Analyzing USDA's New ACRE Program

Analyzing USDA's New ACRE Program

March 20, 2009

It appears that ACRE could be a very attractive farm program option for Nebraska producers in 2009 and beyond.

— Brad Lubben
UNL Extension Public Policy Specialist


Update: New ACRE Data

This week the Federal Farm Service Agency posted additional information on the ACRE program and Excel® spreadsheets with preliminary price benchmarks and guarantees and revenue yield maps that may be helpful when weighing your options. These materials are available at the USDA FSA site, Direct and Counter-Cyclical Program/ACRE.


Area Educator Notes

Because ACRE is an "opt-in" only program and producers will be required to give up a 20% portion of their direct payment and reduced marketing load rates of 30%, it is very important that they thoroughly analyze whether ACRE makes sense for their operation. Use one of several ACRE calculators listed on UNL's Farm Bill Web site, developed by the Department of Agricultural Economics, to compare options.

— Dewey Lienemann,
Extension Educator in Webster County


UNL Extension will host a Farm Bill Update April 7 from 9 a.m. to noon at the Fillmore County Fairgrounds in Geneva. Extension Educator Tim Lemmons and Fillmore County FSA Director Ryne Norton will share the latest information on ACRE, SURE and other new federal programs for crop producers.

— Brandy VanDeWalle
Extension Educator in Fillmore County

This article was originally published in the March 11 UNL Cornhusker Economics. To view it and other agricultural economics topics, go to Cornhusker Economics.

The new farm bill includes a revenue-based safety net, the Average CropRevenue Election (ACRE) Program, that is available toproducers beginning with the 2009 crop year. While finaldetails and implementation of the program is yet to beannounced by the USDA Farm Service Agency (FSA), ananalysis of the mechanics of ACRE and the relevant yields andprices to include in ACRE can help producers assess whetherACRE will be a good choice for this crop year and beyond.

Mechanics of ACRE

The ACRE program is available as an irrevocable optionfor producers beginning in the 2009 crop year. If elected,ACRE replaces the existing Counter-Cyclical Payment (CCP)Program and also requires a 20-percent cut in the DirectPayment (DP) and a 30-percent cut in the marketing loan rate.The ACRE decision is separate for each FSA farm number,but must be agreed upon by all parties in each farm number. IfACRE is not chosen in a given year, it will be available againas a option the next year, but once ACRE is chosen, it islocked in for that farm for the remaining years of the currentfarm program (through 2012).

ACRE covers each program crop separately, and incontrast to the existing direct and counter-cyclical paymentprogram, covers actual planted acres on the farm instead ofbase acres. The total number of acres protected by the ACREprogram on the farm cannot exceed the farm's total baseacreage, but the actual crops covered are based on what isplanted instead of what is in the farm's base.

In ACRE, the income support is triggered if the actualestimate of state crop revenue for each crop falls below a statelevelguarantee, and the actual estimate of farm crop revenuefalls below a similar farm benchmark for each crop. Theguarantee and benchmark equations are:

ACRE State Guarantee = 5-Year Olympic Average State Yield x 2-Year National Average Market Price x 90%
Farm Benchmark Revenue = 5-Year Olympic Average Farm Yield x 2-Year National Average Market Price + Crop Insurance Premium Paid

As the state guarantee and farm benchmark suggest, the ACRE protection is based on a moving average. The fiveyear Olympic average yield is calculated per planted acre. For 2009, it is based on yields from the 2004-2008 crop years, excluding the highest yield and the lowest yield, and averaging the remaining three. The two-year national average price is a simple average of the national marketing year average price for the two preceding crop years. Thus, for the 2009 crop, the national marketing year average prices for the 2007 crop and for the 2008 crop are averaged together. For each succeeding year, the moving average continues to roll forward one year.

 

Since the ACRE guarantee is a moving average, it will move higher or lower over time with changes that occur in overall yield and price levels. Thus, over the long-run the ACRE program will provide producers protection against the risk of sudden changes in revenue levels, but will not provide long-term continued income support against low revenue levels (such as due to a low-price trough), in the way that the existing price-based safety net (counter-cyclical payments and marketing loans) does. However, a 10-percent cap on changes in the state guarantee from year to year means the ACRE program might provide substantial income support to producers through the life of the current farm program, through 2012, even if it does not provide this same protection in the long-run. And given that the ACRE decision is only binding through 2012, the analysis of ACRE and the economics of ACRE depends more on the short-run than the long-run.

ACRE Online Calculators

Visit UNL's Farm Bill Web site for links to online ACRE calculators.

The actual state and farm revenue to count against thestate guarantee and farm benchmark for each crop are basedon the following equations:

Actual State Revenue = Average State Yield x MAX (national average price, marketing loan rate x 70%)
Actual Farm Revenue = Average Farm Yield x MAX (national average price, marketing loan rate x 70%)

The actual yields are again calculated per planted acre. The relevant price is the maximum of either the national average price for the crop's marketing year or the loan rate as adjusted for participants in ACRE. An ACRE payment for a producer is triggered only if the actual state revenue falls below the state guarantee and the producer's actual farm revenue falls below the producer's farm benchmark revenue.

