Is ACRE Worth the Gamble?

January 13, 2010 09:43 AM

Operators of the 128,630 farms that signed up for the new Average Crop Revenue Election (ACRE) program this past August won't know whether their decision was a good one until payments are made—after the end of the marketing year for covered crops.

If you enrolled in ACRE and 2009 state yields were high, you may not get a payment, depending on the year-end price. But if you farm in a state where yields were marginal, you probably will come out ahead, thanks to ACRE.

"To get an ACRE payment, you want to be in a state where a short crop is unlikely to cause market prices to increase,” says Art Barnaby, Kansas State University economist.

That describes the 2009 Oklahoma wheat crop to a tee. For Barnaby, who owns wheat ground outside of Enid, Okla., the decision to enroll in ACRE was made with his tenant Rodney Jones in about "five minutes” (see "Rules of the Game” sidebar below).

"We had a freeze in April that decimated the wheat crop in the northern part of the state along the border with Kansas,” Jones says. So he and others knew state revenue from the crop was likely to be down and farm revenue would also be off, the two conditions that must be met to trigger an ACRE payment.
Watch State Averages. Twenty-five percent of Oklahoma's wheat producers and 37% of the state's base acres signed up for ACRE, second only to Washington, where 26% of farmers and 43% of base acres are enrolled in ACRE.

ACRE uses state data to set yields along with national prices to establish revenue targets. That worked for Oklahoma wheat growers but not for Kansans.

For the Kansas wheat farmers on the southern border of the state, who experienced the same freeze as their Oklahoma brethren, ACRE appears to be of little help. Record wheat yields in the northern part of Kansas offset freeze losses along the Oklahoma border, leading to a 42- bu.-per-acre state yield, the highest since 2003. Because the state average yield is above average, ACRE payments may not be triggered or may amount to only a few dollars per acre for Kansas farmers.

However, in an anomaly that can occur because of the use of state data, a producer in Kansas with land in both states who does business with the Farm Service Agency county office in Oklahoma is eligible to receive ACRE payments on his wheat acres at the rate paid to Oklahoma producers.

Unlike Oklahoma, only 1.5% of Kansas wheat producers and 1.8% of base acres signed up for ACRE. The low participation may be because Kansas producers figured out that ACRE wouldn't work for them or it may have been caused by some of the same hurdles faced by producers in other states.

"To participate, you had to have extensive historical data for your crops, enroll all the program crops on the farm and be able to convince your landlord to make the change,” says USDA economist Larry Salathe. Producers also had to wrap their minds around a program that deals with farm and state yields, national prices, state revenue and farm revenue.

Corn Opts Out. To add to the confusion, there is suddenly a connection between base acres and the ACRE payment. Planting crops with regard to base acres hasn't been a worry since Freedom to Farm became law in 1996.

For each commodity, the total ACRE payment on a farm equals 83.3% of the farm's base acreage, multiplied by the farm's historical yield adjusted to the historical state average, multiplied by the state ACRE payment rate. The total acres eligible for ACRE payments can't exceed the farm's base acres of all program crops. 

In corn country, farmers often have more acres than base acres and can't collect ACRE payments on nonbase acres.

No wonder only a fraction of farms signed up for ACRE.

Rules of the Game
Producers must agree to the following terms in order to participate in the Average Crop Revenue Election (ACRE) program:
1. Forgo counter-cyclical payments.   
2. Take a 20% cut in direct payments.
3. Take a 30% reduction in the marketing assistance loan rates for all crops enrolled in the program.
4. Commit for four crop years.

The cut in the loan rate alone took cotton and rice producers out of the ACRE program because their operations depend on being able to use the marketing loan, says Art Barnaby, Kansas State University economist. A 30% reduction in the loan rate simply cut too far into potential loan deficiency payments.

Wheat growers, however, stand to gain from ACRE. Oklahoma farmer Rodney Jones says: "Our direct payments were $15 per acre per year. A 20% cut means giving up $3 per acre per year or $12 per acre over the four-year period.”

Compare that with the expected $50 to $60 per acre payment from ACRE. "It was enough of a payment to dramatically offset what I will give up,” Jones says.

Though the marketing year for the 2009 wheat crop doesn't end until May 31, 2010, Jones says wheat prices would have to hit $7 to $8 per bushel now and stay there to "bump some of us out.” With abundant global wheat stocks, there is little likelihood that scenario will materialize.

Still, winter wheat growers had an advantage in 2009. When ACRE sign-up ended in August, harvest was over, so they knew their yields and the state yield.

Payment Limits Alter the Odds
Farmers with at least a 1,500-acre wheat base yielding40 bu. per acre run the risk of hitting the effective Average Crop Revenue Election (ACRE) payment limit ($73,000).

Art Barnaby of Kansas State University points out that a farmer in that situation would first be hit by the direct payment limit. The 20% required cut in direct payments—with a $40,000 direct payment limit—equals an $8,000 reduction per year during the next four years, for a total of $32,000.

Without the $73,000 ACRE limit, this same farmer would be betting $32,000 for a chance of a payment approaching $128,000.

"Payment limits really alter the economics of this program,” Barnaby says.


Top Producer, January 2010

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