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CARD: Center for Agricultural and Rural Development

Winter 2009, Vol. 15 No. 1

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Prospects for ACRE Payments in 2009

Bruce A. Babcock

U.S. farmers have until June 1 to decide if they want to enroll in ACRE (Average Crop Revenue Election) for the 2009 crop year. ACRE participants must give up eligibility for countercyclical payments and 20 percent of their direct payments. Participants are still eligible for marketing loans, but loan rates are reduced by 30 percent. Perhaps the most important factor that will influence ACRE participation is whether farmers believe that they will receive more payments from ACRE than they will give up. This is a difficult question to answer because the loss in direct payments is the only future payment that is known with certainty. Loan deficiency payments (LDPs) depend on the level of market prices and yields. Countercyclical payments (CCPs) depend on the level of National Agricultural Statistics Service (NASS) season-average prices relative to target prices. ACRE payments depend on both NASS prices and state yields. None of these factors can be known at the time of sign-up. However, a careful examination of how prices and yields affect ACRE payments relative to traditional program payments reveals that unless prices move significantly higher in the next few months, nearly all corn, soybean, and wheat farmers will find that signing up for ACRE will improve their financial position.

Guarantees in 2009

Table 1

Table 1 provides the data needed to compare payments under traditional programs and under ACRE for corn, soybeans, and wheat. [For details about how ACRE works, see] The three rows under each program compare direct payment rates, CCP prices or ACRE prices, and loan rates. Direct payments and loan rates are reduced under ACRE. But the price used to set the ACRE revenue guarantee is much higher than the CCP trigger price. State revenue guarantees are presented next in Table 1. The guarantees are calculated by taking 90 percent of the product of the estimated ACRE price and the average state yield per planted acre from 2004 to 2008, after eliminating the highest and lowest yields during this period. State revenue triggers vary across states because the state average yield varies. Separate irrigated and dryland guarantees are calculated if a state has sufficient planted acreage in each.

The best indicator of the attractiveness of signing up for ACRE is the level of 2009 crop prices relative to the ACRE price. If 2009 crop prices are expected to be lower than the ACRE price, then expected payments at the time of sign-up will be large. But expected large payments do not necessarily lead to actually getting large payments. Actual ACRE payments may turn out to be zero if state yields are good or if crop prices rise unexpectedly. This uncertainty about future prices and yields illustrates why it will be difficult for farmers to choose a program.

Should Farmers Choose ACRE?

The decision about whether to choose ACRE gets clearer once some standard tools of decision analysis are brought to bear on the problem. First, what should concern farmers is the difference in payments across the two programs. If, for all possible futures, ACRE pays out more than traditional farm programs, then the choice is simple: choose ACRE. But we know the decision is not that simple because if ACRE is not triggered in a state, then the 20 percent loss in direct payments under ACRE means that traditional farm programs would generate greater payments than ACRE. So those farmers who believe that future prices will be higher than the Table 1 ACRE prices and that state yields will be stable should not choose ACRE.

Figure 1

But most farmers know that there is a good chance that future prices could be low, and all farmers know that state yields can fall dramatically. Thus, we need to assess the probability that prices or state yields will drop to levels that trigger ACRE payments. While nobody knows what future yields are going to be, past fluctuations in growing conditions and yields can give insight into the probability that 2009 state average yields will fall below a certain level. A standard measure of variability is the percentage by which the actual yield differs from the trend yield in any year. Figure 1 shows the yearly deviations for corn yields in Iowa and South Dakota from 1980 to 2007. It is clear that yields can fall significantly below trend yields in both states. The figure also shows that if past yield variations can be used as a guide to the future, then the odds of a large yield decline in South Dakota are greater than for Iowa. Over the past 28 years, South Dakota suffered yield declines of 10 percent or more eight times compared to only four times for Iowa.

But ACRE payments are triggered by revenue declines, not yield declines. In addition, price levels determine whether CCPs and LDPs will be triggered. There are two relevant measures of price risk that need to be accounted for. The first is overall price strength in the 2009 marketing year. We could see prices weaken significantly if the economic downturn continues for another year. We should see price strength if oil prices unexpectedly climb, if food demand rebounds, or if there is a crop failure overseas. The second source of price risk is the impact on market prices from the size of the U.S. crop in 2009. Large U.S. crops would mean weaker prices, while a crop failure would send prices much higher.

One way to capture both types of price risk is to use the current level of futures prices as a central estimate of price levels for 2009. Then the difference in payments between ACRE and traditional farm programs can be simulated for many different price deviations around this central tendency, accounting for historical volatilities and the impact of the size of the U.S. crop on prices. The analysis can then be repeated for scenarios for much weaker and much stronger prices in 2009.

