1. Thinking about ACRE Paul D. Mitchell Agricultural and Applied Economics University of Wisconsin-Madison (608) 265-6514 pdmitchell@wisc.edu Big Red Barn, Baldwin, WI July 30, 2009

2. Goal Today ACRE: Blind men and the elephant ACRE: Blind men and the elephant ACRE overview and example sheet ACRE overview and example sheet Preliminary research regarding ACRE Preliminary research regarding ACRE Thinking about ACRE Fact Sheet Thinking about ACRE Fact Sheet

3. ACRE is Like GRIP Crop Insurance Give up certain premium for uncertain payback Give up certain premium for uncertain payback Premium = 20% DP (+ CCP & 30% lower loan rate) Premium = 20% DP (+ CCP & 30% lower loan rate) Basis Risk: State level, not farm level Basis Risk: State level, not farm level Won’t always pay you when you need it and as much as you need, but most of the time it will Won’t always pay you when you need it and as much as you need, but most of the time it will No guarantee that get back your premium No guarantee that get back your premium Farm must establish historical yields, keep records, follow lots of rules, just as for traditional crop insurance Farm must establish historical yields, keep records, follow lots of rules, just as for traditional crop insurance

4. ACRE is not quite like crop insurance At ACRE signup, will not know state or farm ACRE guarantee for 2009 At ACRE signup, will not know state or farm ACRE guarantee for 2009 2008 MYA price finalized in Oct. 2009 2008 MYA price finalized in Oct. 2009 When plant, will not know these either When plant, will not know these either Will not know if ACRE payments due until 2009 state yields (3/15/2010) and 2009 MYA price (10/15/2010) are determined Will not know if ACRE payments due until 2009 state yields (3/15/2010) and 2009 MYA price (10/15/2010) are determined ACRE payments not come until well after crop season, no advance payments made ACRE payments not come until well after crop season, no advance payments made Expect late October, like counter-cyclicals Expect late October, like counter-cyclicals

5. ACRE is a Paradigm Shift ACRE is a brand new idea and a big shift in how commodity programs work— support revenue, not prices ACRE is a brand new idea and a big shift in how commodity programs work— support revenue, not prices Not quite: the idea not really all that new Not quite: the idea not really all that new Congressional Budget Office study (1983) Congressional Budget Office study (1983) Miranda and Glauber AJAE article (1991) Miranda and Glauber AJAE article (1991) Iowa Farm Bureau, 1996 farm bill proposal Iowa Farm Bureau, 1996 farm bill proposal

6. ACRE is a Complicated Program More rules, terms acronyms to figure out More rules, terms acronyms to figure out Benchmark State Yield, Olympic Average, Farm Level Trigger, National MYA Prices, State ACRE Guarantee Benchmark State Yield, Olympic Average, Farm Level Trigger, National MYA Prices, State ACRE Guarantee Remember 1st time you bought crop insurance or revenue insurance? Remember 1st time you bought crop insurance or revenue insurance? Very popular now, but slow adoption at start because new and seemed more complicated Very popular now, but slow adoption at start because new and seemed more complicated ACRE will be clearer after a little work ACRE will be clearer after a little work

7. ACRE is a “no brainer”—sign up! ACRE benefits will differ for each farm & farmer ACRE benefits will differ for each farm & farmer Your benchmark farm yields and probability your yield below farm benchmark, your farm:state yield ratio Your benchmark farm yields and probability your yield below farm benchmark, your farm:state yield ratio Number of base acres, base acre crops, and actual acres of each planted crops Number of base acres, base acre crops, and actual acres of each planted crops Crop insurance coverage you already have Crop insurance coverage you already have Other programs: SURE, CRP, EQIP, etc. Other programs: SURE, CRP, EQIP, etc. Landlord personalities and relationships Landlord personalities and relationships “Every producer will have a totally different situation and the ACRE rules will work differently for each of them.” (Greg Biba, WI FSA) “Every producer will have a totally different situation and the ACRE rules will work differently for each of them.” (Greg Biba, WI FSA)

