1. Sharpening the ACRE Tool Pat Westhoff (westhoffp@missouri.edu)westhoffp@missouri.edu Based on work by Scott Gerlt & Peter Zimmel National Farm Business Management Conference St. Louis, June 15, 2009

2. Today’s agenda  ACRE program  What is ACRE?  How are the calculations made?  Example  Decision tree  Sign up  ACRE tool

3. ACRE  ACRE, the Average Crop Revenue Election program  Offers protection against reduction in gross revenue  Departure from fixed, price-based programs  For payments to occur, state and farm actual revenue must be less than trigger levels that adjust from year to year

4. ACRE’s moving targets  Two triggers must be pulled  State actual revenue must fall below the state ACRE guarantee AND  Actual farm revenue must fall below the farm ACRE benchmark established for your farm  Get a new guarantee each year  Once established, the state ACRE guarantee cannot move more than 10 percent per year. Four Important Revenues Missouri ACRE Guarantee Missouri Actual Your Farm ACRE Benchmark Your Farm Actual

5. The trade-off  Potential payments are quite large, but  Producers give up: ▪20% of direct payments (only guaranteed payment) ▪All countercyclical payments ▪And must accept 30% lower loan rate CropLoan Rate70% of Loan Rate Corn ($/bu)1.951.365 Soybeans ($/bu)5.003.50 Wheat ($/bu)2.751.92 Grain Sorghum ($/bu)1.951.365 Cotton ($/lb)0.520.364 Rice ($/cwt)6.504.55

6. Payment acres  Payment acres are 83.3 percent of planted acres, 2009-2011, 85 percent in 2012  Total payment acres cannot exceed total base acres for the farm  Lesser of 83.3% of planted acres or base acres  Example:  100 acres of base  150 acres planted  Payment acres lesser of:  100 base acres or (150*.833 = 125)  Payment acres = 100 acres

7. Some limits to ACRE payments  State payment rate per acre cannot exceed 25% of state guarantee.  Subject to payment limit rules.  $65,000 + 20% of direct payment you gave up  Payments received October of year following harvest  2009 ACRE payment received in October 2010  No advanced ACRE payments

8. State ACRE guarantee calculation  State ACRE guarantee revenue per planted acre =  Recent 2-year average national season- average farm price ▪times  5-year Olympic average of state yields per planted acre, ▪times  90%

9. Farm ACRE benchmark calculation  Farm ACRE benchmark revenue per planted acre =  Recent 2-year average national price ▪times  5-year Olympic average of farm yields per planted acre, ▪plus  Crop insurance premiums paid

10. Farm benchmark yields  Yields from 5 most recent years  Higher of:  95% of county average yield  Actual farm yield determined by:  Total production divided by total PLANTED acres  If you use 95% of county average for any of the 5 years that you HAD production of that crop, you have to use 95% of county average for all 5 years

11. Acceptable production records  Crop insurance and NAP records  Loan and LDP records  Commercially sold production records  Commercial receipts, settlement sheets, warehouse ledger sheets, load summaries  Fed to livestock  Documentary evidence  Such as contemporaneous measurements, truck scale tickets, contemporaneous diaries

12. Contrast state and farm triggers  State guarantee revenue is docked 10%  Farm benchmark revenue is not docked and crop insurance premium is added  So....  if the state qualifies, the farm will usually qualify, but not always  Formula encourages crop insurance buy up  Correlation between farm and state yields is important

13. Adjustments and stipulations  Farm payments are adjusted for yields  Olympic avg farm relative to Olympic avg state  There is no minimum farm loss to meet the trigger  If farm level loss is $0.01 per acre, payment is same as if farm level loss is $100 per acre  But ACRE payments = 0 if farm revenue exceeds farm benchmark by even $0.01 per acre  Separate ACRE payments calculated for each program crop planted, then summed for farm

14. A hypothetical corn example State ACRE Guarantee Revenue Calculation 20042005200620072008Average MO corn yield/pltd acre161111138137140 Olympic average138137140138 US price per bushel$4.20 Olympic yield * avg price$579.60 MO revenue guarantee with 10% adjustment$521.64 State level trigger is met. Average payment rate: $521.64 - $504.00 = $17.64 per plt acre 2009 STATE ACTUAL REVENUE CALCULATION 2009 Yield 2009/10 US Price 2009 Revenue 140$3.60$504 Maximum payment rate: $130.41 ($25% of $521.64)

15. A Missouri corn farm Farm ACRE Benchm’k Revenue Calculation20042005200620072008Average Farm yield170130100140135135.0 Olympic average130140135135.0 U.S. average price$4.20 Olympic yield * avg price$567.00 Farm revenue benchmark with $25.00 crop insurance $592.00 2009 FARM ACTUAL REVENUE CALCULATION 2009 Yield 2009/10 US Price 2009 Revenue 150$3.60$540 State level trigger is met. Farm level trigger is met.

