What Will the Reference Price Be in the New Farm Bill?
The 2014 Farm Bill added Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC) to give farmers additional risk management. Both programs use a reference price. The 2014 farm bill had a static reference price that was fixed for all five years of the act. The 2018 farm bill added Effective Reference Price (ERP).
This allowed the reference price to float upward if 85% of Olympic average of the midyear average prices (MYA) was high enough. The ERP was the greater of the fixed reference price, or the Olympic average price, with a maximum of 115% of the fixed reference price.
For example, the current corn reference price is $3.70 and 115% of that is $4.26. So the final ERP for any year could range from $3.70 to $4.26. Over the past five years, the reference price for most major crops has remained fixed at the reference price.
However, Olympic average MYA prices have started to increase enough to bump up the ERP. The Olympic average price is determined by removing the highest and the lowest price of the last five MYA prices and taking the average of the three remaining.
The Congressional Budget Office (CBO) estimates corn will hit the $4.26 ERP for 2025 to 2027 crops, maybe longer depending on the MYA prices for the next few years.
What's To Come
Based on the current trend for corn’s MYA price in the 2023 crop year, it’s likely the benchmark price for the 2025 crop will be almost exactly equal to the benchmark price for the 2014 crop year, which was $5.29.
I’m estimating a $5.16 benchmark price for the 2025 crop year (based on the current USDA 2023/24 MYA estimate). This will lead to very healthy ARC payments for 2025 to 2027 if CBO’s estimates of $4.05 to $4.10 MYA prices for those years hold true.
The 2018 farm bill also added the ability for farmers to switch between ARC and PLC each year. This benefit allows the farmer to maximize the payment based on price and yield trends. It’s likely ARC payments for 2025 to 2027 will be higher than PLC payments and in some cases much higher, at least for corn and soybeans.
This assumption is predicated on ARC and PLC remaining in the new farm bill, which currently appear to be part of the future.
