farmgate: ACRE: How Close Are You To Deciding Whether To Sign Up? (UPDATED)
The ink on the new Farm Bill is quickly drying, although USDA has yet to write many of the regulations needed to implement the new farm policy. However, the framework is in place and Cornbelt farmers this winter will be faced with a decision on whether to switch from the traditional program of direct payments to the new ACRE program. If you have not investigated the impact on your farm, beware that farm program signup will soon begin and you will have a significant decision to make.
Beginning with the 2009 crop, the Average Crop Revenue Election (ACRE) program becomes effective, which replaces the blend of direct and counter cyclical payments in the 2002 Farm Bill. Farm operators and cropshare landowners will have the chance to switch to the ACRE program at anytime during the life of the Farm Bill, but will not have the option to switch back, so it requires understanding of the ramifications.
Extension educators and others will undoubtedly offer seminars to help with decisions, but increased familiarity with the program will help when decision time comes. Ohio State University economist Carl Zulauf provides some insight about the impact of the ACRE program on Cornbelt farmers. Zulauf says several risk management options are available:
1) Traditional programs assist with managing the risk of low market prices over a period of time.
2) Crop insurance assists with managing specific farm risk with crop production between planting and harvest.
3) ACRE assists with managing the risk of a decline in revenue of a crop over a short period of years.
What Zulauf has found is that between planting and harvest, there is a much greater risk of price and revenue declining than yield declining. Between 1974 and 2006, corn revenue declined at least 10%, 38% of the time, but never declined more than 25%. During the same years, soybean revenue declined at least 10%, 24% of the time, but never declined more than 25%.
The ACRE program is a state revenue protection program, and the program will issue a payment if the state average yield times the US average price is less than a revenue guarantee. The revenue guarantee uses national prices, state yields, and cannot change more than 10% from year to year. (Many farmers are looking at high guarantees for the initial year based on current prices.)
However, farmers who opt for ACRE will have a sacrifice to make, which is a 20% cut in direct payments and a 30% cut in their marketing loan rate. The tradeoff for the lower support prices is the opportunity for a higher ACRE payment. Zulauf says in the 26 primary agricultural states ACRE payments will more than cover the loss if the US average cash market price exceeds $2.87 for corn, $6.35 for soybeans, and $4.39 for wheat. At breakeven prices, the lost revenue per acre from traditional programs would approximate $4.87 for corn, $2.30 for soybeans, and $3.05 for wheat. As a result, Zulauf says corn would generate an ACRE payment 36% of the time, soybeans 37% of the time and wheat 33% of the time. However, 75% to 79% of the time, there would be multiple year scenarios that would generate ACRE payments for corn, beans, and wheat.
Other issues that Zulauf says are of importance to your bottom line:
1) ACRE protects revenue beyond the crop insurance period, and may encourage multiple year investments such as P & K application.
2) ACRE will not compensate for production risk, so crop insurance is recommended.
3) ACRE benefits areas with higher yield variability.
4) ACRE payments should be capitalized into land values.
5) With today’s highly volatile grain prices, will ACRE more than compensate for the 20% reduction in direct payments?
6) USDA is in the process of writing the regulations, and when the program is ready for implementation, unexpected impacts are to be expected.
Summary:
Cornbelt farmers will need to evaluate the new ACRE program for its potential revenue benefits to their farm. While this optional program comes with a 20% reduction in direct payments and lower loan rates, it provides a longer term revenue support program extending beyond the period of protection by crop insurance. Payments incorporate state and national averages, with limits on how much payments can decline from year to year.
Have you decided yet if ACRE is for your farm? What factors will enter into your decision? What will it take for you to feel prepared to make a decision?
UPDATE (Aug. 13) Iowa State University economists have developed calculators and decision aids for you to use in making estimates of revenue, prior to your decision whether to sign up for ACRE. Find the calculators and Frequently Asked Questions here.
Posted by Stu Ellis on August 11, 2008 12:20 AM to farmgate