Sharpening the ACRE Tool Pat Westhoff ([email protected])[email protected] Based on work by Scott Gerlt & Peter Zimmel National Farm Business.

Sharpening the ACRE Tool

Pat Westhoff ([email protected])Based on work by Scott Gerlt & Peter Zimmel

National Farm Business Management ConferenceSt. Louis, June 15, 2009

Today’s agenda

ACRE program What is ACRE? How are the calculations made? Example Decision tree Sign up

ACRE tool

ACRE

ACRE, the Average Crop Revenue Election program Offers protection against reduction in gross

revenue

Departure from fixed, price-based programs

For payments to occur, state and farm actual revenue must be less than trigger levels that adjust from year to year

ACRE’s moving targets

Two triggers must be pulled State actual revenue must fall below the state ACRE

guarantee AND Actual farm revenue must fall below the farm ACRE

benchmark established for your farm

Get a new guarantee each year Once established, the state ACRE guarantee cannot move more

than 10 percent per year.

Four Important Revenues

Missouri ACRE Guarantee

Missouri Actual

Your Farm ACRE Benchmark

Your Farm Actual

The trade-off

Potential payments are quite large, but Producers give up:

▪ 20% of direct payments (only guaranteed payment)▪ All countercyclical payments▪ And must accept 30% lower loan rate

Crop Loan Rate 70% of Loan Rate

Corn ($/bu) 1.95 1.365

Soybeans ($/bu) 5.00 3.50

Wheat ($/bu) 2.75 1.92

Grain Sorghum ($/bu) 1.95 1.365

Cotton ($/lb) 0.52 0.364

Rice ($/cwt) 6.50 4.55

Payment acres

Payment acres are 83.3 percent of planted acres, 2009-2011, 85 percent in 2012

Total payment acres cannot exceed total base acres for the farm Lesser of 83.3% of planted acres or base acres Example:

100 acres of base 150 acres planted Payment acres lesser of:

100 base acres or (150*.833 = 125)

Payment acres = 100 acres

Some limits to ACRE payments

State payment rate per acre cannot exceed 25% of state guarantee.

Subject to payment limit rules. $65,000 + 20% of direct payment you gave up

Payments received October of year following harvest

2009 ACRE payment received in October 2010 No advanced ACRE payments

State ACRE guarantee calculation

State ACRE guarantee revenue per planted acre =

Recent 2-year average national season-average farm price

▪ times5-year Olympic average of state yields per

planted acre,▪ times

90%

Farm ACRE benchmark calculation

Farm ACRE benchmark revenue per planted acre =

Recent 2-year average national price

▪ times5-year Olympic average of farm yields per

planted acre,

▪ plus Crop insurance premiums paid

Farm benchmark yields

Yields from 5 most recent yearsHigher of:

95% of county average yield Actual farm yield determined by:

Total production divided by total PLANTED acres

If you use 95% of county average for any of the 5 years that you HAD production of that crop, you have to use 95% of county average for all 5 years

Acceptable production records

Crop insurance and NAP recordsLoan and LDP recordsCommercially sold production records

Commercial receipts, settlement sheets, warehouse ledger sheets, load summaries

Fed to livestock Documentary evidence

Such as contemporaneous measurements, truck scale tickets, contemporaneous diaries

Contrast state and farm triggers

State guarantee revenue is docked 10%Farm benchmark revenue is not docked and

crop insurance premium is added So . . . .

if the state qualifies, the farm will usually qualify, but not always

Formula encourages crop insurance buy up

Correlation between farm and state yields is important

Adjustments and stipulations

Farm payments are adjusted for yields Olympic avg farm relative to Olympic avg state

There is no minimum farm loss to meet the trigger If farm level loss is $0.01 per acre, payment is

same as if farm level loss is $100 per acre But ACRE payments = 0 if farm revenue exceeds

farm benchmark by even $0.01 per acre

Separate ACRE payments calculated for each program crop planted, then summed for farm

A hypothetical corn example

State ACRE Guarantee Revenue Calculation

2004 2005 2006 2007 2008 Average

MO corn yield/pltd acre 161 111 138 137 140

Olympic average 138 137 140 138

US price per bushel $4.20 $4.20 $4.20

Olympic yield * avg price $579.60

MO revenue guarantee with 10% adjustment $521.64

State level trigger is met.Average payment rate: $521.64 - $504.00 = $17.64

per plt acre

2009 STATE ACTUALREVENUE CALCULATION

2009 Yield

2009/10 US Price

2009Revenue

140 $3.60 $504

Maximum payment rate: $130.41 ($25% of $521.64)

A Missouri corn farm

Farm ACRE Benchm’k Revenue Calculation 2004 2005 2006 2007 2008 Average

Farm yield 170 130 100 140 135 135.0

Olympic average 130 140 135 135.0

U.S. average price $4.20 $4.20 $4.20

Olympic yield * avg price $567.00

Farm revenue benchmark with $25.00 crop insurance $592.00

2009 FARM ACTUALREVENUE CALCULATION

2009 Yield

2009/10 US Price

2009Revenue

150 $3.60 $540

State level trigger is met.Farm level trigger is met.

