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Thinking about ACRE

Thinking about ACRE. Paul D. Mitchell Agricultural and Applied Economics University of Wisconsin-Madison (608) 265-6514 pdmitchell@wisc.edu Big Red Barn, Baldwin, WI July 30, 2009. Goal Today. ACRE: Blind men and the elephant ACRE overview and example sheet

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Thinking about ACRE

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  1. Thinking about ACRE Paul D. Mitchell Agricultural and Applied Economics University of Wisconsin-Madison (608) 265-6514 pdmitchell@wisc.edu Big Red Barn, Baldwin, WI July 30, 2009

  2. Goal Today • ACRE: Blind men and the elephant • ACRE overview and example sheet • Preliminary research regarding ACRE • Thinking about ACRE Fact Sheet

  3. ACRE is Like GRIP Crop Insurance • Give up certain premium for uncertain payback • Premium = 20% DP (+ CCP & 30% lower loan rate) • Basis Risk: State level, not farm level • Won’t always pay you when you need it and as much as you need, but most of the time it will • No guarantee that get back your premium • Farm must establish historical yields, keep records, follow lots of rules, just as for traditional crop insurance

  4. ACRE is not quite like crop insurance • At ACRE signup, will not know state or farm ACRE guarantee for 2009 • 2008 MYA price finalized in Oct. 2009 • When plant, will not know these either • Will not know if ACRE payments due until 2009 state yields (3/15/2010) and 2009 MYA price (10/15/2010) are determined • ACRE payments not come until well after crop season, no advance payments made • Expect late October, like counter-cyclicals

  5. ACRE is a Paradigm Shift • ACRE is a brand new idea and a big shift in how commodity programs work—support revenue, not prices • Not quite: the idea not really all that new • Congressional Budget Office study (1983) • Miranda and Glauber AJAE article (1991) • Iowa Farm Bureau, 1996 farm bill proposal

  6. ACRE is a Complicated Program • More rules, terms acronyms to figure out • Benchmark State Yield, Olympic Average, Farm Level Trigger, National MYA Prices, State ACRE Guarantee • Remember 1st time you bought crop insurance or revenue insurance? • Very popular now, but slow adoption at start because new and seemed more complicated • ACRE will be clearer after a little work

  7. ACRE is a “no brainer”—sign up! • ACRE benefits will differ for each farm & farmer • Your benchmark farm yields and probability your yield below farm benchmark, your farm:state yield ratio • Number of base acres, base acre crops, and actual acres of each planted crops • Crop insurance coverage you already have • Other programs: SURE, CRP, EQIP, etc. • Landlord personalities and relationships • “Every producer will have a totally different situation and the ACRE rules will work differently for each of them.” (Greg Biba, WI FSA)

  8. ACRE Overview

  9. ACRE Payment Triggers • ACRE payments have two triggers • Actual State Revenue must be less than State ACRE Guarantee • Actual Farm Revenue must be less than Farm ACRE Guarantee • Purpose: tie payments to local conditions and pay farmers only when have losses • Some farmers/states will receive ACRE payments, some will not

  10. State ACRE Guarantee • 5-Year Olympic average of state yield per planted acre x 2-Year national price for marketing year x 90% • USDA-NASS Yield per planted acre • Olympic average: drop highest & lowest • Marketing year price: Sept 1 to Aug 31 • Finishing the 2008 marketing year soon

  11. ACRE State Yields • NASS yield/planted acre fine for most crops • Corn the exception, NASS counts silage as planted acres, but does not yield any grain • 20%-30% WI planted acres are silage • NASS corn yield per planted acre low in WI = 108 bu for 2004-2008 • FSA adjusted NASS data for silage, so more reasonable, 138 bu/ac for 2004-2008

  12. WI ACRE State Yields 2 or 3 times out of the last 5 years, actual state yield below ACRE benchmark yield

  13. Corn Soybeans

  14. Wheat Oats

  15. National Marketing Year Average Price • Corn & Soybean marketing year: Sep 1 to Aug 31 • For 2009 crop, ACRE uses avg of 2007 and 2008 • 2007 prices: $4.20 corn & $10.10 soybeans • 2008 avg after 10 of the 12 months • $4.16 for corn & $10.00 for soybeans • With $2.50 corn & $8.50 soybeans for Jul & Aug, ACRE prices will still be $4.04 and $9.92 • Wheat and Oat prices already set: $6.63 & $2.89 • For 2009, ACRE prices will be high

  16. State ACRE Guarantee • 90% x Benchmark State Yield x 2-Year National MYA price • Yields announced March 15 • Prices announced October 1 • State ACRE Guarantee in October this year • Corn: 90% x $4.00 x 138 = $496.60 • Soybeans: 90% x $10.00 x 39 = $351.00 • Wheat: 90% x $6.63 x 61.9 = $369.36 • Oats: 90% x $2.89 x 64 = $166.46 • Cannot change more than 10% each year

  17. Farm ACRE Guarantee • 5-year Olympic avg farm yields x 2-year avg national price + crop insurance premiums paid • Again: will not know price until October 1, so cannot know farm guarantee until then • Crop insurance not needed for ACRE • SURE requires crop insurance

  18. Farm ACRE Guarantee • Establish historical farm yields 2004-2008 • Crop insurance or similar records • Silage: number of loads, or other measures, then FSA help convert to grain equivalents • Silage & Grain: Carry grain yields over to silage acres • Continuity rules apply: Cannot drop or “lose” records for bad years

  19. Farm ACRE GuaranteeFarmers without yield records • Use yield “plugs” = 95% of NASS county avg yield, officially posted by FSA • Get max of own yield & plug for each year • Give “benefit of the doubt” for sign-up • Begin keeping production records • Each year FSA drops one plug • Accurate reporting of acreage intentions

