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Average Crop Revenue and the 'triple-E' disease

Agriculture.com Staff 11/07/2007 @ 10:19am

One of the new provisions in the Senate Agriculture Committee's version of the farm bill that will certainly generate some discussion is the Average Crop Revenue (ACR) program whose champion has been Midwest corn growers.

In general, the program focuses on revenue by guaranteeing producers that their per-acre revenue in a given year will not fall below a percentage (perhaps 90% but maybe as much as 100%) of the average per-acre revenue received in the previous three years. Producers of other crops are less enthusiastic about the program than corn growers.

Under the provisions now under discussion, farmers would be able to opt into ACR in 2010 for their base acres in exchange for reduced direct payments, the elimination of the Marketing Loan and Counter-Cyclical Payment (CCP) programs, and the switch from nonrecourse loans to recourse loans. It is expected that the program will result in reduced crop insurance rates that would offset a portion of the reduction in direct payments. Once in the program, farmers would be locked into ACR for the duration of the 2007 farm bill.

One of the results of the current high price levels for corn, wheat, and soybeans is that producers of these commodities are limited to receiving just their direct payments. Payments would have to fall below the target price -- adjusted by the direct payments -- for farmers to receive counter-cyclical payments. With the ACR program, these farmers could receive government payments any time per-acre revenue fell below the previous three year's average. In addition, unlike current programs, ACR would protect farmers against reductions in yield in addition to price.

Given its protection against yield loss and the chance to get payments above the target price, ACR may sound pretty good. But to us, it sounds like 1996 all over again.

Why could that be true? Because both Freedom to Farm in 1996 and ACR now are based on the expectation that prices are going to be very good for the foreseeable future and the chance that they would dive off a cliff is very small.

In the case of the 1996 farm bill, farmers and policymakers alike expected continuing high prices because of the "double E" disease -- Export Exuberance. Prices were expected to remain high in response to booming export demand due to China's growing middle class that would switch to a diet with more corn-fed animal protein and less grains and seeds.

China did not become a net importer of corn and by 1998 corn prices had fallen to below $2.00. Farmers collected massive LDPs (Loan Deficiency Payments) and Congress responded with emergency payments.

In the case of the ACR, farmers and policymakers are expecting continuing high prices because of the "triple E" disease -- Ethanol and Export Exuberance. With additional plants coming online, the demand for ethanol is projected to use 3.2 billion bushels of corn. As the result of production problems with feed grains in other countries, U.S. exports are projected to use 2.35 billion bushels of corn. With 2007 crop year projected corn stocks to be at 2 billion bushels, let either of these—exports and ethanol—falter and we have a clear risk of a significant price decline.

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