Thinking about Thinking about ACREACRE

Paul D. MitchellPaul D. MitchellAgricultural and Applied Agricultural and Applied

EconomicsEconomicsUniversity of Wisconsin-MadisonUniversity of Wisconsin-Madison

(608) 265-6514(608) 265-6514pdmitchell@wisc.edupdmitchell@wisc.edu

Big Red Barn, Baldwin, WIBig Red Barn, Baldwin, WIJuly 30, 2009July 30, 2009

Goal TodayGoal Today

ACRE: Blind men and the elephantACRE: Blind men and the elephant ACRE overview and example sheetACRE overview and example sheet Preliminary research regarding ACREPreliminary research regarding ACRE Thinking about ACRE Fact SheetThinking about ACRE Fact Sheet

ACRE is Like GRIP Crop ACRE is Like GRIP Crop InsuranceInsurance

Give up certain premium for uncertain Give up certain premium for uncertain paybackpayback Premium = 20% DP (+ CCP & 30% lower loan Premium = 20% DP (+ CCP & 30% lower loan

rate)rate) Basis Risk: State level, not farm levelBasis Risk: State level, not farm level

Won’t always pay you when you need it and as Won’t always pay you when you need it and as much as you need, but most of the time it willmuch as you need, but most of the time it will

No guarantee that get back your premiumNo guarantee that get back your premium Farm must establish historical yields, keep Farm must establish historical yields, keep

records, follow lots of rules, just as for records, follow lots of rules, just as for traditional crop insurancetraditional crop insurance

ACRE is not quite like crop ACRE is not quite like crop insuranceinsurance

At ACRE signup, will not know state or At ACRE signup, will not know state or farm ACRE guarantee for 2009farm ACRE guarantee for 2009 2008 MYA price finalized in Oct. 20092008 MYA price finalized in Oct. 2009 When When plantplant, will not know these either, will not know these either

Will not know if ACRE payments due until Will not know if ACRE payments due until 2009 state yields (3/15/2010) and 2009 2009 state yields (3/15/2010) and 2009 MYA price (10/15/2010) are determinedMYA price (10/15/2010) are determined

ACRE payments not come until well after ACRE payments not come until well after crop season, no advance payments madecrop season, no advance payments made

Expect late October, like counter-Expect late October, like counter-cyclicalscyclicals

ACRE is a Paradigm ShiftACRE is a Paradigm Shift ACRE is a brand new idea and a big ACRE is a brand new idea and a big

shift in how commodity programs shift in how commodity programs work—support revenue, not priceswork—support revenue, not prices

Not quite: the idea not really all that Not quite: the idea not really all that newnew Congressional Budget Office study Congressional Budget Office study

(1983)(1983) Miranda and Glauber AJAE article (1991)Miranda and Glauber AJAE article (1991) Iowa Farm Bureau, 1996 farm bill Iowa Farm Bureau, 1996 farm bill

proposalproposal

ACRE is a Complicated ACRE is a Complicated ProgramProgram

More rules, terms acronyms to figure outMore rules, terms acronyms to figure out Benchmark State Yield, Olympic Average, Benchmark State Yield, Olympic Average,

Farm Level Trigger, National MYA Prices, Farm Level Trigger, National MYA Prices, State ACRE GuaranteeState ACRE Guarantee

Remember 1st time you bought crop Remember 1st time you bought crop insurance or revenue insurance?insurance or revenue insurance? Very popular now, but slow adoption at start Very popular now, but slow adoption at start

because new and seemed more complicatedbecause new and seemed more complicated ACRE will be clearer after a little workACRE will be clearer after a little work

ACRE is a “no brainer”—sign ACRE is a “no brainer”—sign up!up!

