Risk Management with ACRE Program
July 31, 2009
The August 14 USDA ACRE sign-up deadline is fast approaching and producers are asking themselves:
- "Will ACRE pay in 2009?
- Should I sign up my farm?"
To understand how ACRE might work for your operation, let's work through an example of how to calculate the state guarantee using a field of irrigated corn.
Step 1. Take the state's five-year Olympic average (five years of data, throw out the high and the low and average the remaining three) for irrigated corn for production years 2004 to 2008. Nebraska's irrigated corn five-year Olympic yield for 2004-2008 is 185 bushels per acre.
Step 2. Multiply it by the two-year national weighted market year average price. Here is the point of confusion. The two years used in the two-year average are the 2007 and 2008 marketing years. For fall-harvested crops
- the 2007 national market year average includes prices from Sept. 1, 2007 to Aug. 31, 2008, and
- the 2008 national market year average includes prices from Sept. 1, 2008 to Aug. 31, 2009.
For corn, the 2007 national market year average price was $4.20; the estimated 2008 national market year average price is $4.05. Averaged out, this equates to $4.125.
Step 3. Multiply by a 90% adjustment factor (x 0.90). This establishes a state guarantee of $686.81 per acre for program year 2009 for irrigated corn. The same process is repeated for each of the state's eligible commodities under the 2008 Farm Bill. And, a similar equation is used to establish the farm-level benchmark revenue. Multiply the five-year Olympic average yield on the farm by the two-year national weighted market year average price and then add in the crop insurance premium paid to bump up the guarantee.
For relevant five-year Olympic yields, projected two-year average market year average prices, and guarantees, contact your local extension or USDA Farm Service Agency office.
Eligibility for ACRE Payments
To trigger payments, the state guarantee must be greater than the actual state revenue and the farm benchmark must be greater than the farm revenue for the specific commodity.
See the current issue of Cornhusker Economics for Making an ACRE Decision for 2009. The article examines several scenarios for major Nebraska crops and includes graphs of yield and price combinations that would trigger ACRE payments.
To determine actual state revenue, multiply the actual state yield per acre (available about March 15, 2010) by the 2009 national market year average price (weighted 12-month average price from Sept. 1, 2009 to Aug. 31, 2010).
Knowing the state guarantee value (calculated above) makes it possible to estimate triggers. If we use the same corn example from above, and assume the state actual yield in 2009 is equal to the state's five-year Olympic average (185 bushels per acre), we can derive a price trigger point of $3.71. (Divide $686.81 by 185 bushels per acre.)
The USDA regularly projects national market year average prices for a multitude of crops based on the supply and demand structure of national and global economies.
Corn. Until recently, the projection for corn commodities for the 2009 marketing year averaged about $4.30. In July, the USDA amended that estimate to an average 2009 national market year price of $3.75, placing the potential for ACRE payout eligibility on corn commodities within reach. (Recall the $3.71 trigger.)
Soybean. On the soybean side, past USDA predictions for the 2009 marketing year averaged above $10 (amended to $9.30 in the most recent report). If we again assume that yields will be consistent from guarantee to actual yield per acre, soybeans have a trigger price of $9.04. While this price is lower than the current 2009 national market year average prediction, it falls within range of a "possible payout."
For more state guarantee estimates, projected prices, and pay-out trigger points, contact your local USDA Farm Service Agency office. The current issue of UNL's Cornhusker Economics also studies the yield and price combinations that would trigger ACRE payments at the state level for the major Nebraska crops. And remember that to receive an ACRE payment, both the state and the farm must fall below their respective revenue guarantee/benchmark levels.
Producers need to carefully consider the effect that ACRE has on their current farm payment structure.
The question becomes, "Is it worth investing 20% of the direct payment on the farm for the expected payments and revenue protection that ACRE may provide?"
While the program will offer another chance for enrollment next year, once enrolled, there is no option for leaving the program. Producers choosing not to enroll in the 2009 program year can enroll in the 2010 program year, but, once enrolled, they can't leave the program until after 2012.
If you have any questions regarding how ACRE affects the profitability of your operation, schedule a meeting with your local FSA office or call your local Extension office.
Additional decision aids and tools are available online on a UNL Department of Agricultural Economics Web Site, 2008 Farm Bill: Implementation, Education, and Analysis.
Extension Educator, Cass County
Extension Public Policy Specialist