (80 cents) and sorghum (65 cents) because farm prices are significantly lower 

than their respective reference prices. Soybeans are not projected to receive a PLC payment because 

the farm price is above the reference price. 

For 2019 crops and beyond, simple PLC payment rates for crops would be similar to those generated 

for the 2018 crop if prices move sideways and the farm bill is reauthorized in 2018 with little change 

to farm programs. If a crop’s annual price remains below its reference price, the price portion of the 

ARC guarantee stabilizes at 86 percent of the reference price (in the rolling average calculation, the 

reference price replaces any annual price that is lower than the reference price). If farm prices are 

above the reference price level, the price portion of the ARC revenue guarantee will be higher because 

these higher prices are incorporated into the guarantee. 

Figure 1 also illustrates how reference prices protect farmers from extremely poor market conditions. 

Prices during the early 2000s were significantly lower than today, as shown by the orange historical 

price lines running well below the blue reference price lines. At these very low levels, large PLC 

payments to farmers would be generated, subject to payment limits and other factors.

Figure 1. Farm prices and the 2018 reference prices for corn, soybeans, wheat and sorghum

Sources: Farm prices (actual and forecast) from USDA; for cotton, Univ. of Georgia and author. Reference prices 

from 2014 farm bill; for seed cotton, Bipartisan Budget Act of 2018. 

Note: Orange line = the actual or forecast farm price divided by the 2018 reference price times 100. 
 

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Reference prices to trigger support for cotton, rice, and peanuts 

Farm prices are likely low enough to generate program payments for 2018 crops of seed cotton

(unginned upland cotton, both lint and seed), long grain rice, and peanuts. As shown in figure 2, the 

gap between the reference price and expected farm price is 13 percent for seed cotton (calculated by 

subtracting the price index of 87 from 100). The gap for long grain rice is 20 percent, and for peanuts, 

it’s 23 percent (estimate is for 2017 peanut crop; 2018 estimate is not available). 

If current reference prices had been in place since the 2000 crop, PLC payments would have been 

triggered approximately 78 percent of the time for seed cotton and 83 percent of the time for both 

long grain rice and peanuts. To the extent that farmers plant a crop in proportion to its base (historical 

planting), PLC payments in the coming years will make up at least a portion of any price shortfall for 

each crop.

Figure 2. Farm prices and the 2018 reference prices for seed cotton, rice, and peanuts

Sources: Farm prices (actual and forecast) from USDA; for cotton, Univ. of Georgia and author. Reference prices 

from 2014 farm bill; for seed cotton, Bipartisan Budget Act of 2018. 

Notes: Orange line = the actual or forecast farm price divided by the 2018 reference price times 100. 

Conclusion

Farm bill deliberations in 2018 may leave farm programs largely intact for crop years 2019 and 

beyond. If so, producers will benefit because current reference prices, including a new one for seed 

cotton, will continue to provide them with some support. 

Reference prices are important because, across the seven crops considered in this report, annual farm 

prices since the 2000 crop year have been lower than the reference prices for these crops two-thirds 

of the time.