ACRE benefits will differ for each farm & farmerACRE benefits will differ for each farm & farmer Your benchmark farm yields and probability your Your benchmark farm yields and probability your

yield below farm benchmark, your farm:state yield yield below farm benchmark, your farm:state yield ratioratio

Number of base acres, base acre crops, and actual Number of base acres, base acre crops, and actual acres of each planted cropsacres of each planted crops

Crop insurance coverage you already haveCrop insurance coverage you already have Other programs: SURE, CRP, EQIP, etc.Other programs: SURE, CRP, EQIP, etc. Landlord personalities and relationshipsLandlord personalities and relationships

““Every producer will have a totally different Every producer will have a totally different situation and the ACRE rules will work situation and the ACRE rules will work differently for each of them.” (Greg Biba, WI differently for each of them.” (Greg Biba, WI FSA)FSA)

ACRE OverviewACRE Overview

ACRE Payment TriggersACRE Payment Triggers ACRE payments have two triggersACRE payments have two triggers

Actual State Revenue must be Actual State Revenue must be less less thanthan State ACRE Guarantee State ACRE Guarantee

Actual Farm Revenue must be Actual Farm Revenue must be less less thanthan Farm ACRE Guarantee Farm ACRE Guarantee

Purpose: tie payments to local conditions Purpose: tie payments to local conditions and pay farmers only when have lossesand pay farmers only when have losses Some farmers/states will receive ACRE Some farmers/states will receive ACRE

payments, some will notpayments, some will not

State ACRE GuaranteeState ACRE Guarantee

5-Year Olympic average of state yield per 5-Year Olympic average of state yield per planted acre x 2-Year national price for planted acre x 2-Year national price for marketing year x 90%marketing year x 90% USDA-NASS Yield per USDA-NASS Yield per plantedplanted acre acre Olympic average: drop highest & lowestOlympic average: drop highest & lowest Marketing year price: Sept 1 to Aug 31Marketing year price: Sept 1 to Aug 31

Finishing the 2008 marketing year Finishing the 2008 marketing year soonsoon

ACRE State YieldsACRE State Yields

NASS yield/planted acre fine for most cropsNASS yield/planted acre fine for most crops Corn the exception, NASS counts silage as Corn the exception, NASS counts silage as

planted acres, but does not yield any grainplanted acres, but does not yield any grain 20%-30% WI planted acres are silage20%-30% WI planted acres are silage NASS corn yield per planted acre low in WI NASS corn yield per planted acre low in WI

= 108 bu for 2004-2008= 108 bu for 2004-2008 FSA adjusted NASS data for silage, so more FSA adjusted NASS data for silage, so more

reasonable, 138 bu/ac for 2004-2008reasonable, 138 bu/ac for 2004-2008

WI ACRE State YieldsWI ACRE State Yields

YearYear CornCorn SoybeanSoybeanss

WheatWheat OatsOats

20042004 135135 33.533.5 55.455.4 6565

20052005 148148 43.043.0 52.252.2 6464

20062006 142142 43.543.5 76.176.1 6363

20072007 135135 40.040.0 66.866.8 6767

20082008 136136 34.534.5 63.463.4 6262

ACREACRE 138138 39.039.0 61.961.9 64642 or 32 or 3 times out of the last 5 years, times out of the last 5 years, actual state yield below ACRE actual state yield below ACRE benchmark yieldbenchmark yield

133

135

137

139

141

143

145

147

149

2003 2004 2005 2006 2007 2008 2009

Sta

te Y

ield

s

32

34

36

38

40

42

44

2003 2004 2005 2006 2007 2008 2009

Sta

te Y

ield

s

Corn

Soybeans

50

55

60

65

70

75

80

2003 2004 2005 2006 2007 2008 2009

Sta

te Y

ield

61

62

63

64

65

66

67

68

2003 2004 2005 2006 2007 2008 2009

Sta

te Y

ield

s

Wheat

Oats

National Marketing Year Average National Marketing Year Average PricePrice

Corn & Soybean marketing year: Sep 1 to Aug 31Corn & Soybean marketing year: Sep 1 to Aug 31 For 2009 crop, ACRE uses avg of 2007 and 2008For 2009 crop, ACRE uses avg of 2007 and 2008 2007 prices: $4.20 corn & $10.10 soybeans2007 prices: $4.20 corn & $10.10 soybeans 2008 avg after 10 of the 12 months2008 avg after 10 of the 12 months