8. ACRE Overview

9. ACRE Payment Triggers ACRE payments have two triggers ACRE payments have two triggers Actual State Revenue must be less than State ACRE Guarantee Actual State Revenue must be less than State ACRE Guarantee Actual Farm Revenue must be less than Farm ACRE Guarantee Actual Farm Revenue must be less than Farm ACRE Guarantee Purpose: tie payments to local conditions and pay farmers only when have losses Purpose: tie payments to local conditions and pay farmers only when have losses Some farmers/states will receive ACRE payments, some will not Some farmers/states will receive ACRE payments, some will not

10. State ACRE Guarantee 5-Year Olympic average of state yield per planted acre x 2-Year national price for marketing year x 90% 5-Year Olympic average of state yield per planted acre x 2-Year national price for marketing year x 90% USDA-NASS Yield per planted acre USDA-NASS Yield per planted acre Olympic average: drop highest & lowest Olympic average: drop highest & lowest Marketing year price: Sept 1 to Aug 31 Marketing year price: Sept 1 to Aug 31 Finishing the 2008 marketing year soon Finishing the 2008 marketing year soon

11. ACRE State Yields NASS yield/planted acre fine for most crops NASS yield/planted acre fine for most crops Corn the exception, NASS counts silage as planted acres, but does not yield any grain Corn the exception, NASS counts silage as planted acres, but does not yield any grain 20%-30% WI planted acres are silage 20%-30% WI planted acres are silage NASS corn yield per planted acre low in WI = 108 bu for 2004-2008 NASS corn yield per planted acre low in WI = 108 bu for 2004-2008 FSA adjusted NASS data for silage, so more reasonable, 138 bu/ac for 2004-2008 FSA adjusted NASS data for silage, so more reasonable, 138 bu/ac for 2004-2008

12. WI ACRE State Yields YearCornSoybeansWheatOats 200413533.555.465 200514843.052.264 200614243.576.163 200713540.066.867 200813634.563.462 ACRE13839.061.964 2 or 3 times out of the last 5 years, actual state yield below ACRE benchmark yield

13. Corn Soybeans

14. Wheat Oats

15. National Marketing Year Average Price Corn & Soybean marketing year: Sep 1 to Aug 31 Corn & Soybean marketing year: Sep 1 to Aug 31 For 2009 crop, ACRE uses avg of 2007 and 2008 For 2009 crop, ACRE uses avg of 2007 and 2008 2007 prices: $4.20 corn & $10.10 soybeans 2007 prices: $4.20 corn & $10.10 soybeans 2008 avg after 10 of the 12 months 2008 avg after 10 of the 12 months $4.16 for corn & $10.00 for soybeans $4.16 for corn & $10.00 for soybeans With $2.50 corn & $8.50 soybeans for Jul & Aug, ACRE prices will still be $4.04 and $9.92 With $2.50 corn & $8.50 soybeans for Jul & Aug, ACRE prices will still be $4.04 and $9.92 Wheat and Oat prices already set: $6.63 & $2.89 Wheat and Oat prices already set: $6.63 & $2.89 For 2009, ACRE prices will be high For 2009, ACRE prices will be high

16. State ACRE Guarantee 90% x Benchmark State Yield x 2-Year National MYA price 90% x Benchmark State Yield x 2-Year National MYA price Yields announced March 15 Yields announced March 15 Prices announced October 1 Prices announced October 1 State ACRE Guarantee in October this year State ACRE Guarantee in October this year Corn: 90% x $4.00 x 138 = $496.60 Corn: 90% x $4.00 x 138 = $496.60 Soybeans: 90% x $10.00 x 39 = $351.00 Soybeans: 90% x $10.00 x 39 = $351.00 Wheat: 90% x $6.63 x 61.9 = $369.36 Wheat: 90% x $6.63 x 61.9 = $369.36 Oats: 90% x $2.89 x 64 = $166.46 Oats: 90% x $2.89 x 64 = $166.46 Cannot change more than 10% each year Cannot change more than 10% each year

