How much should PLC reference prices be raised? – Part one
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EmailPart 1: Considering a 10% increase to reference prices in Farm Bill’s Price Loss Coverage (PLC) Program.
The Farm Bill has often been a source of support to farms in managing risk. For commodity growers, that aid has centered on reducing risks to production and market prices. Market volatility and tightening margins have made price risk a major concern in recent years. As discussions on a new Farm Bill continue, many calls are being made to reform the Price Loss Coverage (PLC) program to offer more aid. Specifically, several have proposed raising reference prices that act as a trigger for support payments. The question is, how far should reference prices be raised?
Current reference prices were set in the 2014 Farm Bill. These statutory prices provide support when price shocks were felt during “relatively stable” marketing periods. For a support payment to trigger, the season-average price for a production year would need to be lower than reference prices. Current reference prices are $3.70 for corn, $8.40 for soybeans, and $5.50 for wheat. The 2018 Farm Bill kept reference prices the same but introduced an escalator clause. The clause allows reference prices to increase based on a crop’s Olympic average from the past five years. If the Olympic average is higher than the reference prices, then reference prices increase to match. In an Olympic average, both highest and lowest values are removed before calculating an average. However, the clause also states that any increase to reference prices is capped at 115%.
Since 2014, statutory reference prices have been a mixed bag of support for different commodities. For corn and wheat, support payments triggered almost every year from 2014-2018. For soybeans, market prices have remained high enough that PLC payments have yet to trigger. For all commodities, support from PLC has been almost non-existent since the 2018 Farm Bill was passed. This is largely due to higher-than-expected market prices in corn, soybeans, and wheat.
To make PLC a viable option in comparison with other support programs (i.e., Agricultural Risk Coverage or ARC), some type of reform is needed. The most common suggestion is to raise reference prices, but the proposed level of increase has varied. Below are two frequent scenarios that have been discussed.
Proposal 1: Raise Reference Prices by 10%:
A reoccurring idea being offered is to increase reference prices by 10%. This would change statutory reference prices to $4.07 for corn, $9.24 for soybeans, and $6.05 for wheat. But would 10% higher prices be enough to trigger support?
USDA’s Economic Research Service (ERS) provides an annual baseline projection on market prices in February. These are 10-year projections outlining expected price trends. Based on current market conditions, they provide an “if no changes occur” type of price forecast. Comparing a 10% increase to projected baselines provides some idea of potential PLC support.
Note: ERS baselines originally placed season-average prices for corn at $4.90 per bushel for 2024/2025. However, season-average estimates for 2023/2024 are expected at $4.91 per bushel. Originally, ERS expected 2023/2024 to be at $5.70. Given the accelerated nature of current market conditions, the chart for corn has been adjusted. The 2024/2025 price now reflects as $4.50, which was projected for 2025/2026. All other prices have been moved forward by one year to be in line with long-term projections.
Figure 2 outlines that a 10% increase in PLC reference prices for soybeans would not yield added support. Additionally, only one year would see PLC’s escalator clause take effect. Season-average prices would need to fall to less than $10.63 per bushel to trigger a PLC payment.
Figure 3 outlines a different story for wheat compared to corn and soybeans. ERS baseline projections expected season-average prices for wheat to be close to original reference prices. An increase of 10% would yield more support for wheat acres. But wheat payouts would be larger based on the effective reference price in 2 out of 3 years. So, while a 10% increase would trigger payments, the effective reference price offers more support.
With the exception of wheat, increasing reference prices by 10% would be unlikely to offer additional price support, especially if baseline projections from USDA’s ERS are realized.
This proposal outlines some of the difficulties that exist by simply raising reference prices. With current market price projections, reference prices must be raised high enough to trigger support. Price must also be high enough to offer more meaningful support compared to the escalator clause.
In part two of this series, we’ll explore adjusting reference prices to be based on cost of production. These increases would be higher than the 10% increase shown here. Will it be enough to trigger payments? Find out in part two: Considering if Price Loss Coverage (PLC) reference prices matched cost of production estimates.
