/ACRE_agri-pulse

ACRE: Far from being a ‘no-brainer’

By Sara Wyant © Copyright Agri-Pulse Communications, Inc. This copyrighted article is reprinted by Arkansas Farm Bureau with permission from Agri-Pulse Communications, Inc. Agri-Pulse is the nation's leading farm and rural policy e-newsletter. Each weekly issue is filled with news and analysis designed to help you understand implications of the new farm bill, environmental regulations, international trade issues, upcoming political races, and much more.

For a four-week free trial subscription, go to www.Agri-Pulse.com

Billed as one of the most far-reaching new reforms in the 2008 Farm Bill, the new Average Crop Revenue Election (ACRE) program is getting a lot of attention for what it potentially will or will not deliver. As the farm bill was nearing the end zone, USDA officials raised concerns about the program, citing the potential for large enrollment and billions in budget exposure. However, Kansas State Extension Ag Economist Art Barnaby, who has been “crunching” the numbers on how the new program might work, says that participation is far from being a “no brainer” because farmers must give up 20% of their fixed direct payment for ACRE that may pay or may not pay.

Barnaby has analyzed the potential payouts for all major crops under ACRE and finds mixed results. Much depends on market prices.

The concept behind this new program is simple: pay farmers when revenues drop below normal revenue levels—rather than a program, like direct payments, that dishes out dollars whether or not there has been a yield or price drop.

It’s the formula for implementing the ACRE program, starting in 2009, that has some farmers excited and deficit hawks nervous. It pegs the subsidies to current, record-high prices for grain, meaning farmers could get paid if prices and/or yields fall back to their historical levels. And prices could spike even higher, if there is a short grain crop this year. But the program also requires farmers to accept several other concessions and limitations.

In order to enroll in ACRE, growers must agree to accept a 20% reduction in direct payments and a 30% reduction in the loan rate. The $40,000 limitation on direct payments is reduced by the amount of the direct payment reduction. The combined limit on ACRE and counter-cyclical payments equals $65,000 plus the amount of the direct payment reduction. Once a grower has signed up, he or she must stay enrolled for the life of the program (2009-2012). There is also an ACRE maximum payment limit of 25% of the expected state revenue, Barnaby points out.

“So if a farmer’s loss is bigger than the state level loss then the farmer must absorb that loss. For example, a farmer could suffer a 100% loss while the state loss is capped at 25%. It is also possible for farmers to suffer revenue losses due to low yields and not trigger the state level ACRE payments. That is the exact case for 2007 central Kansas wheat losses that would not have

triggered ACRE payments because of higher yields in Northwest Kansas combined with higher prices.”

“The ACRE program will depend on the market, but is far more likely to generate payments than the counter cyclical or market loan payments on corn, wheat, soybeans and grain sorghum,” says Barnaby. “However, farmers would only want to change to ACRE and give up 20% of their direct payment if the strike price in ACRE is higher than the expected new crop price, i.e. an in-themoney put on expected state revenue, he explains.

For an example, take a look at ACRE participation for a corn grower in Iowa. In 2007, his planted yield was 166.8 bu./acre. The Olympic average yield (5 year avg. minus high and low years) was almost the same: 166.1 bu/acre. If the program would have been operating then, two triggers would have to be met before payments could be issued: A state trigger and a farm trigger.

Under the state trigger, the state ACRE guarantee is calculated by figuring 90% of the Olympic average planted yield x the ACRE Program Guarantee price. In this case, 90% x 166.1 bu. X $2.52.

The total would be $418.57. This number must exceed the Actual State Planted Yield 166.8 bu. x the higher of the current Marketing Year Average (MYA) price or 70% of the national loan rate ($1.95). Or the 2007 state yield of 166.8 bu x the 2007 MYA price of $4.00 = $667.20 In this case, the state trigger test was not met and no ACRE payments would be made.

But let’s say the situation changes in 2009, the first year growers can participate. In this case, corn prices are higher and the Olympic average yield is 160 bu./acre (the law does not allow greater than 10% swings from year to year). The ACRE Guarantee price is $6.00. The actual state planted yield increases to 165 bu. but the national average price falls to $3.90. In this example, 90% x 160 bu. x $6.00 = $864, which exceeds 165 x $3.90 = $643.50--- so the state trigger is met. The calculated net payment is $864 - $643.50 = $220.50, however this payment exceeds the 25% state cap, so the net payment is $216 (25% x $864).

Now the grower must meet the farm trigger, which requires that the farm’s Olympic average yield x the ACRE Program Guarantee Price, plus the Producer-paid Crop Insurance Premium to exceed the actual farm yield times the higher of the National average market prices or 70% of the national loan rate.

In this case, 150 bu. x 6.00 = $900, plus the producer-paid crop insurance premium of $40 exceeds the actual farm yield of 170 bu./ acre x $3.90 = 663. So, the farm trigger is also met.

Payments would be based on 83.3% of planted acres ---from 2009 to 2011 and then back to 85% for 2012.

But the complexity doesn’t end there. To figure actual farm payments, which would be paid after Oct. 1 of the year following harvest, you’d need to take the farms’ yield divided by the state yield (ratio) times the lesser of the State ACRE guarantee minus the Actual State Revenue or the State ACRE Guarantee times 25%. (For a closer look at ACRE, go to Barnaby’s crop by crop analysis at: http://www.agmanager.info.)

Chart below details formulas

Average Crop Revenue Election (ACRE) Program TWO TRIGGERS MUST BE MET BEFORE PAYMENTS CAN BE ISSUED 1. STATE TRIGGER

State ACRE Guarantee

"+/-10% from preceding year"

must exceed

Actual State Revenue

90%

100%

times

times

Benchmark State Yield (5-year olympic average planted yield)

Actual State Planted Yield

times

times higher of: National Average Market Price or 70% of National Loan Rate

ACRE Program Guarantee Price (2-year national average price) AND

2. FARM TRIGGER

Farm ACRE Benchmark Revenue

must exceed

Actual Farm Revenue

100%

100%

times

times

Farm's Average Yield (5-year olympic average planted yield)

Actual Farm Yield

times

times higher of: National Average Market Price or 70% of National Loan Rate

ACRE Program Guarantee Price (2-year national average price) plus Producer-paid Crop Insurance Premium

CALCULATION OF A FARM'S PAYMENT 1/ FARM PAYMENT = 85% (83.3% for 2009, 2010, 2011) of farm's planted acres times (farm's average yield divided by State benchmark yield) times

State ACRE Guarantee

minus

Actual State Revenue

State ACRE Guarantee

times

25%

Lesser of:

ACRE Payments are issued after October 1 of the year following harvest

Participation in ACRE requires a 20 percent reduction in direct payments and 30 percent reduction in the loan rate.

For ACRE participants the $40,000 limitation on direct payments is reduced by the amount of the direct payment reduction.

The combined limitation for ACRE and counter-cyclical payments equals $65,000 plus the amount of the direct payment reduction.

1/ The total number of planted acres for which a producer may receive ACRE payments may not exceed the total base acres for the farm.

If the total number of planted acres exceeds the total base on the farm the producers may elect which planted acres to enroll in ACRE.