ACRE_for_FarmBill

Average Crop Revenue Election (ACRE) Average Crop Revenue Election (ACRE) Versus Traditional Support ProgramsVersus Traditional Support Programs

Analysis of Arkansas Representative FarmsAnalysis of Arkansas Representative Farms

Eric Wailes, Jeffrey Hignight, and Brad WatkinsFarm Bureau Video Conference

July 17, 2008

DISCLAIMERDISCLAIMER

Analysis is based on our reading of the Commodity Title of the Food, Conservation and Energy Act of 2008.

The ACRE program is complex and there are a number of issues open for interpretation and determination by the Secretary of Agriculture.

We might expect that FSA will interpret changes in the law differently that what has been assumed in the following analysis.

OverviewOverview

• Average Crop Revenue Election Program• Representative Panel Farms• Historical View of ACRE Program• Conclusions

As risk management toolsAs risk management tools……• Traditional price support programs assist with

managing market risks of chronic low market prices of a crop over extended periods of time.

• ACRE assists with managing market risks of a decline in revenue of a crop over a short period of time.

• Crop insurance assists in managing farm specific risks during the production season

Implicit risk management fee of ACRE:Implicit risk management fee of ACRE: 20% of average Direct Payment/Acre20% of average Direct Payment/Acre

$19.24

$6.85

$4.87

$3.36

$3.05

$2.30

$1.95

$0.20

Rice

Cotton

Corn

Sorghum

Wheat

Soybeans

Barley

Oats

Source: Carl Zulauf, Ohio State University

Implicit risk management fee of ACRE:Implicit risk management fee of ACRE: 20% of 20% of Farm SpecificFarm Specific DP/AcreDP/Acre

$19.24

$6.85

$4.87

$3.36

$3.05

$2.30

$1.95

$0.20

Rice

Cotton

Corn

Sorghum

Wheat

Soybeans

Barley

OatsArkansas Rep Farms had ranges of:

Soybeans: $1.42 - $2.54Wheat: $3.89 - $4.15Cotton: $5.44 - $9.07Rice: $17.97 - $21.97

Data & MethodologyData & Methodology

• FAPRI 2008 US and World Prices• Representative Panel Farms

– Organized by UA and Texas A&M extension economists

– Panel of local farmers provide farm level data• Excel was used to generate simulation

– Stochastic simulation was for the 2009-2012 time period based on state and farm prices and yield distributions: 500 sims/year/farm

AR Representative Panel FarmsAR Representative Panel Farms

• ARNC5000 – Leachville• ARCR6500 - Osceola• ARCR4000 - Pine Bluff• ARC6000 - McGehee

• ARSR3640 - Stuttgart• ARWR1200 - Wynne• ARHR3000 – Hoxie• ARC4200 – Forrest City

UA AG ECON Staff Paper 02 Access at:

http://www.uark.edu/depts/agriecon/staff08/html

The ARNC5000 Farm: The ARNC5000 Farm: LeachvilleLeachville

• Total cropland: 5000 acres• 1,000 owned, 3,200 share lease, 800 cash

lease

• Planted acres - cotton: • 4,500 irrigated, 500 acres dry

• Base Acres – 4,050 irrigated, 450 dry• Direct pay yield: 480 lbs/acre• CCP pay yield: 725 lbs/acre

20092009--2012 Results2012 Results

BASE ACRE Difference Percent($/acre) ($/acre) ($/acre) ACRE>BASE

ARNC5000 747.30 718.72 28.58 5.6%

Each farm was simulated 2000 times over the 4 year period

ARNC5000: Gross Returns/AcARNC5000: Gross Returns/Ac

0.180.27

0.400.36

0.42 0.37

0%10%20%30%40%50%60%70%80%90%

100%

BASE ACRE

<$500 $500 - $650 >$650

The ARSR 3640 Farm: StuttgartThe ARSR 3640 Farm: Stuttgart• Total cropland: 3640 acres

• 728 owned, 2912 share lease

• Planted acres – rice, soybeans, wheat: • 1620 lg rice, 1620 irrigated beans, 324 wheat

