ACRE Revenue Guarantee: Up Close

By Jane Fyksen Crops Editor
Thursday, August 14, 2008 9:39 AM CDT

Its important crop producers understand ACRE, so as to make an informed decision to stick with the usual farm program next year or go with the new farm bill program’s revenue guarantee.

Carl Zulauf, Ohio State university ag economist who was instrumental in developing this new farm bill option, provides additional details.

The ACRE state revenue guarantee for a given crop per crop year equals: 90 percent times ACRE benchmark state yield times ACRE price guarantee. Benchmark state yield is an Olympic average (i.e. high and low values removed) of Wisconsin’s yield per planted acre for the five most recent crop years. Price guarantee is an average of U.S. price for the two most recent crop years. Beginning in 2010, a state’s revenue guarantee can’t change by more than 10 percent from the prior year. The limit on increases is called a “cap,” while the limit on decreases is called a “cup,” Zulauf explains.

He says the 10 percent cup/cap is important. It limited changes in the revenue guarantee around half of the time in an analysis that calculated breakeven price at which expected payments were the same from ACRE and traditional farm program.

ACRE’s guarantee declines as revenue declines, but the guarantee’s decline lags the revenue decline. The primary reason for the lag is the use of historical moving averages. Thus, ACRE provides revenue protection for a longer period than the plant-harvest period covered by crop insurance.

ACRE’s revenue guarantee varies less than does the product of state yield multiplied by the U.S. price for a year. The reasons are the use of: Historical averages, an Olympic yield average that reduces the impact of high and low yields, and a 10 percent cup/cap which limits the impact of large one-year changes in price (i.e. due to droughts).

The potential for continued high prices this crop year means the 10 percent cup may affect the decision to elect ACRE in 2009, notes Zulauf.

“ACRE’s revenue guarantee for 2009 is calculated using yields and midpoint prices in USDA’s June 2008 World Agricultural Supply and Demand Estimates for 2007 and 2008. ACRE’s revenue guarantee for 2009 is reduced 10 percent each year from 2010 through 2012. Minimum revenue guarantee for marketing loan price counter-cyclical programs is derived using the U.S. loan rate and target price for 2010-12, average U.S. counter-cyclical yield and the highest U.S. planted acre yield over 2004-08,” this economist details.

Given all that, the minimum revenue guarantee is higher from ACRE’s revenue program than from the marketing loan and counter-cyclical programs for wheat, irrespective of what path market prices take, he notes. The same goes for corn and soybeans.

Bruce Babcock and colleagues at Iowa State University have developed a calculator to determine ACRE payments. This calculator will allow corn, soybean and wheat growers for all states to try to find a combination of 2008 and 2009 season average prices whereby the traditional farm programs generate more payments than ACRE.

According to Babcock, “The only scenario we could find is when 2008 prices are high and then 2009 prices are equal to or greater than the average price over 2007 and 2008. Otherwise ACRE dominates. In addition, a farmer should find that ACRE dominates even in this situation because the value of the 2010 ACRE put option is much greater than 20 percent of direct payments.”

The calculators are spreadsheets in Microsoft Excel. Calculators are available at http://www.card.iastate.edu/ag_risk_tools/acre/.

Zulauf notes the above calculator makes the calculation only for 2009, but that anyone who signs up for ACRE in 2009, as mentioned, is making a commitment for all eligible crops through the 2012 crop years.

Zulauf has a series of Internet-based documents outlining the specifics of ACRE and how the program works available at http://aede.osu.edu/people/publications.php?user=zulauf.1.

Comments »

Comment on this story

Comments will be approved within 48 hours

Name:

Email: (optional)

Comments:

Image Verification: (Case sensitive)