Econ 339X, Spring 2010 ECON 339X: Agricultural Marketing Chad Hart Assistant Professor/Grain Markets Specialist

Econ 339X, Spring 2010 Today’s Topics Government Programs

Econ 339X, Spring 2010 Farm Bill Titles I. CommoditiesIX. Energy II. ConservationX. Hort. & Organic Ag. III. TradeXI. Livestock IV. NutritionXII. Crop Insurance V. CreditXIII. Commodity Futures VI. Rural DevelopmentXIV. Miscellaneous VII. ResearchXV. Trade & Taxes VIII. Forestry

Econ 339X, Spring 2010 The 2008 Farm Bill  Continues many of the same programs we have currently  Direct payments  Price countercyclical payments (CCPs)  Marketing loans  CRP, EQIP, and other conservation programs  Gives producers a choice on programs  Average Crop Revenue Election (ACRE)  Sets up new permanent disaster program  Supplemental Revenue Assistance Payments Program (SURE)

Econ 339X, Spring 2010 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)

Econ 339X, Spring 2010 Farmer Choice  Starting in 2009, producers were 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  Deadline for sign-up, June 1 of each year (Aug. 14, this year)  Producers choosing ACRE agree to 20% decline in direct payments and 30% decline in loan rates

Econ 339X, Spring 2010 ACRE Settings  ACRE is based on planted acres  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

Econ 339X, Spring 2010 Loan Rates under ACRE Corn $1.365Soybeans $3.50 Current Loan Rates Corn $1.95Soybeans $5.00

Econ 339X, Spring 2010 Average Direct Payments Per Payment Acre for Iowa CropCurrent Program ACREDifference Corn Soybeans Please note the 83.3 or 85% rule has not been yet to these payments.

Econ 339X, Spring 2010 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

Econ 339X, Spring 2010 ACRE Set-up for Iowa Soybeans YearYield per Planted Acre (bu./acre) Olympic Average50.5 YearSeason-average Price ($/bu.) Average10.04 The 2009 yield and price are USDA’s March 2010 estimates. So the expected state yield would be 50.5 bushels per acre and the ACRE price guarantee would be $10.04 per bushel.

Econ 339X, Spring 2010 ACRE Structure  ACRE revenue guarantee = 90% * ACRE price guarantee * Expected state yield  For our example, the ACRE revenue guarantee is 90% * $10.04/bu. * 50.5 bu./acre  $456.32/acre  ACRE actual revenue = Max(Season- average price, Loan rate) * Actual state yield per planted acre

Econ 339X, Spring 2010 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 2009 Iowa soybeans  50.5 bu./acre * $10.04/bu. + $11.32/acre  $518.34/acre

Econ 339X, Spring 2010 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 $456.32/acre and ACRE actual farm revenue is below $518.34/acre

Econ 339X, Spring 2010 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

Econ 339X, Spring 2010 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

Econ 339X, Spring 2010 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 $456.32, then the 2010 ACRE revenue guarantee must be between $ and $501.95

Econ 339X, Spring 2010 An Example for 2009  To start, we need the expected state and farm yields and the ACRE price guarantee  Expected state yield 50.5 bu/acre  Expected farm yield 55.0 bu/acre  Olympic average of yields per planted acre  ACRE price guarantee$10.04/bu  Average of 2007 and 2008 season-average prices  ACRE Revenue Guarantee$  90% * $10.04/bu * 50.5 bu/acre  ACRE Farm Revenue Guarantee$  $10.04 * 55 bu/acre + $20/acre

Econ 339X, Spring 2010 Example (continued)  For 2009, we need the actual state yield, the actual farm yield, and the season-average price  Actual state yield 50.5 bu/acre  Actual farm yield 55 bu/acre  Season-Average Price$9.45/bu  ACRE Actual Revenue$  $9.45/bu * 50.5 bu/acre  ACRE Farm Actual Revenue$  $9.45/bu * 55 bu/acre

Econ 339X, Spring 2010 Example (continued)  State Trigger  ACRE Revenue Guarantee$  ACRE Actual Revenue$  So we have not met the state trigger  Thus, no ACRE payment for 2009  But what if the season-average price was $9.00 per bushel

Econ 339X, Spring 2010 Example (continued)  Actual state yield 50.5 bu/acre  Actual farm yield 55 bu/acre  Season-Average Price$9.00/bu  ACRE Actual Revenue$  $9.00/bu * 50.5 bu/acre  ACRE Farm Actual Revenue$  $9.00/bu * 55 bu/acre

Econ 339X, Spring 2010 Example (continued)  State Trigger  ACRE Revenue Guarantee$  ACRE Actual Revenue$  Then we have met the state trigger  Farm Trigger  ACRE Farm Revenue Guarantee$  ACRE Farm Actual Revenue$  So we’ve met the farm trigger

Econ 339X, Spring 2010 Example (continued)  ACRE Payment$1.65  Min(25%*$456.32, $ – $454.50) * (55 bu/acre / 50.5 bu/acre) * 83.3%

Econ 339X, Spring 2010 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

Econ 339X, Spring 2010 Factors to Consider  ACRE looks more attractive if:  You think prices will fall in the future, but stay above the current loan rates  Markets continue to show higher price volatilities  Current programs look more attractive if:  You think prices will rise in the future  Potentially no ACRE payments combined with cut in direct payments

Econ 339X, Spring 2010 Supplemental Revenue Assistance Payments Program (SURE)  Provides payments to producers in disaster counties for crop losses  Based on crop insurance program, non- insured crop assistance program, and disaster declarations  Whole-farm revenue protection, not commodity-specific

Econ 339X, Spring 2010 SURE Triggers  Declared “disaster county” by Secretary of Agriculture or contiguous to one  Farm with losses exceeding 50% of normal production in a calendar year

Econ 339X, Spring 2010 Iowa SURE Eligibility in 2008

Econ 339X, Spring 2010 Iowa SURE Eligibility in 2009

Econ 339X, Spring 2010 SURE Settings  Participation and revenue guarantee tied to crop insurance  Farm revenue, including some government payments, used to determine payment  Payments set as 60% of the difference between guarantee and actual revenue  Limited to $100,000 per producer  Payments not known or paid until the end of the marketing year

Econ 339X, Spring 2010 SURE Guarantee  Farm guarantee is the sum of  115%*Crop insurance price election*Crop insurance coverage level*Planted acres* Max(APH or CCP yield), for insurable commodities  120%*NCAP price election*Planted acres* Max(NCAP or CCP yield), for non-insurable commodities  For an individual crop, the guarantee can not be greater than 90% of the crop’s expected revenue

Econ 339X, Spring 2010 SURE Expected Farm Revenues  Expected farm revenue is the sum of  Max(APH or CCP yield)*Planted acres*100% of the crop insurance price for insurable commodities  100% of NCAP yield*100% of NCAP price*Planted acres for non-insurable commodities

Econ 339X, Spring 2010 SURE Actual Farm Revenues  Actual farm revenue is the sum of  Harvested acres*Farm yield*National season- average price for all commodities  15% of direct payments  All CCP or ACRE payments  All marketing loan benefits  All crop insurance or NCAP payments  Any other disaster assistance payments

Econ 339X, Spring 2010 SURE Payments  Payments set as 60% of the difference between farm guarantee and actual farm revenue  Payments limited to $100,000 per producer  Payments not known until end of marketing year

Econ 339X, Spring 2010 Class web site: lawrence/ lawrence/