The resulting ACRE payment rate is:

ACRE Payment = Min [(ACRE State Guarantee - Actual State Revenue), (25% x ACRE State Guarantee)] x (5-Year Olympic Average Farm Yield/5-Year Olympic Average State Yield) x 83.3%

The ACRE payment equation is a straightforward payment of any losses in revenue below the state guarantee, but it is limited to no more than 25% of the guarantee. The payment is adjusted by the ratio of the farm's Olympic average yield to the state's Olympic average yield, to account for productivity differences and revenue expectations between farms. It is also multiplied by 83.3%, since payments are made on only a percentage of planted acres (83.3% for 2009-2011 and 85% for 2012).

Table 1. State Yields for ACRE - Nebraska Yields per Planted Acre
Year
Corn
Corn
Irrigated
Corn
Dry
Soybeans
Soybeans
Irrigated
Soybeans
Dry
Wheat
Grain
Sorghum
2003
138.8
180.9
74.8
40.1
53.4
30.0
44.1
47.0
2004
160.0
181.1
127.2
45.5
53.3
39.0
33.0
58.9
2005
149.5
180.5
104.3
50.1
58.7
42.6
37.1
64.0
2006
145.4
179.1
94.8
49.6
58.2
41.7
34.0
50.6
2007
156.6
177.5
122.2
50.7
54.9
46.9
41.1
64.5
2008
156.4
179.1
126.0
46.1
55.4
38.3
42.0
63.7
2003-2007 Oly. Avg.
150.5
180.2
107.1
48.4
55.5
41.1
37.4
57.8
2004-2008 Oly. Avg.
154.2
179.6
117.5
48.6
56.2
41.1
37.4
62.2
Source: USDA National Agricultural Statistics Service, March 11, 2009.
Table 2. Market Prices for ACRE - National Average Market Prices
Year
Corn
Soybeans
Wheat
Grain Sorghum
2006
$3.04
$6.43
$4.26
$3.29
2007
4.20
10.10
6.48
4.08
2008
4.10
9.35
6.80
3.20
2006-2007 Average
$3.62
$8.27
$5.37
$3.69
2007-2008 Average
$4.15
$9.73
$6.64
$3.64
Source: USDA National Agricultural Statistics Service and USDA World Agricultural Outlook Board, March 11, 2009.

Analysis of ACRE

We can begin to understand and analyze the new ACREprogram if we have some of the numbers that will plug into theabove equations. The data on yields per planted acre for majorNebraska crops, as released by the USDA NationalAgricultural Statistics Service (NASS), is reported in Table 1.

In the table, you will note that corn and soybeans include an overall yield in addition to an irrigated and dryland yield. These two crops (and a few minor Nebraska crops) have at least 25% of their acreage in both irrigated and dryland production, and thus have ACRE protection calculated and available separately by practice. For example, the 2004-2008 Olympic average yield used for the 2009 ACRE guarantee should be 179.6 bushels per planted acre for irrigated corn, while the dryland corn yield would be 117.5 bushels per planted acre.

While these yields are from official data on production and planted acreage published by NASS, they will not exactly be the yield numbers used by FSA, due to some agency adjustments to yields to account for issues such as planted acreage not intended for grain production.

The data on national average prices is shown in Table 2. The ACRE guarantee for 2009 will be basedon the average of the 2007 and 2008 crop's marketing yearaverage prices. While the 2007 crop's marketing year averageprice is known, the 2008 crop's marketing year is just overhalf complete for the fall harvested crops. Thus, we will notknow with certainty what the average price used in the 2009ACRE guarantee will be until the marketing year is completefor each crop (about the time the next year's crop is beingharvested). But we do have an estimate for the marketing yearbased on the midpoint of the price range published by theUSDA World Agricultural Outlook Board in their monthlysupply and demand estimates. For corn again as an example,the 2007 crop's national marketing year average price finishedat $4.20 per bushel, while the midpoint of the current rangeestimated for the 2008 crop's marketing year average price justrose in the March 11, 2009 report to $4.10 per bushel. As aresult, the current estimated average price for corn for the2009 ACRE guarantee is calculated at $4.15 per bushel.

Taking these yield and price numbers, we can thencalculate the ACRE state guarantee. By multiplying the 2004-2008 Olympic average yield times the 2007-2008 averageprice times 90%, we can calculate the ACRE stateguarantees shown in Table 3. For example,the ACRE state guarantee would be $670.75 per planted acrefor irrigated corn and $438.84 per planted acre for drylandcorn. If revenue falls below these guarantee levels, ACREpayments would be available to producers who also fellbelow their farm's benchmark revenue levels. At maximum,the ACRE payment per planted acre would be equal to 25percent of the guarantee multiplied by 83.3% for 2009,or $139.68 per planted acre for irrigated corn and $91.39 perplanted acre for dryland corn. These guarantees and potentialpayments compare quite favorably with the potentialpayments under the existing CCP program. Under thatprogram, revenue is protected on corn base acres (not plantedacres) only if the national marketing year average price ofcorn drops below $2.35 per bushel. Based on estimatedaverage program yield levels in Nebraska, the maximum CCPpayment (if prices fell to the loan rate of $1.95 per bushel)would be approximately $47.77 on irrigated corn and $27.30on dryland corn.