• Base Acres:• 1620 rice, 1620 beans, 235 wheat

• Direct pay yield:• 55 cwt rice, 29 bu beans, 44 bu wheat

• CCP pay yield:• 59 cwt rice, 36 bu beans, 44 bu wheat

20092009--2012 Results2012 Results

BASE ACRE Difference Percent($/acre) ($/acre) ($/acre) ACRE>BASE

ARNC5000 747.30 718.72 28.58 5.6%ARSR3640 443.59 438.72 4.87 21.2%

ARSR3640ARSR3640

0.34 0.39

0.50 0.47

0.16 0.14

0%10%20%30%40%50%60%70%80%90%

100%

BASE ACRE

<$400 $400 - $500 >$500

The ARC4200 Farm: Forrest CityThe ARC4200 Farm: Forrest City• Total cropland: 4200 acres

• 1000 owned, 1700 share lease, 1500 cash lease

• Planted acres – cotton, beans, corn • 2600 irrigated cotton, 1200 dryland beans, 400 corn

• Base Acres –• 780 cotton, 780 beans

• Direct pay yield: • 500 cotton lbs/acre, 20 bu beans

• CCP pay yield: • 825 cotton lbs/acre, 25 bu. beans

20092009--2012 Results2012 Results

BASE ACRE Difference Percent($/acre) ($/acre) ($/acre) ACRE>BASE

ARNC5000 747.30 718.72 28.58 5.6%ARSR3640 443.59 438.72 4.87 21.2%ARC4200 538.47 527.98 10.49 27.1%

ARC4200ARC4200

0.40 0.46

0.410.38

0.18 0.16

0%10%20%30%40%50%60%70%80%90%

100%

BASE ACRE

<$500 $500 - $600 >$600

20092009--2012 All Farm Results2012 All Farm Results

BASE ACRE Difference Percent($/acre) ($/acre) ($/acre) ACRE>BASE

ARNC5000 747.30 718.72 28.58 5.6%ARCR6500 551.10 527.57 23.52 8.6%ARCR4000 495.96 481.90 14.06 15.9%ARC6000 613.48 596.51 16.97 13.0%ARSR3640 443.59 438.72 4.87 21.2%ARWR1200 575.25 565.48 9.77 23.3%ARHR3000 552.18 539.52 12.66 16.1%ARC4200 538.47 527.98 10.49 27.1%

Historical PerspectiveHistorical Perspective 19801980--20072007

YearsPayment Years ACRE DP Loss DifferenceOccurred ACRE>DP ($/acre) ($/acre) ($/acre)

Corn 6 5 4.29 4.87 -0.58Cotton 5 5 9.06 6.79 2.27Grain Sorghum 7 5 3.83 3.37 0.46Soybean-Irr 9 8 5.25 2.30 2.95Soybean-NonIrr 12 12 6.48 2.30 4.18Rice 8 6 12.90 19.26 -6.36Wheat 7 7 4.44 3.05 1.39Source: Kansas State University AgManager.info website: http://www.agmanager.info/default.asp

ACRE Analysis versus BaseACRE Analysis versus Base

• Preliminary results of analysis by us and others suggest there are no ‘rules of thumb’

• The ACRE decision has many moving parts: farm yield, state yield, marketing year price and expected future price.

• And the correlation of moving parts

Irrigated/non-irrigated programs for Arkansas?

• Arkansas has 2 major crops that historically have had significant non-irrigated acres: cotton and soybeans.

• What is the likelihood of having separate ACRE programs?

25% non-irrigated acreage pattern in Arkansas

01020304050607080

1991

1993

1995

1997

1999

2001

2003

2005

2007

Cotton Soybeans 25%

%

ConclusionsConclusions• Arkansas Representative Panel Farms

– BASE average revenue was larger than ACRE a higher percent of the time for all Arkansas representative farms

– ACRE did have larger revenue than BASE during for some of the simulations for all Arkansas farms

– The relative importance on farms with cotton and rice and their loss of direct payment is dominant in the analysis.

ConclusionsConclusions• It is important for each producer to

carefully consider their own circumstances before committing to the ACRE program.

• ACRE is not a risk management substitute for crop insurance

ConclusionsConclusions• ACRE most benefits farms with high yield

variability

• ACRE does not provide a support floor and farmers will have to adjust to lower market revenues.

• ACRE will likely be Amber box in the WTO

Thank YouThank You