17. Farm ACRE Guarantee 5-year Olympic avg farm yields x 2-year avg national price + crop insurance premiums paid 5-year Olympic avg farm yields x 2-year avg national price + crop insurance premiums paid Again: will not know price until October 1, so cannot know farm guarantee until then Again: will not know price until October 1, so cannot know farm guarantee until then Crop insurance not needed for ACRE Crop insurance not needed for ACRE SURE requires crop insurance SURE requires crop insurance

18. Farm ACRE Guarantee Establish historical farm yields 2004-2008 Establish historical farm yields 2004-2008 Crop insurance or similar records Crop insurance or similar records Silage: number of loads, or other measures, then FSA help convert to grain equivalents Silage: number of loads, or other measures, then FSA help convert to grain equivalents Silage & Grain: Carry grain yields over to silage acres Silage & Grain: Carry grain yields over to silage acres Continuity rules apply: Cannot drop or “lose” records for bad years Continuity rules apply: Cannot drop or “lose” records for bad years

19. Farm ACRE Guarantee Farmers without yield records Use yield “plugs” = 95% of NASS county avg yield, officially posted by FSA Use yield “plugs” = 95% of NASS county avg yield, officially posted by FSA Get max of own yield & plug for each year Get max of own yield & plug for each year Give “benefit of the doubt” for sign-up Give “benefit of the doubt” for sign-up Begin keeping production records Begin keeping production records Each year FSA drops one plug Each year FSA drops one plug Accurate reporting of acreage intentions Accurate reporting of acreage intentions

20. St Croix ACRE Yield Plugs YearCornSoybeansWheatOats 2004129.630.642.671.6 2005150.042.843.258.5 200685.532.645.353.0 200775.925.345.365.2 2008134.230.744.555.2 Olympic Avg 1163144.360

21. Pierce ACRE Yield Plugs YearCornSoybeansWheatOats 2004131.632.342.667.1 2005157.442.943.253.9 2006134.340.545.358.6 2007123.632.538.672.1 2008153.939.544.564.9 Olympic Avg 14037.543.463.5

22. ACRE Payments If BOTH triggers satisfied, then ACRE payment calculated as Planted Acres x 83.3% x (Farm Yield/State Yield) x (State Guarantee – Actual State Revenue) If BOTH triggers satisfied, then ACRE payment calculated as Planted Acres x 83.3% x (Farm Yield/State Yield) x (State Guarantee – Actual State Revenue) Planted or considered planted acres Planted or considered planted acres 83.3% (or 85%) standard multiplier 83.3% (or 85%) standard multiplier (Farm Yield/State Yield) adjusts for your farms’ greater yield potential (Farm Yield/State Yield) adjusts for your farms’ greater yield potential “Loss” = State Guarantee – Actual State Revenue “Loss” = State Guarantee – Actual State Revenue

23. Fact Sheet Example Example on FSA Fact Sheet: Table 3 (p. 3) Example on FSA Fact Sheet: Table 3 (p. 3) Works through detailed example for made up case for corn, see steps and numbers needed Works through detailed example for made up case for corn, see steps and numbers needed Triggers ACRE payment due to price decrease, even though farm yield high Triggers ACRE payment due to price decrease, even though farm yield high Table 4 (p. 4) compares DCP vs ACRE for this specific case Table 4 (p. 4) compares DCP vs ACRE for this specific case

24. Do Your Own Example Official FSA web page http://www.fsa.usda.gov/dcp Official FSA web page http://www.fsa.usda.gov/dcp Official program details, yields, prices, etc. Official program details, yields, prices, etc. ACRE Calculator (Excel spreadsheet) ACRE Calculator (Excel spreadsheet) Enter your farm details, see DCP vs. ACRE payments received with different price and yield assumptions you make Enter your farm details, see DCP vs. ACRE payments received with different price and yield assumptions you make Work with your County Extension Agent Work with your County Extension Agent