Corn payment

It does not matter how much lower farm actual revenue is to the farm benchmark revenue.

State payment rate: $17.64

Ratio of Farm to State Yields: 135/138 = 0.98

Farm payment per payment acre of corn:State payment rate X Ratio of farm to state

yields

$17.64 X 0.98 = $17.29

Eligible planted acres

Payment acres are: the lesser of 83.3 percent of planted acres or base acres (cannot exceed total base)

Assume example farm has 100 acres total base (of all crops combined), and only plants corn

If 200 or 150 or 125 acres corn planted in 2009 Payment acres = 100, Farm payment = $1,729

If 110 acres corn planted in 2009 Payment acres = 91.6, Farm payment = $1,584

If 90 acres corn planted in 2009 Payment acres = 75.0, Farm payment = $1,297

Deciding whether to participate

IF future revenue is steady or increasing Zero ACRE payments

and lose 20% of direct payment

IF future revenue declines Payments likely to be

larger than foregone payments —potential to be a lot large.

In some ways, sort of like a crop insurance choice Like crop insurance, most likely outcome in any given

year is no ACRE payments, but When payments occur, they could be large Are likely benefits enough to justify “premium” of

reduced traditional program payments?

Differences from crop insurance Payment depends on state results Once decide to participate, in for life of farm bill Must enroll all crops on a farm

Deciding whether to participate

ACRE decision tree:State payment trigger

Prices

State Yields

Level

State Yields

Down

State Yields

Up

No MaybeYes Maybe NoNo

Average Average

Yes Yes Maybe

Up

Average

Down UpDown UpDown

ACRE decision tree:Farm payment trigger

Prices

Farm Yields

Level

Farm Yields

Down

FarmYields

Up

No MaybeYes Maybe NoNo

Average Average

Yes Yes Maybe

Up

Average

Down UpDown UpDown

State Payment Triggered

Yes

No Farm Payment

No

ACRE sign up

Signup Began April 27 Ends August 14

Two step process Elect to enroll (CCC-509 ACRE) Must sign contract each year (CCC-509 ACRE)

Will have choice to sign up in any year 2009-2012

ACRE sign up

Must enroll all crops on the farm

Must report production for planted acres each year No later than last reporting date for each crop In year following contract year

Once in, can’t opt out Decision is FARM SPECIFIC!! Once farm is enrolled, it is in, no matter who owns

or farms it

What type of farms benefit?

Must be determined farm-by-farm

One key is how your farm yields correlate with state yields Do they move in sync?

However, we can look at averages from FAPRI simulations for some clues . . .

WA

OR

CA

NV

ID

MT

WY

UT

AZ

ND

SD

NE

KSCO

NM

TX

OK*

MN

IA

MO

AR*

LAMS

AL

GA

WI

IL IN

OHPA

KY

TN NC

SC

FL

VA

ME

NYMI

NH

MA

CTRI

NJ MDDE

WV

VT

DC

Traditional payments greater

ACRE payments greater

ACRE payments vs. traditional paymentsSimulation of state average results

Chart reflects average results over 2009/10-2012/13

*In Oklahoma and Arkansas, ACRE payments are greater in some years and traditional payments are greater in other years. Over the four years, ACRE payments are greater in Oklahoma and traditional payments were greater in Arkansas.

Missouri simulation results

Corn Wheat Soybeans Cotton

Average ACRE payment/acre $11.67 $11.62 $10.44 $14.95

Payments foregone/acre $4.79 $5.69 $1.59 $132.79

Net benefit of ACRE/acre $6.88 $5.93 $8.84 -$117.84

Annual share of outcomes with ACRE payments

28.5% 42.7% 37.8% 30.7%

Results reflect annual averages across 500 stochastic outcomes for an average of all farmers in the state. Acres are defined as crop acres eligible for ACRE payments. Outcomes for particular farms will be different than these state averages, even if all the assumptions about state-level yields and national-level prices are exactly correct.

Based on February 2009 baseline. More current information would yield different estimates.

FAPRI ACRE Risk Management Tool:The FARM Tool

Compare staying in the CCP program or enrolling in the ACRE program

Excel spreadsheet (Version 2003 or newer)

Available for download from the FAPRI web site http://www.fapri.missouri.edu

Sample farm

242.9 base acres 124.5 ac corn 118.4 ac soybeans

230 acres planted acres 125 ac corn 105 ac soybeans

Payment acres for ACRE program = 191.6 230 * .833

Yields and program information

Model assumes actual yields will vary around these averages

Base Acres = 243

Planted and payment acres

Try different price paths to see what impact it has on payments!

Average price assumptions

The model assumes a distribution around these average prices

Can look at total payments or per acre payments.

Summary: Average effects

Summary: Probabilities

Detail by crop

More detail by crop

What if prices are much lower?

FAPRI Baseline Prices:

What if prices are much lower?

FARM Tool

Currently available for download http://www.fapri.missouri.edu

Educational effort underway Contact Peter Zimmel if you are interested:

Email: [email protected] Office: 573-884-8787 Cell: 573-529-9010