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ACRE lowers some revenue risk

Agriculture.com Staff 07/29/2009 @ 11:14am

You have until August 14 to decide if you want 2009 crops in USDA's ACRE (Average Crop Revenue Election) program. Think of ACRE as state-level group risk insurance.

To collect, your state's revenue has to drop 10% below a benchmark set by an average of marketing year cash prices for 2007 and 2008 crops and a five-year olympic average of statewide yields. Individual crops on your farm have to lose revenue, too. The 2008 marketing year ends August 31 -- after sign-up -- but the July USDA World Agricultural Supply and Demand Estimate (WASDE) gets you close.

The next step most will take is to guess whether 2009 crop revenue will trigger payments. By now you have some feel for yields. But for ACRE, the average cash price for 2009 is set in the marketing year that runs September 1 through August of 2010. No one knows that price, of course, but the WASDE report projects a high and low cash price for 2009-2010.

"Let WASDE give you an indication of what the price is going to be for 2009-2010," says Steve Johnson, Iowa State University Extension farm and ag business management specialist.

Take the midpoint between the high and low. If that number falls below the trigger of 2007 and 2008 average crop prices x 90% ($3.78 for corn in early June; $9.05 on beans), then odds improve for a payment.

But just as you don't know whether you really need crop insurance when you buy it, don't expect to know whether ACRE will pay out, he adds.

Carl Zulauf, the Ohio State University economist who designed an early version of ACRE, agrees that it's nearly impossible to know whether ACRE will pay out. Yields as well as price determine revenue. To be in ACRE you give up 20% of your direct payment (about $4 an acre) and take 30% smaller LDPs. Once in ACRE, you can’t opt out before the farm bill ends in 2012.

"Accumulated evidence from many years of study is that very few people possess the ability to predict changes in prices," Zulauf says in a presentation he made this spring. Instead, Zulauf suggests, look at the level of state income risk you may protect with ACRE vs. the countercyclical payments (CCP) you give up.

As of early April, the Ohio revenue target for ACRE for corn was $567 an acre vs. only $282 an acre for CCP (which also kicks in at a much lower price of $2.35 a bushel).

Ultimately, there are trade-offs, perhaps best put by a University of Illinois summary of the program. It says the traditional program "will have $4 to $5 higher per-acre direct payment but almost no chance of LDP or countercyclical payments," Illinois economists say. "ACRE will have $4 to $5 lower direct payment but much higher chance of ACRE payments (30% to 40% of years)."

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