Transcript Sharpening the ACRE Tool

Sharpening the ACRE Tool
Pat Westhoff ([email protected])
Based on work by Scott Gerlt & Peter Zimmel
National Farm Business Management Conference
St. 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
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
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 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
Yields from 5 most recent years
Higher 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 records
Loan and LDP records
Commercially 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
MO corn yield/pltd acre
161
111
138
137
140
138
137
140
138
$4.20
$4.20
$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
2004
2005
2006
2007
2008
Average
170
130
100
140
135
135.0
140
135
135.0
$4.20
$4.20
$4.20
Farm yield
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
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
ACRE decision tree:
State payment trigger
Prices
Down
Up
Level
State
Yields
Down
State
Yields
Up
Down
Yes
Up
Down
Average
Average
Yes
State
Yields
Maybe
Yes
Maybe
Up
Average
No
Maybe
No
No
ACRE decision tree:
Farm payment trigger
State Payment
Triggered
No
Yes
No Farm
Payment
Prices
Down
Up
Level
Farm
Yields
Down
Farm
Yields
Up
Down
Yes
Up
Down
Average
Average
Yes
Farm
Yields
Maybe
Yes
Maybe
Up
Average
No
Maybe
No
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 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?
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 . . .
ACRE payments vs. traditional payments
Simulation of state average results
WA
VT
MT
ME
ND
NH
MN
OR
ID
WI
SD
WY
OH
IL
UT
CA
CO
KS
KY
LA
NC
SC
AL
MS
TX
VA
TN
AR*
NM
IN
WV
MO
OK*
AZ
RI
PA
IA
NE
NV
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
Chart reflects
average results over
2009/10-2012/13
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
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
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
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