The crop insurance deadline and planting time will have come and gone by June 1, when Cornbelt farmers will have to decide whether to enroll in the ACRE program for 2009. It is a one-way decision, since you cannot reverse the decision, but it is one that can be deferred until 2010. ACRE is the Average Crop Revenue Election element in the new Farm Bill, which is designed as a risk management program, rather than a price support like counter cyclical payments. If you are unsure whether to sign up, read on…

You have probably heard that the offset to the ACRE program is a loss of 20% of your direct payments, as well as for counter-cyclical payments if prices go low enough to trigger them. The loan rate is also cut 30% for ACRE participants, if the marketing loan figures into your marketing plan.

But most farmers will try to determine if the ACRE formula will give them more revenue protection in this unusual market price year. Unfortunately, many of the variables in the formula will not be known when the June 1 sign up deadline arrives, says economist Bruce Babcock at Iowa State University in the Winter edition of the Iowa Ag Review. But his educated guess is for ACRE to pay off, unless there is a sudden bull market for Cornbelt grains.

ACRE contains a trigger price, but it varies for each state because the state average yield varies. Other elements include the average state yield for the past 5 years and a national average price. But Babcock says one of the keys to your decision whether to sign up is the relationship between current commodity prices with the prices guaranteed by the ACRE program. If you expect 2009 prices to be low, sign up for ACRE. If you expect 2009 prices to rise, then ACRE will not be your choice.

Babcock says ACRE payments could be eliminated if yields are good and prices rise, and that is the hedge you have to make. He says if the yield and price in a given state does not trigger an ACRE payment, then the conventional direct and counter cyclical program will provide more revenue support.

An ACRE payment depends on both yield and price, so if your state has widely varying yields, your chance of an ACRE payment may be greater. The strength of prices in 2009 should also be noted says Babcock. They could weaken further with the economy, or they could strengthen if the economy turns around and oil prices push corn and ethanol to higher price levels. Supply and demand also determines revenue, and a large US crop will enlarge the supply further and that weakens price strength.

Using recent futures prices and the USDA’s expected season average prices, Babcock tested an ACRE decision on $3.88 corn, $9.20 beans, and $5.98 wheat. Prices that end up 35% lower than those have a more than 90% chance of getting an ACRE payment. Prices that are 35% higher than those have a less than 10% chance of getting an acre payment. Those specific prices have a 35% to 70% chance of getting a beneficial ACRE payment, depending upon the state and the crop.

Babcock says he believes, “Most midwestern farmers will sign up for ACRE unless prices unexpectedly strengthen in the next few months.” He says constant prices will mean ACRE payments that will compensate farmers for the lost payments from direct and counter cyclical payments. “If prices stay up and growing conditions are good, then the loss in direct payments will not be compensated, but market returns for most farmers will be high. If market conditions deteriorate in the next few months, then all farmers will have quite a large incentive to move into ACRE immediately, as there is a very small probability that payments from LDPs and CCPs will approach the level of ACRE payments.”

Summary:
ACRE is the new Farm Bill program that is designed to provide risk management support to farmers, based on state yields and state average revenue. However, signing up for the program requires a sacrifice of 20% of direct and counter cyclical payments. But if current prices hold, ACRE payments will make up the loss and provide more revenue-based risk subsidies, as would a large crop with low revenue. Stronger prices because of a stronger economy would reduce any ACRE payment and give the preference to the direct payment program.