25. ACRE Spreadsheet Do an Example Do your own with farm data

26. ACRE Preliminary Research AAEA Meetings July 26-28 Lots of talk about ACRE Lots of talk about ACRE Low signup thus far Low signup thus far Will signup be low or a big rush at end? Will signup be low or a big rush at end? Why are farmers waiting? Why are farmers waiting? Is ACRE a good choice? Is ACRE a good choice? Overlap among ACRE, SURE, & crop insurance Overlap among ACRE, SURE, & crop insurance

27. Farm Survey: WI, TX, MS, NC Risk management survey of farmers in 4 states in March and April Risk management survey of farmers in 4 states in March and April ACRE question: “Which of the following farm program options are you more likely to choose for this FSA Farm?” ACRE question: “Which of the following farm program options are you more likely to choose for this FSA Farm?” Switch to ACRE in 2009, Maybe switch after 2009, Stay in DCP, Not in programs Switch to ACRE in 2009, Maybe switch after 2009, Stay in DCP, Not in programs

28. WIMSNCTX Switch to ACRE in 2009 13 (3%) 4 (2%) 10 (5%) 2 (1%) Wait, maybe switch after 2009 124 (32%) 41 (24%) 60 (27%) 75 (26%) Stay in DCP for this Farm Bill 205 (54%) 112 (67%) 127 (58%) 194 (68%) Not in Commodity Programs 41 (11%) 11 (7%) 23 (10%) 14 (5%) Total383168220285 If you are hesitant and unsure what to do, you are not alone!

29. ACRE Simulations Keith H. Coble, Ag Econ at Mississippi State University Keith H. Coble, Ag Econ at Mississippi State University NCGA ACRE brochure and spreadsheet NCGA ACRE brochure and spreadsheet Reviewed methodology and critiqued “tool” Reviewed methodology and critiqued “tool” Robert Dismukes and Christine Arriola, USDA-ERS Robert Dismukes and Christine Arriola, USDA-ERS Simulate counties to predict ACRE payments Simulate counties to predict ACRE payments Representative farms with county average yield and variability to match APH premiums for 65% coverage Representative farms with county average yield and variability to match APH premiums for 65% coverage Price variability based on CBOT Dec corn futures historical variability over last few years Price variability based on CBOT Dec corn futures historical variability over last few years Run to predict 5 years into the future 1000 times Run to predict 5 years into the future 1000 times

30. Average ACRE Payments National average over 5 years, for each county planting, weighted by 2007 planted acres, with current market conditions National average over 5 years, for each county planting, weighted by 2007 planted acres, with current market conditions Corn: $7.94/ac Corn: $7.94/ac Soybeans: $8.48/ac Soybeans: $8.48/ac Wheat: $9.77/ac Wheat: $9.77/ac Huge geographic variability Huge geographic variability

34. Main Point ACRE looks valuable for Wisconsin farmers ACRE looks valuable for Wisconsin farmers Farm with average yield and typical variability Farm with average yield and typical variability Farms with higher average yields will get even more, since have the Farm:State average yield ratio multiplier Farms with higher average yields will get even more, since have the Farm:State average yield ratio multiplier Less likely to meet farm trigger? Less likely to meet farm trigger? Each farm and farmer is different, no one is typical or average Each farm and farmer is different, no one is typical or average

35. Thinking about ACRE

36. Three ACRE Advantages 1. FSA has developed procedures to deal with silage 2. ACRE will offer better price protection than DCP for this Farm Bill 3. ACRE flexibility allows moving program benefits to crops actually plant

37. Silage State corn yields corrected for silage effect State corn yields corrected for silage effect FSA procedures with establishing farm benchmark yields for silage FSA procedures with establishing farm benchmark yields for silage Carry grain yields over to silage acres Carry grain yields over to silage acres Grain equivalents are generous Grain equivalents are generous Yield plugs generous for those w/out records Yield plugs generous for those w/out records Start keeping production records like crop insurance and have to certify production Start keeping production records like crop insurance and have to certify production Growing lots of silage should not keep you from enrolling in ACRE if it looks good for you Growing lots of silage should not keep you from enrolling in ACRE if it looks good for you

