Understanding ARC-CO as a Shallow Loss Program

This article continues the discussion of ARC-CO. Previous articles in this series were posted on November 25, 2015 and December 9, 2015. They respectively addressed ARC-CO as transition assistance and as a multiple year loss program. This article examines ARC-CO as a shallow loss program.

In contrast to multiple year loss for which no standard definition exists, a shallow loss is commonly defined as a loss that is less than the deductible on individual farm insurance. For example, if individual farm insurance has a 25% deductible, a shallow loss occurs if insurance revenue at harvest is 10% less than the revenue expected prior to planting. To facilitate the flow of this article, the methods and data used in the analysis are discussed in an appendix at the end of the article.

Shallow Losses

Of the 37 crop years in the analysis period, a shallow loss occurred an average of 22 crop years across the 4 crops examined: corn, sorghum, soybeans, and wheat (see Figure 1). The range was 14 to 27 crop years for soybeans and sorghum, respectively.

Except for soybeans, a shallow loss occurred over half the time. The shallow loss per acre as a share of revenue per acre ranged from 4% for soybeans to 10% for sorghum, with an average of 7% for the 4 crops (see Figure 2). The shallow loss for each crop is calculated using the average coverage level purchased by farmers for individual farm insurance for the crop for the 2015 crop year.

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ARC-CO and Shallow Loss

By crop, ARC-CO made an indicated payment in 40% to 60% of the crop years in which a shallow loss occurred (see Figure 1). The average for the 4 crops was 50% (ARC-CO payment an average of 11 years divided by a shallow loss an average of 22 years). For years with a shallow loss, ARC-CO indicated payments averaged 29% of the total per acre shallow loss (see Figure 3). The range was 23% for soybeans to 34% for sorghum and wheat.

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Summary Observations

  • Shallow loss occurred in over hall of the years for the 4 crops, excluding soybeans, analyzed in this article.
  • Shallow loss per acre averaged 7% of crop revenue when shallow loss is defined relative to the average individual farm coverage level purchased for the 2015 crop.
  • The two previous findings likely underscore why farmers and their advocates made shallow loss an issue during the debate over the last two farm bills.
  • Consistent differences existed among the 4 crops examined, with shallow loss more of an issue for sorghum and less of an issue for soybeans.
  • ARC-CO covered between one fifth and one third of the shallow loss that occurred.
  • CAVEAT: While ARC-CO’s estimated coverage share of shallow loss is non-trivial, it is highly likely to be an upper bound. This analysis used the same yield for insurance and ARC-CO, a situation highly unlikely in the real world as insurance and ARC use different methods to determine program yield. Moreover, ARC-CO uses county yield while insurance uses farm yield. These important differences in program yield determination almost certainly reduce the effectiveness of ARC-CO in covering shallow loss.

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