Department of Economics ACRE Chad Hart ISU Extension Farm Management In-Service Ames, Iowa September 19, 2008

Department of Economics Average Crop Revenue Election (ACRE)  ACRE is a revenue-based counter-cyclical payment program  Based on state and farm-level yields per planted acre and national prices  Producers choose between the current price-based counter-cyclical payment (CCP) program and ACRE  There are still some details to be worked out about ACRE (stay tuned)

Department of Economics Farmer Choice  Starting in 2009, producers will be given the option of choosing ACRE or not  Can choose to start ACRE in 2009, 2010, or beyond  Once you’re in ACRE, you stay in ACRE until the next farm bill  If you sign up for ACRE, you must do so for all eligible crops  Producers choosing ACRE agree to 20% decline in direct payments and 30% decline in loan rates

Department of Economics ACRE Settings  Total acres eligible for ACRE payments limited to total number of base acres on the farm  Farmers may choose which planted acres are enrolled in ACRE when total base area is exceeded

Department of Economics Loan Rates under ACRE Corn $1.365Soybeans $3.50 Current Loan Rates Corn $1.95Soybeans $5.00

Department of Economics Average Direct Payments Per Payment Acre CropCurrent Program ACREDifference Corn Soybeans

Department of Economics ACRE  Program has state and farm trigger levels, both must be met before payments are made  Expected state and farm yield based on 5 year Olympic average yields per planted acre  ACRE price guarantee is the 2 year average of the national season-average price

Department of Economics ACRE Set-up for Iowa Corn YearYield per Planted Acre (bu./acre) Olympic Average166.1 YearSeason-average Price ($/bu.) Average4.85 The 2008 yield and price are USDA’s September 2008 estimate. So the expected state yield would be bushels per acre and the ACRE price guarantee would be $4.85 per bushel. Please note the years used in the price average is under debate and may change

Department of Economics ACRE Structure  ACRE revenue guarantee = 90% of ACRE price guarantee * Expected state yield  For our example, the ACRE revenue guarantee is 90% * bu./acre * $4.85/bu.  $725.03/acre  ACRE actual revenue = Max(Season- average price, Loan rate) * Actual state yield per planted acre

Department of Economics ACRE Structure  ACRE Farm revenue trigger = Expected farm yield * ACRE price guarantee + Producer-paid crop insurance premium  Let’s assume farm yields equal to state yields and use the average producer-paid crop insurance premium for 2008 (so far)  bu./acre * $4.85/bu. + $22.77/acre  $828.36/acre

Department of Economics ACRE Payment Triggers  ACRE actual farm revenue = Max(Season- average price, Loan rate) * Actual farm yield per planted acre  Given our example, ACRE payments are triggered when ACRE actual revenue is below $725.03/acre and ACRE actual farm revenue is below $828.36/acre

Department of Economics ACRE Payments  Payment rate = Min(ACRE revenue guarantee – ACRE actual revenue, 25% * ACRE revenue guarantee)  Payments made on 83.3% of planted/base acres in , 85% in 2012  ACRE payment adjustment: Payment multiplied by ratio of Expected farm yield to Expected state yield

Department of Economics ACRE Payments  Payment rate = Min($ – ACRE actual revenue, $181.26)  So the maximum per acre payment is $ in our example

Department of Economics ACRE Payment Timing  Payments can begin as soon as practicable possible after the end of the marketing year  So 2009 ACRE payments could start to be paid out in October 2010  There are no provisions for advance payments

Department of Economics ACRE Payments ACRE pays out No ACRE payments

Department of Economics ACRE vs. CCP ACRE pays out No ACRE payments CCP pays out No CCP payments

Department of Economics ACRE Prices  One of the biggest decisions yet to be made is on the prices in the ACRE price average  Senator Harkin has indicated Congress intended 2007 and 2008 crop year prices  USDA is looking at some options, including using 2006 and 2007 crop year prices

Department of Economics How Much Difference Does It Make? Using 2007 and 2008 Crop Year Prices Using 2006 and 2007 Crop Year Prices ACRE Price$4.85/bu.$3.62/bu. ACRE Revenue Guarantee $725.03/acre$541.15/acre ACRE Farm Trigger $828.36/acre$624.06/acre ACRE Maximum Payment $181.26/acre$135.29/acre

Department of Economics Looking Beyond 2009  The ACRE revenue guarantee is updated each year using the same rules  5 year Olympic average for yields  2 year average for prices  But the ACRE revenue guarantee can not change by more than 10 percent (up or down) from year to year  So if the 2009 ACRE revenue guarantee is $725.03, then the 2010 ACRE revenue guarantee must be between $ and $797.53

Department of Economics Farmer’s Choice  In deciding about ACRE, farmers must weigh:  The loss of 20% of their direct payments, a 30% drop in the marketing loan rate, and no access to CCP payments versus  The potential for payments under ACRE

Department of Economics Comparing Program Parameters  For Iowa Corn  Under the current CCP program  CCP Yield Average = bushels per acre  CCP Effective Target Price = $2.35/bushel  In our example, for ACRE  ACRE Yield Guarantee = bushels per acre  ACRE Price Guarantee = $4.85/bushel  20% of average Iowa corn direct payment = $6.50 per acre

Department of Economics Factors to Consider  ACRE looks more attractive if:  USDA uses 2007 and 2008 prices for average  You think prices will fall in the future, but stay above the current loan rates  Markets continue to show higher price volatilities

Department of Economics Factors to Consider  Current programs look more attractive if:  USDA uses 2006 and 2007 prices for average  You think prices will rise in the future  Potentially no ACRE payments combined with cut in direct payments

Department of Economics You Don’t Have to Decide Today  ACRE signup will not be for a while, probably next spring at the earliest  Once the ACRE rules are finalized, there will be a number of decision tools available to help producers  Preliminary ACRE tools are available at:

Department of Economics Thanks for your time! Any questions?