$4.16 for corn & $10.00 for soybeans$4.16 for corn & $10.00 for soybeans With $2.50 corn & $8.50 soybeans for Jul & Aug, With $2.50 corn & $8.50 soybeans for Jul & Aug,

ACRE prices will still be $4.04 and $9.92ACRE prices will still be $4.04 and $9.92 Wheat and Oat prices already set: $6.63 & $2.89Wheat and Oat prices already set: $6.63 & $2.89 For 2009, ACRE prices will be highFor 2009, ACRE prices will be high

State ACRE GuaranteeState ACRE Guarantee 90% x Benchmark State Yield x 2-Year 90% x Benchmark State Yield x 2-Year

National MYA priceNational MYA price Yields announced March 15Yields announced March 15 Prices announced October 1Prices announced October 1

State ACRE Guarantee in October this State ACRE Guarantee in October this yearyear Corn: 90% x Corn: 90% x $4.00$4.00 x 138 = $496.60 x 138 = $496.60 Soybeans: 90% x Soybeans: 90% x $10.00$10.00 x 39 = $351.00 x 39 = $351.00 Wheat: 90% x $6.63 x 61.9 = $369.36Wheat: 90% x $6.63 x 61.9 = $369.36 Oats: 90% x $2.89 x 64 = $166.46Oats: 90% x $2.89 x 64 = $166.46

Cannot change more than 10% each yearCannot change more than 10% each year

Farm ACRE GuaranteeFarm ACRE Guarantee

5-year Olympic avg farm yields x 2-5-year Olympic avg farm yields x 2-year avg national price + crop year avg national price + crop insurance premiums paidinsurance premiums paid

Again: will not know price until Again: will not know price until October 1, so cannot know farm October 1, so cannot know farm guarantee until thenguarantee until then

Crop insurance not needed for ACRECrop insurance not needed for ACRE SURE requires crop insuranceSURE requires crop insurance

Farm ACRE GuaranteeFarm ACRE Guarantee Establish historical farm yields 2004-2008Establish historical farm yields 2004-2008

Crop insurance or similar recordsCrop insurance or similar records Silage: number of loads, or other Silage: number of loads, or other

measures, then FSA help convert to grain measures, then FSA help convert to grain equivalentsequivalents

Silage & Grain: Carry grain yields over to Silage & Grain: Carry grain yields over to silage acressilage acres

Continuity rules apply: Cannot drop or Continuity rules apply: Cannot drop or “lose” records for bad years“lose” records for bad years

Farm ACRE GuaranteeFarm ACRE GuaranteeFarmers without yield recordsFarmers without yield records

Use yield “plugs” = 95% of NASS county Use yield “plugs” = 95% of NASS county avg yield, officially posted by FSAavg yield, officially posted by FSA

Get max of own yield & plug for each Get max of own yield & plug for each yearyear

Give “benefit of the doubt” for sign-upGive “benefit of the doubt” for sign-up Begin keeping production recordsBegin keeping production records Each year FSA drops one plugEach year FSA drops one plug Accurate reporting of acreage intentionsAccurate reporting of acreage intentions

St Croix ACRE Yield PlugsSt Croix ACRE Yield Plugs

YearYear CornCorn SoybeaSoybeansns

WheaWheatt

OatsOats

20042004 129.129.66

30.630.6 42.642.6 71.671.6

20052005 150.150.00

42.842.8 43.243.2 58.558.5

20062006 85.585.5 32.632.6 45.345.3 53.053.0

20072007 75.975.9 25.325.3 45.345.3 65.265.2

20082008 134.134.22

30.730.7 44.544.5 55.255.2

Olympic Olympic AvgAvg

116116 3131 44.344.3 6060

Pierce ACRE Yield PlugsPierce ACRE Yield Plugs

YearYear CornCorn SoybeaSoybeansns

WheaWheatt

OatsOats

20042004 131.131.66

32.332.3 42.642.6 67.167.1

20052005 157.157.44

42.942.9 43.243.2 53.953.9

20062006 134.134.33

40.540.5 45.345.3 58.658.6

20072007 123.123.66

32.532.5 38.638.6 72.172.1

20082008 153.153.99

39.539.5 44.544.5 64.964.9

Olympic Olympic AvgAvg

140140 37.537.5 43.443.4 63.563.5

ACRE PaymentsACRE Payments If If BOTHBOTH triggers satisfied, then ACRE triggers satisfied, then ACRE

