Department of EconomicsDepartment of Economics

ACRE

Chad Hartchart@iastate.edu

515-294-9911

ISU Extension Farm Management In-ServiceAmes, Iowa

September 19, 2008

Department of Economics

Average Crop Revenue Election (ACRE)

ACRE is a revenue-based counter-cyclical payment programBased 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)

Department of Economics

Farmer Choice

Starting in 2009, producers will be given the option of choosing ACRE or notCan choose to start ACRE in 2009, 2010, or beyondOnce 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

Producers choosing ACRE agree to 20% decline in direct payments and 30% decline in loan rates

Department of Economics

ACRE Settings

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

Department of Economics

Loan Rates under ACRE

Corn $1.365 Soybeans $3.50

Current Loan Rates

Corn $1.95 Soybeans $5.00

Department of Economics

Average Direct Payments Per Payment Acre

Crop Current Program

ACRE Difference

Corn 28.67 22.94 5.73

Soybeans 13.55 10.84 2.71

Department of Economics

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

Department of Economics

ACRE Set-up for Iowa CornYear Yield per Planted Acre

(bu./acre)

2004 176.7

2005 168.9

2006 162.7

2007 166.8

2008 158.2

Olympic Average 166.1

Year Season-average Price ($/bu.)

2007 4.20

2008 5.50

Average 4.85

The 2008 yield and price are USDA’s September 2008 estimate.

So the expected state yield would be 166.1 bushels per acre and the ACRE price guarantee would be $4.85 per bushel.

Please note the years used in the price average is under debate and may change

Department of Economics

ACRE StructureACRE revenue guarantee = 90% of ACRE

price guarantee * Expected state yieldFor our example, the ACRE revenue guarantee is

90% * 166.1 bu./acre * $4.85/bu.

$725.03/acre

ACRE actual revenue = Max(Season-average price, Loan rate) * Actual state yield per planted acre

Department of Economics

ACRE StructureACRE Farm revenue trigger = Expected

farm yield * ACRE price guarantee + Producer-paid crop insurance premiumLet’s assume farm yields equal to state yields

and use the average producer-paid crop insurance premium for 2008 (so far)

166.1 bu./acre * $4.85/bu. + $22.77/acre

$828.36/acre

Department of Economics

ACRE Payment TriggersACRE 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 $725.03/acre and ACRE actual farm revenue is below $828.36/acre

Department of Economics

ACRE PaymentsPayment rate = Min(ACRE revenue

guarantee – ACRE actual revenue, 25% * ACRE revenue guarantee)

Payments made on 83.3% of planted/base acres in 2009-11, 85% in 2012

ACRE payment adjustment: Payment multiplied by ratio of Expected farm yield to Expected state yield

Department of Economics

ACRE PaymentsPayment rate = Min($725.03 – ACRE actual

revenue, $181.26)

So the maximum per acre payment is $181.26 in our example

Department of Economics

ACRE Payment TimingPayments can begin as soon as practicable

possible after the end of the marketing yearSo 2009 ACRE payments could start to be paid

out in October 2010There are no provisions for advance payments

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ACRE Payments

ACRE pays out

No ACRE payments

Department of Economics

ACRE vs. CCP

ACRE pays out

No ACRE payments

CCP pays out

No CCP payments

Department of Economics

ACRE PricesOne of the biggest decisions yet to be made is

on the prices in the ACRE price average

Senator Harkin has indicated Congress intended 2007 and 2008 crop year prices

USDA is looking at some options, including using 2006 and 2007 crop year prices

Department of Economics

How Much Difference Does It Make?Using 2007 and 2008 Crop Year

Prices

Using 2006 and 2007 Crop Year

Prices

ACRE Price $4.85/bu. $3.62/bu.

ACRE Revenue Guarantee

$725.03/acre $541.15/acre

ACRE Farm Trigger

$828.36/acre $624.06/acre

ACRE Maximum Payment

$181.26/acre $135.29/acre

Department of Economics

Looking Beyond 2009The ACRE revenue guarantee is updated each

year using the same rules5 year Olympic average for yields2 year average for prices

But the ACRE revenue guarantee can not change by more than 10 percent (up or down) from year to yearSo if the 2009 ACRE revenue guarantee is $725.03, then

the 2010 ACRE revenue guarantee must be between $652.52 and $797.53

Department of Economics

Farmer’s ChoiceIn 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

Department of Economics

Comparing Program ParametersFor Iowa Corn

Under the current CCP programCCP Yield Average = 122.1 bushels per acreCCP Effective Target Price = $2.35/bushel

In our example, for ACREACRE Yield Guarantee = 166.1 bushels per acreACRE Price Guarantee = $4.85/bushel

20% of average Iowa corn direct payment = $6.50 per acre

Department of Economics

Factors to ConsiderACRE looks more attractive if:

USDA uses 2007 and 2008 prices for average

You think prices will fall in the future, but stay above the current loan rates

Markets continue to show higher price volatilities

Department of Economics

Factors to ConsiderCurrent programs look more attractive if:

USDA uses 2006 and 2007 prices for average

You think prices will rise in the futurePotentially no ACRE payments combined with cut in

direct payments

Department of Economics

You Don’t Have to Decide TodayACRE signup will not be for a while,

probably next spring at the earliestOnce the ACRE rules are finalized, there

will be a number of decision tools available to help producers

Preliminary ACRE tools are available at: http://www.card.iastate.edu/ag_risk_tools/acre/

Department of Economics

Thanks for your time!

Any questions?