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ACRE: A look under the hood and a test drive

Agriculture.com Staff 08/25/2008 @ 2:49pm

In the coming months, your eyes may be glazing over at countless winter workshops on the farm bill's newest wrinkle, the Average Crop Revenue Election, or ACRE.

You can take the easy way out. Just ignore it. ACRE is a voluntary program. You can sign up for it for 2009, or as late as the 2012 crop.

Yet this could be one of the most important decisions that farmers in the commodity program will make during the life of the current farm bill.

Think of ACRE as a quirky, somewhat unreliable revenue insurance policy. The revenue in your entire state for a particular crop has to drop for payments to trigger on that crop. And your own farm has to have a shortfall in expected revenue, too. Yet, if the last two years of relatively high prices turn out to be a bubble, ACRE is much more likely to protect you on the way down than the old 2002 farm bill safety net's counter-cyclical payments.

Already there are some online spreadsheets that allow you to enter your own hunches about future prices and yields in order to see how ACRE might or might not work for you. Iowa State University has one on the Web site for the Center for Agricultural and Rural Development (CARD) here.

However, a more realistic scenario might be one that Kansas State University ag economist Art Barnaby recently shared with Agriculture Online. He used a step-by-step worksheet that you can download to see how ACRE might work.

As you'll see, the starting point for all this is the national average price for your crop in the two years before the crop that might be covered by ACRE. The first crop you can enroll is 2009. So we start with averages for the 2007-2008 marketing year and the 2008-2009 year.

These probably won't be the exact prices you've seen. They're the average price received by farmers as reported by the USDA's National Agricultural Statistics Service. And we don't know either one. The NASS price for the 2007 will be known sometime after that marketing year ends at the end of August, probably by late October or early November, Barnaby says. This year's price won't be known for another year.

To make his worksheet calculations easier, Barnaby used a 2007-2008 corn price of $4 and put the price for '08-'09 at $6. The price for last year's crop, as estimated by NASS for the August 12 crop report was $4.25. The range of its projection for this year's crop was $5.50 to $6.50, so, barring a disastrous early freeze in the Corn Belt, these numbers could be pretty close to the average price. If they hold up, that gives you an average price of $5 for the two years.

"It's basically a year after harvest," when the NASS prices are known, Barnaby says.

Barnaby calls that $5 two-year average the ACRE strike price, because he sees ACRE as something like a put option on state revenue. If real prices for the 2009 crop fall below that, then ACRE could have an in-the-money strike price.

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