  20. St Croix ACRE Yield Plugs

  21. Pierce ACRE Yield Plugs

  22. ACRE Payments • If BOTH triggers satisfied, then ACRE payment calculated as Planted Acres x 83.3% x (Farm Yield/State Yield) x (State Guarantee – Actual State Revenue) • Planted or considered planted acres • 83.3% (or 85%) standard multiplier • (Farm Yield/State Yield) adjusts for your farms’ greater yield potential • “Loss” = State Guarantee – Actual State Revenue

  23. Fact Sheet Example • Example on FSA Fact Sheet: Table 3 (p. 3) • Works through detailed example for made up case for corn, see steps and numbers needed • Triggers ACRE payment due to price decrease, even though farm yield high • Table 4 (p. 4) compares DCP vs ACRE for this specific case

  24. Do Your Own Example • Official FSA web page http://www.fsa.usda.gov/dcp • Official program details, yields, prices, etc. • ACRE Calculator (Excel spreadsheet) • Enter your farm details, see DCP vs. ACRE payments received with different price and yield assumptions you make • Work with your County Extension Agent

  25. ACRE Spreadsheet Do an Example Do your own with farm data

  26. ACRE Preliminary ResearchAAEA Meetings July 26-28 • Lots of talk about ACRE • Low signup thus far • Will signup be low or a big rush at end? • Why are farmers waiting? • Is ACRE a good choice? • Overlap among ACRE, SURE, & crop insurance

  27. Farm Survey: WI, TX, MS, NC • Risk management survey of farmers in 4 states in March and April • ACRE question: “Which of the following farm program options are you more likely to choose for this FSA Farm?” • Switch to ACRE in 2009, Maybe switch after 2009, Stay in DCP, Not in programs

  28. If you are hesitant and unsure what to do, you are not alone!

  29. ACRE Simulations • Keith H. Coble, Ag Econ at Mississippi State University • NCGA ACRE brochure and spreadsheet • Reviewed methodology and critiqued “tool” • Robert Dismukes and Christine Arriola, USDA-ERS • Simulate counties to predict ACRE payments • Representative farms with county average yield and variability to match APH premiums for 65% coverage • Price variability based on CBOT Dec corn futures historical variability over last few years • Run to predict 5 years into the future 1000 times

  30. Average ACRE Payments • National average over 5 years, for each county planting, weighted by 2007 planted acres, with current market conditions • Corn: $7.94/ac • Soybeans: $8.48/ac • Wheat: $9.77/ac • Huge geographic variability

  31. Main Point • ACRE looks valuable for Wisconsin farmers • Farm with average yield and typical variability • Farms with higher average yields will get even more, since have the Farm:State average yield ratio multiplier • Less likely to meet farm trigger? • Each farm and farmer is different, no one is typical or average

  32. Thinking about ACRE

  33. Three ACRE Advantages • FSA has developed procedures to deal with silage • ACRE will offer better price protection than DCP for this Farm Bill • ACRE flexibility allows moving program benefits to crops actually plant

  34. Silage • State corn yields corrected for silage effect • FSA procedures with establishing farm benchmark yields for silage • Carry grain yields over to silage acres • Grain equivalents are generous • Yield plugs generous for those w/out records • Start keeping production records like crop insurance and have to certify production • Growing lots of silage should not keep you from enrolling in ACRE if it looks good for you

  35. ACRE Price Protection • Price declines will be the most important determinant of ACRE payments • State yields move, but not as much as prices • ACRE 2009 prices pretty high for 2009 • ~$4/bu corn and ~$10/bu soybeans • $2.89/bu oats and $6.63/bu wheat • ACRE state revenue guarantee cannot change more than 10% in any one year • If markets collapse, ACRE guarantees will fall slowly • Is this better protection worth 20% of your DP?

  36. Caveat • If prices jump rapidly higher, ACRE guarantees will rise slowly (10% rule) • Do you really need a payment then? (Only if input prices rising faster)

  37. ACRE Flexibility:Base Acres vs Planted Acres • Base acres establish total acres eligible for ACRE payments, but not your eligible crops • Suppose farm has 50 ac of oat base, but plants 100 ac of corn • Give up 20% of oat DP & enroll 50 corn acres in ACRE, even if farm has no corn base acres • Suppose farm has 50 ac of corn base, but just seeded it down to alfalfa • Can’t enroll alfalfa in ACRE, stay in DCP until later • Note: Cannot establish new base acres

  38. ACRE Flexibility: Set Crop Priority • Suppose 200 acres of base and plant 150 acres corn and 150 acres soybeans 1) Corn 1st: 150 ac corn & 50 ac soybeans 2) Soybeans 1st: 150 ac soybeans & 50 ac corn • Suppose ACRE payments are $5/ac for corn and for $10/ac soybeans 1) 150 x 5 + 50 x 10 = $500 = $1,250 2) 150 x 10 + 50 x 5 = $250 = $1,750

  39. Summary • ACRE likely has value for many farmers • Silage “correction” for state good for corn • Grain yields carry over to silage acres • Generous grain equivalents • ACRE Flexibility: Tied to crops plant, not historical base • ACRE revenue guarantee implies locking in some very good prices given current futures markets

  40. Summary • You must decide for yourself if you want to choose ACRE: August 14th deadline • Don’t wait until the end, get the election form signed first, then enroll • Sit down with UWEX agents and county FSA • Enter your base acres and planted crops into ACRE calculator and see what prices and state/farm yields needed for ACRE payments

  41. Questions? Paul D. Mitchell UW-Madison Ag & Applied Economics Office: (608) 265-6514 Cell: (608) 320-1162 Email: pdmitchell@wisc.edu Extension Web Page: www.aae.wisc.edu/mitchell/extension.htm

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