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ACRE: A look under the hood and a test drive

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.

Average national price is just a third of the calculation of your state's revenue guarantee. The other third is the five-year Olympic average of yields in your state just before the crop year to be covered by ACRE. That average throws out the high and low years and calculates the average of the other three. The example Barnaby used is for Iowa. It's high yield was 176.7 bushels per acre in 2004 and the low was 162.7 in 2006. (It might be this year, if the yield is less than the 163 USDA estimate. But we won't know that number until next January's USDA estimate).

The average of those three years (168.9 in '05, 166l8 in '07 and 163 this year, is 166.2. (You can find state yield averages on the National Agricultural Statistics Service Web site. You'll notice that they're higher for Iowa than the averages Barnaby used. That's because NASS calculates a yield on harvested acres. For ACRE, the average yield is derived from planted acres, a larger number).

The last factor in calculating the state yield is 90%. The government isn't going to guarantee all of state revenue. That was considered too costly by the writers of the farm bill.

Multiply the average price of $5 times the Olympic average of 166.2 times 90%, and your corn revenue guarantee under ACRE is $784.07 an acre.

Now let's see what it takes to get a payment.

In this example, Barnaby uses a trendline yield of 166.2 bushels an acre, which is the same as the previous five-year Olympic average. And he uses a price of $4 a bushel. Multiply those two numbers and you've got $664.80 an acre in state revenue to count. That's $83.27 less than the state revenue guarantee of $784.07.

At this point it looks like you're going to get an ACRE payment, but there's another catch. The ACRE program has a 25% payment cap. It will never pay on more than one-fourth of your state's guarantee. In this example, it's $187.01 an acre. In this example, $83.27 is less than the 25% cap, so that's the amount the payment is derived from.

Oh yes, this program only pays on 83.3% of your acres (85% in 2012), so your payment is multiplied by .833, to get $69.36 an acre payment at the state level.

But your own farm's records are the final piece to this puzzle. If your farm's revenue doesn't fall below its own benchmark, you won't get an ACRE payment.

In this example, the farm's benchmark is calculated from an Olympic average yield of 160.2 bushels an acre on the farm. That's multiplied by the same $5 national average price used at the state level. You are also allowed to add in your crop insurance premium, which is $40 an acre in this example. After doing that, you've got a farm-level benchmark of $841 an acre.

In this example, the farm actually had an average yield of 160 bushels an acre, just below its Olympic average. Multiply that by the 2009 price of $4 a bushel, and the farm's revenue is $640 an acre, below the benchmark, making the farm eligible for an ACRE payment.

"What you want to be is just $1 under your benchmark," Barnaby says, in order to get the maximum possible payment and crop sales.

The final calculation of your payment is the farm's own Olympic yield ratio to the state's. In this case, it's .964.

Multiply that factor times the state payment of $69.36, and you get an actual payment of $66.84 an acre.

There is a payment limit of $73,000 per individual, so in this example, your farm could not have more than 1,092 acres of corn (and no losses on other crops) to get that $66.84 per acre. For a married couple farming, they could have 2,184 acres of corn.

The cost to being in ACRE is giving up 20% of your direct payments, or about $5 an acre for corn. Your loan rate would also drop by 30%, cutting the already low likelihood of getting loan deficiency payments.

For those who sign up for ACRE for 2009, "you're giving up $5 for 4 years, so you're essentially giving up $20 an acre. You probably need to collect on one of those four years to make it worth it," Barnaby says.

All of this is hypothetical. There's no way to know what ACRE payments will be in advance. Any payments for 2009 would be based on average prices that NASS would likely make public around November of 2010.

One way to improve your odds of collecting on ACRE before you decide on signing up would be to look at December 2009 corn futures. (New crop futures tend to average 10 to 15 cents per bushel higher than NASS prices, Barnaby says).

If the December corn futures are a lot lower than the two-year average price, then there's a better chance that ACRE will pay out.

"That doesn't guarantee a payment," Barnaby adds. "If the average price ends up being $6, that puts you a dollar out of the money."

Some other economists don't advocate trying to outguess ACRE. They compare it to insurance that you hope you don't collect on. Futures prices could just as well be $6 when the ACRE sign up takes place next spring, then crash to $4 after the 2009 crop is harvested. And that's when NAAS will keep track of its value for about a year.

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.

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