ACRE Beats Counter-cyclical Payments

February 7, 2010 06:00 PM
 
 
Linda H. Smith, AgWeb Business and Marketing Editor
 
Counter-cyclical payments have not been a factor for corn ($2.35 trigger) or soybeans ($5.56) for several years. "Should prices fall to those levels, ACRE (Average Crop Revenue Election) would be the much better choice,” says Steven Johnson, Iowa State University farm management specialist. "ACRE is the government farm program of the future. Don't fight this revenue safety net. Giving up 20% of direct payments ($4-$6/acre) may be well worth the cost. If we see 90 to 92 million acres of corn planted, go in ACRE. If we have a wet spring and a lot of acres go to beans, sign up for ACRE.” You must sign up by June 1, and it is a multiyear contract--through 2012.
 
Two revenue triggers have to be met for ACRE payments, one at the state level and one at the farm level. Farms correspond to FSA units, just as for the current commodity programs, says Iowa State University economist William Edwards.  
 
Both the state average yields and farm level yields are rolling five-year Olympic averages. These are multiplied by the national marketing year price to determine levels of revenue guarantees and payments for a specific year.
 
The price component of both of these triggers is the rolling average of the two most recent USDA national average marketing year prices, Edwards says. For corn and soybeans the marketing year runs from September through August, so the 2009 guarantee was based on 2007 and 2008 crop years: $4.13 for corn and $10.10 for soybeans. (All) wheat's two-year average is $6.63.
 
The state revenue guarantee is 90% of the average state yield multiplied by the two-year average marketing price. For the farm level revenue guarantee, the same two-year average price is used, multiplied by the Olympic average of the last five years of yields for the farm. The value of the farmer-paid crop insurance premiums is added to the farm-level guarantee.
 
Edwards explains that to trigger a payment under ACRE, the "actual” revenues for both the state and the farm must be less than their corresponding guarantees. The actual revenues are the current marketing year price multiplied by the state average yield and the actual farm level yield, respectively. If both triggers are reached, the payment to the farm will be the difference between the state guarantee and the state actual revenue. The payment level cannot exceed 25% of the state guarantee, however. It also will be adjusted up or down by the ratio of the farm Olympic average yield to the state Olympic average yield. For example, if the farm average yield is 10% above the state average yield, the ACRE payment will be increased by 10% for that farm.
 
The payment will be made on 83.3% of the farm acres planted to the crop (85% in 2012). However, the total planted acres that receive a payment cannot exceed the total base acres for all crops established for counter-cyclical payments in the signup for the 2003 farm bill program. Producers who sign up for ACRE will continue to receive 80% of the direct payments that have been paid, regardless of actual prices or yields each year.
 
If you sign up for ACRE, you forfeit 20% of direct payments through 2012, so that is a fixed cost. You also will give up any potential counter-cyclical payments, and the loan rate used to calculate loan deficiency payments or marketing loans will be lowered by 30%. "The loss of potential CCPs and LDPs may not be too critical, because if market prices fall enough to trigger those payments it is likely that the ACRE payment would be at least as large,” Edwards says. "Producers who use FSA marketing loans will have to commit more bushels to borrow the same number of dollars.”
 
The outcome for 2009 won't be known until the marketing year is over, but here are how prices and yields look right now, on a national basis:
 
  Price guarantee  Midpoint projected price Yield
Wheat 6.63 4.85 44..4
Soybeans 10.03 9.65 44.0
Corn 4.13 3.70 165.2
                 
ACRE is like life insurance, Johnson says. "You don't want to collect on it, but you want it in place if the need arises.”
 

For More Information
 

 
You can e-mail Linda H. Smith at lsmith@farmjournal.com.
 

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