Limit ARC and PLC Payment Acres to 30 Percent of Base Acres

Background

The Agricultural Act of 2014 (Public Law 113-79) provides support to producers of covered commodities (wheat, oats, barley, corn, grain sorghum, long-grain rice, medium-grain rice, soybeans and other oilseeds, peanuts, chickpeas, dried peas, and lentils) through the Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) programs.

Eligibility under the ARC and PLC programs is determined from a producer's planting history. Only producers who have established base acres (that is, who have shown a history of planting covered commodities on their farms) with the Department of Agriculture under statutory authority granted by previous farm bills may participate. Growers with base acres for covered commodities need not plant a crop to receive payments.

The ARC program pays farmers when the revenues in a crop year fall short of guaranteed amounts at either the county level (ARC-County, or ARC-CO—accounting for most coverage) or the individual farm level (ARC-Individual Coverage, or ARC-IC). (A crop year begins in the month that the crop is first harvested and ends 12 months later. For example, the corn crop year begins September 1 and ends the following August 31.) The PLC program pays farmers when the national average market price for a covered commodity in a given crop year falls below a reference price specified in the law.

When a payment for a crop is triggered, total payments are calculated by multiplying the payment per acre by a producer's payment acres for that crop. For ARC-CO and PLC, the number of payment acres equals 85 percent of base acres; for ARC-IC, it is 65 percent of base acres. Fiscal year 2017 payments for ARC-CO and PLC were $2.4 billion and $2.9 billion, respectively. The Congressional Budget Office estimates that ARC-IC payments in the same year were $36 million, but data from USDA do not distinguish ARC-CO payments from ARC-IC payments.

Option

Beginning with the 2024 crop year, this option would limit payment acres for ARC-CO and for PLC to 30 percent of base acres and would make a comparable cut to ARC-IC (to 23 percent of base acres). This option reflects the baseline assumption that the programs (which are scheduled to expire with the beginning of the 2019 crop year) are extended as they exist in the 2014 farm bill, and that the first contracts under that extension would run through crop year 2023. Producers are assumed to enter into contracts under the current system covering the period through the 2023 crop year, so CBO assumes that the option's new limits on payment acres would take effect in crop year 2024.

Effects on the Budget

Savings would begin in fiscal year 2026, when ARC and PLC payments for crop year 2024 would be made. Any payments come well after crop harvest for two reasons: First, the crop year for each commodity must be complete before the season-average price is known. Second, the 2014 farm bill requires payments to be made beginning October 1 after the end of the applicable crop year, which pushes them into the next fiscal year. Total savings over the 2026-2028 period would be $10.0 billion, CBO estimates. Savings would be proportional—reducing payment acres by an additional 10 percent would increase the savings by 10 percent.

This estimate relies upon CBO's estimates for crop price and yield, which are forecast 8 to 10 years into the future. CBO takes uncertainty into account in various ways, such as projecting the chances that prices of covered crops would be below certain thresholds. Nonetheless, given that agricultural markets can vary because of weather, annual planting decisions, and changes in consumption and trade patterns, actual savings from implementing this option could be higher or lower than projected.

Other Effects

One argument in favor of this option is that it would limit the competitive advantage that farmers with base acres have over farmers without base acres. Those advantages include the payments themselves, as well as decreased risk and the expectation of a more stable income.

The option might also affect the production and prices of some crops. Factors other than federal payments—such as consumers' demand, climate, infrastructure, and producers' investment in specialized equipment—generally have the greatest impact on producers' planting choices. However, because only covered commodities are eligible for ARC and PLC support, the availability of those payments tends to encourage farmers to plant crops they might not otherwise plant. Prices for fruits and vegetables (which are not covered by the ARC or PLC programs) may be higher than they would be without those programs. Program rules require a reduction in payments if a farmer plants fruits, vegetables, or wild rice, which tends to reduce the supply of such crops. Those effects might be reduced if the programs were cut back.

An argument against this option is that farming is an inherently risky enterprise. Many growers favor the income stability fostered by federal programs.