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Economist's Angle: Breaking Down the Crop Year 2020 Soybean Safety Net

12/02/2021 | 04:42pm EST
Economist's Angle: Breaking Down the Crop Year 2020 Soybean Safety Net

Dec 02, 2021

By Scott Gerlt • ASA Economist

The federal farm safety net for soybean producers is provided by the farm bill and crop insurance. These standing programs are designed to protect against different adverse conditions. While the 2020 crop might seem like old news as the 2021 harvest is wrapping up, key farm bill program payments are calculated and paid about one year after harvest. As a result, the full picture of the 2020 program outcomes is emerging. This Economist's Angle breaks down the location and types of farm bill and insurance payments for soybeans for the 2020 crop.

Safety net program calculations are dependent on yield and market conditions, so background about the 2020 crop is important. In the spring of 2020, 83.4 million acres of soybeans were planted while 1.5 million were prevented from being planted. About two-thirds of the prevented plantings were in North and South Dakota due to wet conditions. While the national prevented plantings were down from the high levels in 2019, they were still well above a typical year. The national yield was 51.0 bushels per harvested acre, which was the third highest in history. Soybean prices had been depressed for several years, but starting in July 2020, prices began to rally, going from less than $9.00 on the futures market to over $16.00 per bushel. Unfortunately, the timing of the rally resulted in producers often being unable to fully capitalize on it. The national marketing year average price received by farmers ended up at $10.80 for 2020/21, up from $8.57 the previous marketing year but much less than the market peak.

The farm bill provides an annual option for producers to choose between Price Loss Coverage (PLC) and Agriculture Risk Coverage (ARC)[1] starting in 2020. PLC makes payments based upon historical plantings (base acres) and yields when the national marketing year average price fall below $8.40 for soybeans. Given prices were unlikely to do this in 2020, only 14% of soybean base acres were enrolled in PLC that year. As the annual average price ended up at $10.80-well above the $8.40 trigger level-PLC did not end up making payments for the 2020 crop.

The rest of the soybean base acres were enrolled in ARC. This program makes payments if current year county revenues for the crop fall below a county benchmark. The benchmark is the product of 86%, a price based upon the national average from the past five years and a yield based upon the county average from the past five years. Everyone within the county receives the same payment rate for the crop and the rate cannot exceed 10% of the benchmark. Figure 1 shows the county rates for soybeans. In counties where irrigated and non-irrigated base acres were broken out, the average was taken to display in the figure. Since prices in 2020 were above the previous years, it would take a drop in yields in the county to trigger an ARC payment. Of the 2,630 county/irrigation combinations for soybeans, 2,528 (96.1%) did not trigger ARC payments. Fifty-eight (2.2%) received the maximum payment rate of 10% of the benchmark and 44 (1.7%) received an ARC payment at less than the maximum level. The relatively strong yields across the country with an increase in prices meant that only adverse local conditions were triggering ARC payments.

Figure 1: Average soybean ARC payment rate for crop year 2020

As previously mentioned, crop insurance also provides a safety net, albeit against a different type of risk. While the farm bill tends to help with longer-run downturns and be more focused on prices, crop insurance focuses on short-term losses but not specifically on prices. Crop insurance for soybeans only provides protection between planting and harvest. Figure 2 shows the reasons for losses in the 2020 soybean crop that spurred indemnity payments. The largest cause of loss was excess moisture. Almost half of the excess moisture-related indemnities went to North Dakota and South Dakota. The next-largest category was drought. Iowa had the most indemnities in this category and received about a fourth of the total for the category. Most of the rest of the causes were from various other weather-related events.

Figure 2: Crop insurance cause of losses for 2020 soybeans

Figure 3 shows the crop insurance loss ratio for 2020 soybeans. The loss ratio is the ratio of indemnities (crop insurance payouts) divided by total premiums[2] (cost of crop insurance). If the loss ratio is greater than one, more was paid out in losses by insurance companies than was paid in premiums, and vice versa. Compared to ARC payments, many more soybean counties received net benefits under crop insurance. While indemnities in the Corn Belt generally did not exceed premiums, many other states had a good share of counties that did due to local weather conditions. Even so, the national average loss ratio was 0.49, which is significantly less than one due to the broadly favorable growing conditions. The long-term structural focus of ARC versus the short-term liquidity focus of crop insurance led to different local outcomes.

Figure 3: Crop insurance loss ratio for 2020 soybeans

In summary, the farm safety net is intended to help provide financial safety to soybean producers. Given an increasing price and broadly favorable growing conditions in 2020, the safety net did not provide much support, as PLC did not make soybean payments and over 96% of ARC county/irrigation combinations also did not trigger payments. However, local weather conditions did create losses for some producers that were more likely to be covered under crop insurance. Continued prices above early 2020 levels and good yields indicate that the programs may yield similar outcomes for the 2021 crop.

[1] ARC payments can be calculated using farm or county numbers. Almost all participation is at the county level, so references to ARC here are specifically for the county program. Additionally, another program based upon loan rates is available to soybean producers but is unlikely to pay given program parameters. As a result, it is not discussed here.

[2] This includes the producer paid and subsidized portion of the premium.

Disclaimer

ASA - American Soybean Association published this content on 02 December 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 02 December 2021 21:41:02 UTC.


ę Publicnow 2021
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