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ACRE option helps farmers manage crop risk

Agriculture.com Staff 08/07/2008 @ 10:04am

Amid volatile markets, high crop prices and rising input costs, a different way of managing the revenue risk associated with producing field crops is being offered through the new farm program.

Beginning next year, farmers will have a choice of farm support programs: the current traditional suite of programs or a new suite of programs known as Average Crop Revenue (ACRE). Carl Zulauf, an Ohio State University agricultural economist with the Department of Agricultural, Environmental, and Development Economics, said that learning ACRE will take some patience on the part of farmers but offers an alternative that could be useful to them given their current on-farm situation.

"I think ACRE is a very significant addition to farm policy particularly at this point in time because it is designed to help farmers manage the risk they now face," says Zulauf. "When I talk to farmers I get this very conflicted statement from them: 'I'm both excited and scared. I’m excited because I never thought I would be planting $6 or $7 corn, but I’m scared because of how much money I have tied up in input costs.'"

The traditional suite of farm support programs -- marketing loan, price counter-cyclical and direct payments -- are designed to help farmers with what has been the traditional farm income problem since the Great Depression, and that is chronic surplus capacity keeping prices chronically low over an extended period of time.

"The traditional suite of farm programs assumes it knows we will have chronically high farm surpluses and low farm prices. If prices get low enough they trigger a payment," Zulauf says.

In contrast, "ACRE is a revenue (price times yield) program, not a price program. More importantly, ACRE does not presume what the market is going to be, it just follows the market. If prices or yields decline dramatically, ACRE provides support given the market conditions we are in at the time," says Zulauf. "It's, conceptually, a fundamentally different program. Both ACRE and traditional programs are risk management programs, but they manage different kinds of risk. Traditional programs help manage the risk of chronic low prices. ACRE helps manage the risk of a decline in revenue over the short period of a few years. Producers need to understand that they can't look at ACRE through the same eyes they looked at traditional programs, and that will be a real challenge."

Zulauf, who helped develop the ACRE program, has written a series of Web-based documents outlining the specifics of ACRE and how the program works.

Here are some things farmers should know about ACRE:

  • Beginning in 2009, farmers can choose either the traditional suite of farm payment programs or ACRE. If ACRE is chosen, that program must be used throughout the life of the 2008 farm bill. For example, if a farmer chooses ACRE for the 2009 crop year, he/she must use ACRE for each crop year through 2012. For farmers who choose the traditional farm program, they can elect ACRE the following crop year. For example, farmers who use traditional farm programs in 2009 can choose ACRE for the 2010 through 2012 crop years.
  • ACRE cannot be elected for only one program crop. "If you choose ACRE for corn, you must also choose it for wheat and soybeans. However, this is not a whole-farm situation in terms of calculating payment," says Zulauf. "ACRE's payment calculation is specific to an individual crop. A farmer can receive a payment for corn, but not for soybeans."
  • Like traditional farm support programs, ACRE offers direct payments, but only at 80%. "You are going to give up 20% of your direct payments if you choose ACRE. For most corn and soybean farmers, that is going to be $2 to $6 an acre per year you are giving up," says Zulauf. “I think that the central question that every producer is going to have to answer is: Is this 20% reduction in direct payments more than compensated for by the improved management of risk that ACRE provides relative to the counter-cyclical program in today's market of high and volatile prices? Given the prices and cost of production that exist right now, ACRE provides a better risk management option than the price counter-cyclical program. It is unlikely that prices will stay below the price level at which payments will be made from the counter-cyclical program."
  • ACRE is a put option on revenue. "Farmers are used to put options on prices. This program establishes a put option on state revenue. The value at which the revenue put option is established, which is ACRE's state revenue guarantee, equals the following calculation: 90% times the two-year moving average of U.S. market year price times the five-year Olympic moving average of state yield. The use of moving averages of yield and price is why the ACRE revenue guarantee moves with the market," Zulauf says.
  • Under ACRE, not only must the average state revenue per acre for the crop be less than the ACRE revenue guarantee, but the individual farm must have a loss for the crop as well. "Current programs do not require that an individual farmer experience a loss. Farmers can receive a counter-cyclical payment and still have record revenue. That's not going to happen under ACRE," says Zulauf.
  • When deciding whether or not to choose ACRE, the time path that prices take is critical. "If prices continue to go up, then payments under the traditional suite of programs will be greater than under ACRE. Why? Because you are giving up 20% of the direct payments and if prices keep going up, ACRE will never trigger a payment," Zulauf says. "On the other hand, if prices drop substantively, ACRE payments are likely to be larger. ACRE provides you protection in particular to short, steep declines in revenue."

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