38. ACRE Price Protection Price declines will be the most important determinant of ACRE payments Price declines will be the most important determinant of ACRE payments State yields move, but not as much as prices State yields move, but not as much as prices ACRE 2009 prices pretty high for 2009 ACRE 2009 prices pretty high for 2009 ~$4/bu corn and ~$10/bu soybeans ~$4/bu corn and ~$10/bu soybeans $2.89/bu oats and $6.63/bu wheat $2.89/bu oats and $6.63/bu wheat ACRE state revenue guarantee cannot change more than 10% in any one year ACRE state revenue guarantee cannot change more than 10% in any one year If markets collapse, ACRE guarantees will fall slowly If markets collapse, ACRE guarantees will fall slowly Is this better protection worth 20% of your DP? Is this better protection worth 20% of your DP?

39. Caveat If prices jump rapidly higher, ACRE guarantees will rise slowly (10% rule) If prices jump rapidly higher, ACRE guarantees will rise slowly (10% rule) Do you really need a payment then? Do you really need a payment then? (Only if input prices rising faster)

40. ACRE Flexibility: Base Acres vs Planted Acres Base acres establish total acres eligible for ACRE payments, but not your eligible crops Base acres establish total acres eligible for ACRE payments, but not your eligible crops Suppose farm has 50 ac of oat base, but plants 100 ac of corn Suppose farm has 50 ac of oat base, but plants 100 ac of corn Give up 20% of oat DP & enroll 50 corn acres in ACRE, even if farm has no corn base acres Give up 20% of oat DP & enroll 50 corn acres in ACRE, even if farm has no corn base acres Suppose farm has 50 ac of corn base, but just seeded it down to alfalfa Suppose farm has 50 ac of corn base, but just seeded it down to alfalfa Can’t enroll alfalfa in ACRE, stay in DCP until later Can’t enroll alfalfa in ACRE, stay in DCP until later Note: Cannot establish new base acres Note: Cannot establish new base acres

41. ACRE Flexibility: Set Crop Priority Suppose 200 acres of base and plant 150 acres corn and 150 acres soybeans Suppose 200 acres of base and plant 150 acres corn and 150 acres soybeans 1) Corn 1 st : 150 ac corn & 50 ac soybeans 2) Soybeans 1 st : 150 ac soybeans & 50 ac corn Suppose ACRE payments are $5/ac for corn and for $10/ac soybeans Suppose ACRE payments are $5/ac for corn and for $10/ac soybeans 1) 150 x 5 + 50 x 10 = $500 = $1,250 2) 150 x 10 + 50 x 5 = $250 = $1,750

42. Summary ACRE likely has value for many farmers ACRE likely has value for many farmers Silage “correction” for state good for corn Silage “correction” for state good for corn Grain yields carry over to silage acres Grain yields carry over to silage acres Generous grain equivalents Generous grain equivalents ACRE Flexibility: Tied to crops plant, not historical base ACRE Flexibility: Tied to crops plant, not historical base ACRE revenue guarantee implies locking in some very good prices given current futures markets ACRE revenue guarantee implies locking in some very good prices given current futures markets

43. Summary You must decide for yourself if you want to choose ACRE: August 14 th deadline You must decide for yourself if you want to choose ACRE: August 14 th deadline Don’t wait until the end, get the election form signed first, then enroll Don’t wait until the end, get the election form signed first, then enroll Sit down with UWEX agents and county FSA Sit down with UWEX agents and county FSA Enter your base acres and planted crops into ACRE calculator and see what prices and state/farm yields needed for ACRE payments Enter your base acres and planted crops into ACRE calculator and see what prices and state/farm yields needed for ACRE payments

44. Questions? Paul D. Mitchell UW-Madison Ag & Applied Economics Office: (608) 265-6514 Cell: (608) 320-1162 Email: pdmitchell@wisc.edu Extension Web Page: www.aae.wisc.edu/mitchell/extension.htm