By Cory G. Walters and Greg Halich
The deadline for deciding whether to enroll in the optional ACRE program over Direct and Counter-Cyclical Program (DCP) is fast approaching, June 1, 2010. The purpose of this short article is to identify the likelihood of ACRE payments for both the 2010 crop year and the entire life of the farm bill, 2010-12 crop years.
ACRE program provides revenue protection similar to crop insurance. There are four primary differences between ACRE and crop insurance. First, the revenue guarantee incorporates historical revenue instead of expected revenue found in crop insurance. This takes revenue experienced in the past and extends it out into the future. If price were to drop from one year to the next an ACRE payment may be made. Second, ACRE uses state yields to compute the revenue guarantee instead of farm yields found in crop insurance (not including group insurance products). ACRE payments are based on what happens to state yield. When state yield drops but prices remain constant ACRE payments may be available. Third, ACRE uses U.S. season average prices instead of futures. ACRE payments are made when revenue falls from one crop year to another, unlike crop insurance where revenue products pay when futures prices drop from planting (base price) to harvest (harvest price). Fourth, the ACRE insurable “unit” is the farm number where in crop insurance the insurable “unit” is categorized as optional, basic, enterprise, whole farm. With the insurable unit being farm number, producers interested in signing up can pick and choose which farm numbers to enroll.
Price protection found in ACRE is significantly higher than that found in the DCP. In corn, the ACRE trigger price (holding yields constant since it is a revenue program) is $3.45 where in DCP the trigger price is $2.35. Meaning that if payments were to be made in either program ACRE would start paying well in advance of DCP. For soybeans, the ACRE trigger price is $8.74 where the DCP trigger price is $5.36. For wheat, ACRE starts paying when price drops below $5.26 (holding yields constant) and DCP starts paying when price drops below $3.40.
To help determine if ACRE is the best program for KY farmers we ran many revenue simulations using current market information. In this process we had to come up with reasonable expectations for a range of prices and yields, accounting for correlation between these variables in the process. The mean price estimates are noted in the table below (titled Mean Price Estimates). However, each price has a range built around this mean price. For example, the 2010 corn price has a 10% chance of falling below $2.98/bu and has a 10% chance of rising above $4.02/bu in the distribution we used.
Mean Price Estimates
2010 2011 2012
Corn $3.50 $3.76 $3.80
Soybeans $8.86 $9.03 $9.20
Note: Prices based on CME fall contract futures for the week of 5/10/10 and adjusted for $0.30 and $0.40 per bu basis for corn and soybeans respectively.
The base scenario evaluated was for a 1000 acre farm (collection of farm numbers summing to 1000 acres) that is in a 50-50 rotation of corn and soybeans. This base scenario resulted in a +$3.50/acre per year net benefit for the ACRE program in 2010-2012 over DCP. This means that on average, the ACRE payment exceeded the loss in direct payments by $3.50/acre per year. For 2010 only, the net benefit to ACRE rose to +$11.50 over DCP. This means that 2010 looks to be the most likely year for an ACRE payment for the remainder of the farm bill with current market conditions. In other words, if you are considering signing up in the next three years, 2010 is the time to do it.
Farm size will have an impact on the expected ACRE payout. As farm size increases, the likelihood of reaching the yearly payment limitation increases. The practical implication of this is that as you go above 1000 acres, the expected ACRE payments will decrease. With a 2500 acre farm, the net benefit to ACRE decreased from +$3.50 to +$0.50 for 2010-2012. Two points to note about this:
1) You do not have to enroll all of your farms in ACRE and thus you could put roughly 1000 acres in the program.
2) The $0.50 net benefit does not account for the risk management benefit of ACRE (it is providing a type of insurance).
For questions and comments please contact either Cory Walters at firstname.lastname@example.org or Greg Halich at email@example.com