Simulation Results

Table 2

Based on futures prices on January 13, 2009, expected NASS season average prices for the 2009/10 marketing year are $3.88/bu, $9.20/bu, and $5.98 per bushel for corn, soybeans, and wheat, respectively. A comparison of these projected prices with the estimated ACRE prices that will be used to set the state revenue guarantees shows that expected prices for wheat and soybeans are quite a bit lower than the ACRE price while the corn projected price is just a bit below the ACRE price. This implies that if overall market conditions stay where they currently are, wheat and soybeans have a greater chance of receiving ACRE payments than does corn. Simulated payment outcomes are carried out first by centering 2009 prices at levels indicated by the January 13 futures prices. To see what happens to payments under both stronger and weaker price situations, results are also generated for prices that are centered 35 percent higher and lower than the January 13 indicated levels. Results for a number of the Table 1 state-crop combinations are reported in Table 2.

Iowa Corn

There are a number of ways that a comparison of payments can be made. The method used here is to report total ACRE payments in a state acting as if all acreage is signed up to the program. These payments are compared to what traditional program payments would be if no acreage were signed up for ACRE. Thus, the results indicate what payments would occur if all of a state's farmers participated in ACRE relative to the payments that would occur if none of the state's farmers moved to ACRE. When 2009 corn prices are centered at $3.88/bu (that is, the average simulated price equals $3.88), average Iowa corn payments from ACRE are $242 million. If all Iowa corn farmers chose traditional programs, they would receive an average of only $4 million in LDPs and CCPs. This suggests that farmers would be better off choosing ACRE. However, to obtain ACRE payments, Iowa corn farmers would have to give up $82 million in direct payments. Thus, unless ACRE payments exceed $82 million, Iowa corn farmers would be better off not choosing ACRE.

The last two columns of Table 2 report some key probabilities. The first of these is the probability that that ACRE pays out on the 2009 crop. As shown for Iowa corn, there is a 32 percent chance that ACRE will pay out. The second column of probabilities is the probability that farmers will receive more in ACRE payments on their 2009 crop than they would receive from the traditional programs. For Iowa corn this probability is only 30 percent, which means that there is a 70 percent probability that Iowa corn farmers would receive more payments under traditional farm programs than under ACRE. Taking these probabilities together, there is a good likelihood that the loss in direct payments will be greater than the gain in ACRE payments. But when ACRE pays, the average payout is much larger than the loss in direct payments. Therefore, at current price conditions, ACRE is similar to a subsidized crop insurance program in which the loss of direct payments equals the farmer-paid premium. A comparison of the expected ACRE payout to the loss in direct payments implies a premium subsidy rate of about two-thirds.

Increasing the average 2009 corn price by 35 percent (to $5.24/bu) greatly decreases the chances of receiving an ACRE payment. The reason is that the ACRE price used to set the guarantee would be much lower than prevailing prices. The probability that ACRE payments exceed the loss of direct payments for Iowa corn decreases from 30 percent to 2 percent. The expected ACRE payment is reduced from $240 million to only $14 million. Thus, if farmers believe that 2009 prices will be much stronger than is indicated by current futures, then they will probably want to wait a year before signing up for ACRE.

If market conditions weaken considerably and the average 2009 corn price falls 35 percent (to $2.52/bu), then expected ACRE payments increase dramatically, to $1.7 billion. CCPs and LDPs increase also, but only to $369 million. The probability that ACRE would result in a payout is 97 percent in this scenario. And there is only a 4 percent chance for Iowa corn farmers that ACRE payments would be exceeded by LDPs and CCPs. So, dramatically lower prices favor ACRE even more than current prices. The reason is, of course, that ACRE provides support at $3.90 per bushel, which is much greater than the CCP trigger price.

Soybeans and Wheat

The overall pattern of results for Iowa corn holds for other corn states and for soybeans and wheat. But soybean and wheat farmers have an even greater incentive to participate in ACRE than do corn farmers because the ACRE prices for soybeans and wheat are higher than those currently indicated for 2009. Minnesota and South Dakota wheat farmers have an extra incentive to sign up for ACRE because growing conditions from 2004 to 2008 were better than average. Hence, the ACRE yield used to set the ACRE guarantee is quite high relative to the average-trend-adjusted yield from 1980 to 2007.

Bottom Line

The conclusion that can be drawn from the Table 2 results is that most midwestern farmers will sign up for ACRE unless prices unexpectedly strengthen in the next few months. If market conditions stay reasonably constant, then farmers who sign up for ACRE will be compensated for their loss in direct payments if prices fall unexpectedly or if statewide growing conditions turn out to be poor in 2009. If prices stay up and growing conditions are good, then the loss in direct payments will not be compensated, but market returns for most farmers will be high. If market conditions deteriorate in the next few months, then all farmers will have quite a large incentive to move into ACRE immediately, as there is a very small probability that payments from LDPs and CCPs will approach the level of ACRE payments.

For More Information

For analysis of more crop-state combinations, see calculators available at