payment calculated as Planted Acres x 83.3% payment calculated as Planted Acres x 83.3% x (Farm Yield/State Yield) x (State x (Farm Yield/State Yield) x (State Guarantee – Actual State Revenue)Guarantee – Actual State Revenue)

Planted or considered planted acresPlanted or considered planted acres 83.3% (or 85%) standard multiplier83.3% (or 85%) standard multiplier (Farm Yield/State Yield) adjusts for your (Farm Yield/State Yield) adjusts for your

farms’ greater yield potentialfarms’ greater yield potential ““Loss” = State Guarantee – Actual State Loss” = State Guarantee – Actual State

RevenueRevenue

Fact Sheet ExampleFact Sheet Example

Example on FSA Fact Sheet: Table 3 (p. 3)Example on FSA Fact Sheet: Table 3 (p. 3) Works through detailed example for Works through detailed example for

made up case for corn, see steps and made up case for corn, see steps and numbers needednumbers needed

Triggers ACRE payment due to price Triggers ACRE payment due to price decrease, even though farm yield highdecrease, even though farm yield high

Table 4 (p. 4) compares DCP vs ACRE for Table 4 (p. 4) compares DCP vs ACRE for this specific casethis specific case

Do Your Own ExampleDo Your Own Example

Official FSA web page Official FSA web page http://www.fsa.usda.gov/dcphttp://www.fsa.usda.gov/dcp Official program details, yields, prices, etc.Official program details, yields, prices, etc.

ACRE Calculator (Excel spreadsheet)ACRE Calculator (Excel spreadsheet) Enter your farm details, see DCP vs. ACRE Enter your farm details, see DCP vs. ACRE

payments received with different price and payments received with different price and yield assumptions you makeyield assumptions you make

Work with your County Extension AgentWork with your County Extension Agent

ACRE SpreadsheetACRE Spreadsheet

Do an ExampleDo an Example

Do your own with farm dataDo your own with farm data

ACRE Preliminary ResearchACRE Preliminary Research

AAEA Meetings July 26-28AAEA Meetings July 26-28

Lots of talk about ACRELots of talk about ACRE Low signup thus farLow signup thus far Will signup be low or a big rush at end?Will signup be low or a big rush at end? Why are farmers waiting?Why are farmers waiting? Is ACRE a good choice?Is ACRE a good choice? Overlap among ACRE, SURE, & crop Overlap among ACRE, SURE, & crop

insuranceinsurance

Farm Survey: WI, TX, MS, Farm Survey: WI, TX, MS, NCNC

Risk management survey of farmers in Risk management survey of farmers in 4 states in March and April4 states in March and April

ACRE question: “Which of the following ACRE question: “Which of the following farm program options are you more farm program options are you more likely to choose for this FSA Farm?” likely to choose for this FSA Farm?”

Switch to ACRE in 2009, Maybe switch Switch to ACRE in 2009, Maybe switch after 2009, Stay in DCP, Not in after 2009, Stay in DCP, Not in programs programs

WIWI MSMS NCNC TXTXSwitch to ACRE Switch to ACRE in 2009in 2009

13 13 (3%)(3%)

4 4 (2%)(2%)

10 10 (5%)(5%)

2 2 (1%)(1%)

Wait, maybe Wait, maybe switch after switch after 20092009

124 124 (32%(32%

))

41 41 (24%(24%

))

60 60 (27%(27%

))

75 75 (26%(26%

))Stay in DCP for Stay in DCP for this Farm Billthis Farm Bill

205 205 (54%(54%

))

