Sharpening the ACRE Tool Pat Westhoff westhoffpmissouri edu

Sharpening the ACRE Tool Pat Westhoff (westhoffp@missouri. edu) Based on work by Scott Gerlt & Peter Zimmel National Farm Business Management Conference St. Louis, June 15, 2009

Today’s agenda v. ACRE program What is ACRE? How are the calculations made? Example Decision tree Sign up v. ACRE tool

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 Four Important Revenues Missouri ACRE Guarantee Missouri Actual Your Farm ACRE Benchmark Your Farm Actual Get a new guarantee each year Once established, the state ACRE guarantee cannot move more than 10 percent per year.

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 v. Payment acres are 83. 3 percent of planted acres, 2009 -2011, 85 percent in 2012 v. 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 v. State payment rate per acre cannot exceed 25% of state guarantee. v Subject to payment limit rules. $65, 000 + 20% of direct payment you gave up v. 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 seasonaverage farm price ▪ times 5 -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 ▪ times 5 -year Olympic average of farm yields per planted acre, ▪ plus Crop insurance premiums paid

Farm benchmark yields v. Yields from 5 most recent years v. Higher of: 95% of county average yield Actual farm yield determined by: Total production divided by total PLANTED acres v. 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 v. Crop insurance and NAP records v. Loan and LDP records v. Commercially sold production records Commercial receipts, settlement sheets, warehouse ledger sheets, load summaries v. Fed to livestock Documentary evidence Such as contemporaneous measurements, truck scale tickets, contemporaneous diaries

Contrast state and farm triggers v. State guarantee revenue is docked 10% v. Farm benchmark revenue is not docked and crop insurance premium is added v So. . if the state qualifies, the farm will usually qualify, but not always Formula encourages crop insurance buy up v. Correlation between farm and state yields is important

Adjustments and stipulations v. Farm payments are adjusted for yields Olympic avg farm relative to Olympic avg state v. 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 v. 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 MO corn yield/pltd acre 161 111 138 137 140 138 $4. 20 Olympic average US price per bushel Average Olympic yield * avg price $579. 60 MO revenue guarantee with 10% adjustment $521. 64 2009 STATE ACTUAL REVENUE CALCULATION 2009 Yield 140 2009/10 2009 US Price Revenue $3. 60 $504 State level trigger is met. Average payment rate: $521. 64 - $504. 00 = $17. 64 per plt acre Maximum payment rate: $130. 41 ($25% of $521. 64)

A Missouri corn farm Farm ACRE Benchm’k Revenue Calculation Farm yield 2004 2005 2006 2007 2008 Average 170 130 100 140 135 135. 0 $4. 20 Olympic average 130 U. S. average price Olympic yield * avg price $567. 00 Farm revenue benchmark with $25. 00 crop insurance $592. 00 2009 FARM ACTUAL REVENUE CALCULATION 2009 Yield 150 State level trigger is met. Farm level trigger is met. 2009/10 2009 US Price Revenue $3. 60 $540

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

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.

Deciding whether to participate v 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? v 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

ACRE decision tree: State payment trigger

ACRE decision tree: Farm payment trigger

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 20092012

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? v. Must be determined farm-by-farm v. One key is how your farm yields correlate with state yields Do they move in sync? v. However, we can look at averages from FAPRI simulations for some clues. . .

ACRE payments vs. traditional payments Simulation of state average results WA VT MT ME ND NH MN OR ID WY NV PA IA NE CO KS OH MO TX WV VA TN AR* NM IN KY OK* AZ LA NC SC AL MS GA FL ACRE payments greater Traditional payments greater *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. MA NY MI IL UT CA WI SD Chart reflects average results over 2009/10 -2012/13 RI NJ CT MD DE DC

Missouri simulation results Corn Wheat Soybeans Cotton $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% Average ACRE payment/acre 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. 30. 7%

FAPRI ACRE Risk Management Tool: The FARM Tool v. Compare staying in the CCP program or enrolling in the ACRE program v. Excel spreadsheet (Version 2003 or newer) v. Available for download from the FAPRI web site http: //www. fapri. missouri. edu

Sample farm v 242. 9 base acres 124. 5 ac corn 118. 4 ac soybeans v 230 acres planted acres 125 ac corn 105 ac soybeans v Payment acres for ACRE program = 191. 6 230 *. 833

Yields and program information Model assumes actual yields will vary around these averages

Planted and payment acres Base Acres = 243

Average price assumptions The model assumes a distribution around these average prices Try different price paths to see what impact it has on payments!

Summary: Average effects Can look at total payments or per acre payments.

Summary: Probabilities

Detail by crop

More detail by crop

What if prices are much lower?

What if prices are much lower? FAPRI Baseline Prices:

FARM Tool v. Currently available for download http: //www. fapri. missouri. edu v. Educational effort underway Contact Peter Zimmel if you are interested: Email: zimmelp@missouri. edu Office: 573 -884 -8787 Cell: 573 -529 -9010