ACRE Benefits for Nebraska Farmers

The data indicate ACRE could hold a large advantageover the existing CCP program in terms of protectingNebraska producers against revenue losses from currentexpected levels in 2009. If there are concerns or expectationsthat revenue will drop from current levels due particularly toa price decline, then ACRE will certainly pay quicker andmuch more than the CCP. But the choice of ACRE isirrevocable for the life of the farm program through 2012, sothe analysis needs to be of potential protection and paymentsover the four-year period, not just 2009. While a drop inrevenue from year to year will eventually drop the guaranteeas well, the potential downside protection under ACRE stilllooks to be greater than that provided under the CCP. But,there is also the cost of giving up 20% of the DP eachyear to participate in ACRE. That could amount to about $6per base acre in irrigated corn and $3 per base acre in drylandcorn, based on the additional data in Table 3. If priceexpectations for 2009-2012 are steady to increasing, then thepotential payments under ACRE could be very small if at alland the producer would be out the amount of the lost DPs.

Table 3. Comparison of ACRE and DCP - estimated average Nebraska program payments
Commodity
ACRE Option
DCP Option
2009 ACRE
Revenue
Guarantee
2009 MAX ACRE
Payment

Direct Payment*

2009 CCP
Price
Guarantee
2009 MAX
CCP
Payment*
Direct
Payment*
 
(per planted acre)
(per base acre)
(per bushel)
(per base acre)
Corn - Irrigated
$670.75
$139.68
$23.45
$2.35
$47.77
$29.32
Corn - Dry
438.84
91.39
13.40
$2.35
27.30
16.74
Soybeans - Irrigated
491.65
102.39
11.93
5.36
13.83
14.92
Soybeans - Dry
359.76
74.92
8.53
5.36
9.88
10.67
Wheat
223.53
46.55
12.58
3.40
20.44
15.72
Grain Sorghum
203.69
42.42
16.77
2.22
16.71
20.96
* Estimated DP and CCP payments based on estimated statewide average DP and CCP yields.

That could be a significant cost if producers are confident in the direction of prices over the next four years, but it also might effectively be a small premium to pay for the downside risk protection that ACRE could provide over the same four years. 

With all of the data known to date, it appears that ACREcould be a very attractive farm program option for Nebraskaproducers in 2009 and beyond. There are some further detailsand issues yet to resolve before the analysis can becompleted.

First, the exact yields and prices to go into the calculation of the guarantee are not yet known, so the analysis is currently based on estimated and expected numbers.

Second, and more significantly, the procedures for producersto prove a farm-level five-year Olympic average yield must bedetermined and announced by FSA. There is expected to besubstitute yield level provided by FSA for producers whocannot prove their historical yields and there will be someprocedures needed for beginning farmers, farmers new to aspecific farm number, or farmers with a crop rotation thatleaves them with less than five years of yield history in thefive-year period. But, determining this farm-level yieldbenchmark is important in determining the level of protectionreally provided by a safety net that triggers only if revenue onthe farm falls below the benchmark. If the benchmark is basedon some substitute yield far below the farm's true yieldpotential, then the protection offered by the benchmark goesdown accordingly.

Beyond some of the program details that are yet to befinalized, there are some general economic implications ofACRE that are important to producers and their riskmanagement decisions. By protecting revenue losses insteadof price losses, the ACRE program more directly protects aproducer's bottom line than does the existing CCP program.And, by protecting the farm's planted acreage instead of thefarm's base acreage, the ACRE program also improves the riskprotection provided by the farm program. But, it is also clearthat ACRE is limited in the amount of risk protection it canprovide. First, since ACRE payments are limited to no morethan 25% of the guarantee, it is clearly not a completereplacement for crop insurance policies that protect lossesbelow a certain deductible. Second, since the ACRE paymentis based on shortfalls in state-level crop revenue and not farmlevelcrop revenue, it does not directly protect the farm's croprevenue risk. And third, as noted, the ACRE program comeswith a 20% cut in the DP and a 30% cut inmarketing loan rates.

Tools for ACRE Analysis

To fully analyze ACRE and the economics of both farmprogram decisions and broader risk management strategies,producers will need to carefully calculate the potential impactsof ACRE versus the existing CCP program. And to do a fullanalysis, producers don't need just the data going into the2009 crop year, but also some expectations for averages andvariability around farm-level yields, state-level yields andnational prices for the 2009-2012 crop years. Severaltools are available for ACRE calculations, although all of them to date areincomplete at best, given details yet to be released by FSA. These tools are listed at the UNL farm bill Web site at farmbill.unl.edu.

Bradley D. Lubben
Extension Public Policy Specialist