112 112 (67%(67%

))

127 127 (58%(58%

))

194 194 (68%(68%

))Not in Not in Commodity Commodity ProgramsPrograms

41 41 (11%(11%

))

11 11 (7%)(7%)

23 23 (10%(10%

))

14 14 (5%)(5%)

TotalTotal 383383 168168 220220 285285

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

ACRE SimulationsACRE Simulations Keith H. Coble, Ag Econ at Mississippi State Keith H. Coble, Ag Econ at Mississippi State

UniversityUniversity NCGA ACRE brochure and spreadsheetNCGA ACRE brochure and spreadsheet Reviewed methodology and critiqued “tool”Reviewed methodology and critiqued “tool”

Robert Dismukes and Christine Arriola, USDA-Robert Dismukes and Christine Arriola, USDA-ERSERS

Simulate counties to predict ACRE payments Simulate counties to predict ACRE payments Representative farms with county average yield and Representative farms with county average yield and

variability to match APH premiums for 65% coveragevariability to match APH premiums for 65% coverage Price variability based on CBOT Dec corn futures Price variability based on CBOT Dec corn futures

historical variability over last few yearshistorical variability over last few years Run to predict 5 years into the future 1000 timesRun to predict 5 years into the future 1000 times

Average ACRE PaymentsAverage ACRE Payments

National average over 5 years, for National average over 5 years, for each county planting, weighted by each county planting, weighted by 2007 planted acres, with current 2007 planted acres, with current market conditionsmarket conditions Corn: $7.94/acCorn: $7.94/ac Soybeans: $8.48/acSoybeans: $8.48/ac Wheat: $9.77/acWheat: $9.77/ac

Huge geographic variabilityHuge geographic variability

Main PointMain Point

ACRE looks valuable for Wisconsin ACRE looks valuable for Wisconsin farmersfarmers Farm with average yield and typical Farm with average yield and typical

variabilityvariability Farms with higher average yields will get Farms with higher average yields will get

even more, since have the Farm:State even more, since have the Farm:State average yield ratio multiplieraverage yield ratio multiplier Less likely to meet farm trigger?Less likely to meet farm trigger?

Each farm and farmer is different, no one Each farm and farmer is different, no one is typical or averageis typical or average

Thinking about ACREThinking about ACRE

Three ACRE AdvantagesThree ACRE Advantages

1.1. FSA has developed procedures to FSA has developed procedures to deal with silagedeal with silage

2.2. ACRE will offer better price ACRE will offer better price protection than DCP for this Farm protection than DCP for this Farm BillBill

3.3. ACRE flexibility allows moving ACRE flexibility allows moving program benefits to crops actually program benefits to crops actually plantplant

SilageSilage State corn yields corrected for silage effectState corn yields corrected for silage effect FSA procedures with establishing farm FSA procedures with establishing farm

benchmark yields for silagebenchmark yields for silage Carry grain yields over to silage acresCarry grain yields over to silage acres Grain equivalents are generousGrain equivalents are generous Yield plugs generous for those w/out recordsYield plugs generous for those w/out records

Start keeping production records like crop Start keeping production records like crop insurance and have to certify productioninsurance and have to certify production

Growing lots of silage should not keep you Growing lots of silage should not keep you from enrolling in ACRE if it looks good for from enrolling in ACRE if it looks good for youyou

ACRE Price ProtectionACRE Price Protection Price declines will be the most important Price declines will be the most important

determinant of ACRE paymentsdeterminant of ACRE payments State yields move, but not as much as pricesState yields move, but not as much as prices

ACRE 2009 prices pretty high for 2009ACRE 2009 prices pretty high for 2009 ~$4/bu corn and ~$10/bu soybeans~$4/bu corn and ~$10/bu soybeans $2.89/bu oats and $6.63/bu wheat$2.89/bu oats and $6.63/bu wheat

ACRE state revenue guarantee cannot change ACRE state revenue guarantee cannot change more than 10% in any one yearmore than 10% in any one year If markets collapse, ACRE guarantees will fall slowlyIf markets collapse, ACRE guarantees will fall slowly

Is this better protection worth 20% of your DP?Is this better protection worth 20% of your DP?

