Price Loss Coverage (PLC) is a crucial safety net within the U.S. farm safety net programs designed to help farmers manage the financial risks associated with fluctuating commodity prices. It provides direct payments to producers when the market price of a covered crop falls below a government-established reference price. This coverage helps stabilize farm income during periods of low commodity prices, ensuring farmers can maintain operations despite market volatility.
Crops Covered by PLC
PLC primarily targets certain staple crops such as wheat, corn, soybeans, cotton, and rice. Unlike insurance that covers yield losses, PLC focuses exclusively on price declines. When the national average market price for a covered commodity drops below its reference price during the marketing year, eligible producers receive payments to offset the difference, calculated on a percentage of their base acreage and historical yields.
How Price Loss Coverage Works: A Real-World Example
To better understand how Price Loss Coverage works, consider the case of a corn farmer in Iowa during the 2019 marketing year. The reference price for corn under PLC was set at $3.70 per bushel. However, due to market conditions influenced by global trade tensions and increased production, the average market price for corn that year dropped to approximately $3.60 per bushel.
Because the market price was below the reference price, the farmer became eligible for PLC payments. If this farmer had a base acreage of 100 acres and a historical yield of 150 bushels per acre, the PLC payment would be calculated on the difference of $0.10 per bushel multiplied by 85% of the base acreage and the yield.
Here's the simplified calculation:
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Payment rate: $3.70 (reference price) - $3.60 (market price) = $0.10 per bushel
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Payment acres: 100 acres × 85% = 85 acres
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Total bushels for payment: 85 acres × 150 bushels/acre = 12,750 bushels
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PLC payment: 12,750 bushels × $0.10 = $1,275
This $1,275 payment provided the farmer with some financial relief by partially offsetting the losses incurred due to lower corn prices, helping to cover operational costs or invest in the next planting season.
Key Features of PLC
It's important to note that PLC payments are based on historical base acres and yields, not the current year’s production. This mechanism offers predictability for farmers planning their finances. However, because PLC only activates when prices fall below the reference level, it doesn't provide any benefit if market prices remain stable or rise.
Enrollment and Risk Management
Farmers interested in utilizing Price Loss Coverage must enroll during the Farm Bill signup periods and maintain compliance with program rules. PLC is one of several farm programs available, and producers often evaluate it alongside other tools like Agricultural Risk Coverage (ARC) or crop insurance to build a comprehensive risk management strategy.
Conclusion
In summary, Price Loss Coverage serves as a targeted financial tool to protect farmers from significant commodity price declines. By providing payments tied to price shortfalls, PLC helps stabilize farm revenue and supports the continuity of agricultural operations amid unpredictable market conditions. The 2019 corn example illustrates how even a modest price drop can trigger valuable payments, highlighting the importance of PLC in a farmer’s risk management toolkit.
