Is this ACRE green?

Agriculture.com Staff 08/21/2008 @ 10:34am

Imagine this: You're at a hotel for the winter meeting of your favorite farm group. A fire alarm sounds. You have two choices for escape. Open your room window and jump 10 stories to a tiny net held by firefighters. Or, dash down the hall into a newfangled, insulated elevator designed to let you down slowly.

That's the essence of a decision facing commodity growers. We've all been on the upper floors of the High Price Hotel. If a fire sale turns high prices to smoke, the 2008 farm bill offers you a one-time choice. Rely on the old safety net to protect you if prices fall below target prices. (That's $2.63 a bushel for corn). Or jump into the Average Crop Revenue Election (ACRE) program, starting as early as sign-up for the 2009 crop.

ACRE is like an elevator. It's not a solid floor. Instead of countercyclical payments tied to a fixed target price, it offers payments for specific crops tied to a state-level revenue guarantee. The guarantee moves up or down with the market because it's hooked to several rolling averages.

ACRE's state revenue guarantee is based on a two-year average of the U.S. crop year cash price multiplied by an Olympic average of your state's five most recent crop year yields. (That's an average that tosses out the high and low years.) If a state's revenue falls below 90% of that per-acre guarantee, payments start to kick in. But you'll never get more than 25% of that guarantee. The guarantee is for 83.3% of your planted crop acres (85% in 2012).

There's a second trigger, too. Your farm has to have a loss. That happens when your farm's income (actual yields times the U.S. market year-average price) is below on-farm expected revenue. That's calculated using a five-year Olympic average of your yields and the two-year rolling average of national prices. (Crop insurance premiums are added back in to the on-farm benchmark.)

The reason why all of this works something like an elevator is that the farm law limits changes in the state-level ACRE guarantee to 10% a year, going up or down. So your guarantee can't fall too fast.

Because any benefits of ACRE depend on where prices go through 2012, no one can predict with absolute certainty whether ACRE will be better than sticking with the old safety net. But Carl Zulauf, an economist at Ohio State University, understands it as well as anyone. He designed a program similar to ACRE for American Farmland Trust during the farm bill debate.

ACRE, Zulauf says, can help you "adjust to systemic risk from price and state yield declines." And he adds, "it has the ability to help farmers when there’s a period of rapidly increasing cost of production."

If things get bad, ACRE could kick in sooner and help you a lot more than the old safety net. But not forever, because ACRE is based on averages that could keep falling.

ACRE has a cost. You give up 20% of your direct payments if you opt in. For corn, that's a U.S. average of $4.87 an acre. There's a second potential cost if prices really fall. Anyone in ACRE is still in the marketing loan program. But your loan rates drop by 30%. The national loan rate for corn stays at $1.95 in the 2008 farm bill. Under ACRE it is $1.65 1/2.

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