CaveatCaveat

If prices jump rapidly higher, ACRE If prices jump rapidly higher, ACRE guarantees will rise slowly (10% rule)guarantees will rise slowly (10% rule) Do you really need a payment then?Do you really need a payment then?

(Only if input prices rising faster)(Only if input prices rising faster)

ACRE Flexibility:ACRE Flexibility:Base Acres vs Planted AcresBase Acres vs Planted Acres

Base acres establish total acres eligible for Base acres establish total acres eligible for ACRE payments, but not your eligible cropsACRE payments, but not your eligible crops

Suppose farm has 50 ac of oat base, but Suppose farm has 50 ac of oat base, but plants 100 ac of cornplants 100 ac of corn Give up 20% of oat DP & enroll 50 corn acres in Give up 20% of oat DP & enroll 50 corn acres in

ACRE, even if farm has no corn base acresACRE, even if farm has no corn base acres Suppose farm has 50 ac of corn base, but Suppose farm has 50 ac of corn base, but

just seeded it down to alfalfajust seeded it down to alfalfa Can’t enroll alfalfa in ACRE, stay in DCP until Can’t enroll alfalfa in ACRE, stay in DCP until

laterlater Note: Cannot establish new base acresNote: Cannot establish new base acres

ACRE Flexibility: Set Crop ACRE Flexibility: Set Crop PriorityPriority

Suppose 200 acres of base and plant 150 Suppose 200 acres of base and plant 150 acres corn and 150 acres soybeansacres corn and 150 acres soybeans

1) Corn 11) Corn 1stst: 150 ac corn & 50 ac soybeans: 150 ac corn & 50 ac soybeans

2) Soybeans 12) Soybeans 1stst: 150 ac soybeans & 50 ac : 150 ac soybeans & 50 ac corncorn

Suppose ACRE payments are $5/ac for Suppose ACRE payments are $5/ac for corn and for $10/ac soybeanscorn and for $10/ac soybeans

1) 150 x 5 + 50 x 10 = $500 = $1,2501) 150 x 5 + 50 x 10 = $500 = $1,250

2) 150 x 10 + 50 x 5 = $250 = $1,7502) 150 x 10 + 50 x 5 = $250 = $1,750

SummarySummary ACRE likely has value for many farmersACRE likely has value for many farmers Silage “correction” for state good for Silage “correction” for state good for

corncorn Grain yields carry over to silage acresGrain yields carry over to silage acres Generous grain equivalentsGenerous grain equivalents

ACRE Flexibility: Tied to crops plant, ACRE Flexibility: Tied to crops plant, not historical basenot historical base

ACRE revenue guarantee implies ACRE revenue guarantee implies locking in some very good prices given locking in some very good prices given current futures marketscurrent futures markets

SummarySummary

You must decide for yourself if you want to You must decide for yourself if you want to choose ACRE: August 14choose ACRE: August 14thth deadline deadline Don’t wait until the end, get the election form Don’t wait until the end, get the election form

signed first, then enrollsigned first, then enroll Sit down with UWEX agents and county FSASit down with UWEX agents and county FSA

Enter your base acres and planted crops Enter your base acres and planted crops into ACRE calculator and see what prices into ACRE calculator and see what prices and state/farm yields needed for ACRE and state/farm yields needed for ACRE paymentspayments

Questions?Questions?

Paul D. MitchellPaul D. Mitchell

UW-Madison Ag & Applied EconomicsUW-Madison Ag & Applied Economics

Office: (608) 265-6514Office: (608) 265-6514

Cell: (608) 320-1162Cell: (608) 320-1162

Email: pdmitchell@wisc.eduEmail: pdmitchell@wisc.edu

Extension Web Page:Extension Web Page:

www.aae.wisc.edu/mitchell/extension.htmwww.aae.wisc.edu/mitchell/extension.htm