16. Corn payment It does not matter how much lower farm actual revenue is to the farm benchmark revenue. State payment rate:$17.64 Ratio of Farm to State Yields: 135/138 = 0.98 Farm payment per payment acre of corn: State payment rate X Ratio of farm to state yields $17.64 X 0.98 = $17.29

17. Eligible planted acres  Payment acres are: the lesser of 83.3 percent of planted acres or base acres (cannot exceed total base)  Assume example farm has 100 acres total base (of all crops combined), and only plants corn  If 200 or 150 or 125 acres corn planted in 2009  Payment acres = 100, Farm payment = $1,729  If 110 acres corn planted in 2009  Payment acres = 91.6, Farm payment = $1,584  If 90 acres corn planted in 2009  Payment acres = 75.0, Farm payment = $1,297

18. Deciding whether to participate  IF future revenue is steady or increasing  Zero ACRE payments and lose 20% of direct payment  IF future revenue declines  Payments likely to be larger than foregone payments —potential to be a lot large.

19.  In some ways, sort of like a crop insurance choice  Like crop insurance, most likely outcome in any given year is no ACRE payments, but  When payments occur, they could be large  Are likely benefits enough to justify “premium” of reduced traditional program payments?  Differences from crop insurance  Payment depends on state results  Once decide to participate, in for life of farm bill  Must enroll all crops on a farm Deciding whether to participate

20. ACRE decision tree: State payment trigger

21. ACRE decision tree: Farm payment trigger

22. ACRE sign up  Signup  Began April 27  Ends August 14  Two step process  Elect to enroll (CCC-509 ACRE)  Must sign contract each year (CCC-509 ACRE)  Will have choice to sign up in any year 2009- 2012

23. ACRE sign up  Must enroll all crops on the farm  Must report production for planted acres each year  No later than last reporting date for each crop  In year following contract year  Once in, can’t opt out  Decision is FARM SPECIFIC!!  Once farm is enrolled, it is in, no matter who owns or farms it

24. What type of farms benefit?  Must be determined farm-by-farm  One key is how your farm yields correlate with state yields  Do they move in sync?  However, we can look at averages from FAPRI simulations for some clues...

25. WA OR CA NV ID MT WY UT AZ ND SD NE KS CO NM TX OK* MN IA MO AR* LA MS AL GA WI IL IN OH PA KY TN NC SC FL VA ME NY MI NH MA CT RI NJ MD DE WV VT DC Traditional payments greater ACRE payments greater ACRE payments vs. traditional payments Simulation of state average results Chart reflects average results over 2009/10-2012/13 *In Oklahoma and Arkansas, ACRE payments are greater in some years and traditional payments are greater in other years. Over the four years, ACRE payments are greater in Oklahoma and traditional payments were greater in Arkansas.

26. Missouri simulation results CornWheatSoybeansCotton Average ACRE payment/acre$11.67$11.62$10.44$14.95 Payments foregone/acre $4.79$5.69 $1.59$132.79 Net benefit of ACRE/acre $6.88$5.93$8.84-$117.84 Annual share of outcomes with ACRE payments 28.5%42.7% 37.8% 30.7% Results reflect annual averages across 500 stochastic outcomes for an average of all farmers in the state. Acres are defined as crop acres eligible for ACRE payments. Outcomes for particular farms will be different than these state averages, even if all the assumptions about state-level yields and national-level prices are exactly correct. Based on February 2009 baseline. More current information would yield different estimates.

27. FAPRI ACRE Risk Management Tool: The FARM Tool  Compare staying in the CCP program or enrolling in the ACRE program  Excel spreadsheet (Version 2003 or newer)  Available for download from the FAPRI web site  http://www.fapri.missouri.edu http://www.fapri.missouri.edu

28. Sample farm  242.9 base acres  124.5 ac corn  118.4 ac soybeans  230 acres planted acres  125 ac corn  105 ac soybeans  Payment acres for ACRE program = 191.6  230 *.833

30. Yields and program information Model assumes actual yields will vary around these averages

31. Base Acres = 243 Planted and payment acres

32. Try different price paths to see what impact it has on payments! Average price assumptions The model assumes a distribution around these average prices

33. Can look at total payments or per acre payments. Summary: Average effects

34. Summary: Probabilities

35. Detail by crop

36. More detail by crop

37. What if prices are much lower?

38. FAPRI Baseline Prices: What if prices are much lower?

39. FARM Tool  Currently available for download  http://www.fapri.missouri.edu http://www.fapri.missouri.edu  Educational effort underway  Contact Peter Zimmel if you are interested:  Email: zimmelp@missouri.eduzimmelp@missouri.edu  Office: 573-884-8787  Cell: 573-529-9010