Sharpening the ACRE Tool

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					    Sharpening the ACRE Tool

  Pat Westhoff (westhoffp@missouri.edu)
Based on work by Scott Gerlt & Peter Zimmel

    National Farm Business Management Conference
                St. Louis, June 15, 2009
                Today’s agenda

ACRE program
     What is ACRE?
     How are the calculations made?
     Example
     Decision tree
     Sign up


ACRE tool
                        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
             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

                   Four Important Revenues
          Missouri ACRE         Missouri Actual
          Guarantee
          Your Farm ACRE        Your Farm Actual
          Benchmark

 Get a new guarantee each year
     Once established, the state ACRE guarantee cannot move more
      than 10 percent per year.
                       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
     Crop                   Loan Rate      70% of Loan Rate
     Corn ($/bu)                    1.95               1.365
     Soybeans ($/bu)                5.00                3.50
     Wheat ($/bu)                   2.75                1.92
     Grain Sorghum ($/bu)           1.95               1.365
     Cotton ($/lb)                  0.52               0.364
     Rice ($/cwt)                   6.50                4.55
                      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
        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
     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%
     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
              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
        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
        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
          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
             A hypothetical corn example

State ACRE Guarantee        2004   2005    2006    2007    2008    Average
Revenue Calculation
MO corn yield/pltd acre     161     111     138     137     140
Olympic average                             138     137     140        138
US price per bushel                                $4.20   $4.20     $4.20
Olympic yield * avg price                                          $579.60
MO revenue guarantee with 10% adjustment                           $521.64


2009 STATE ACTUAL                          2009         2009/10    2009
REVENUE CALCULATION                        Yield       US Price Revenue
                                            140            $3.60      $504

                 State level trigger is met.
 Average payment rate: $521.64 - $504.00 = $17.64 per plt acre
               Maximum payment rate: $130.41 ($25% of $521.64)
                      A Missouri corn farm

Farm ACRE Benchm’k
Revenue Calculation           2004    2005     2006       2007    2008    Average
Farm yield                     170     130      100        140     135      135.0
Olympic average                        130                 140     135      135.0
U.S. average price                                        $4.20   $4.20     $4.20
Olympic yield * avg price                                                 $567.00
Farm revenue benchmark with $25.00 crop insurance                         $592.00


2009 FARM ACTUAL                               2009            2009/10    2009
REVENUE CALCULATION                            Yield          US Price Revenue
                                                    150           $3.60      $540

                            State level trigger is met.
                            Farm level trigger is met.
                        Corn payment

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



 It does not matter how much lower farm actual revenue is to the
 farm benchmark revenue.
                     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
            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.
         Deciding whether to participate

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
                        ACRE decision tree:
                        State payment trigger


                                  Prices


                 Down                             Up

                                   Level




       State                      State                  State
       Yields                     Yields                 Yields

Down              Up       Down             Up   Down              Up

       Average                    Average                Average



Yes     Yes      Maybe     Yes    Maybe     No   Maybe     No      No
                         ACRE decision tree:
                         Farm payment trigger

                                  State Payment
                                    Triggered


                                                  No
                                  Yes

                                                            No Farm
                                                            Payment



                                 Prices

                 Down                                  Up

                                  Level



       Farm                      Farm                          Farm
       Yields                    Yields                        Yields

Down             Up       Down             Up          Down             Up
       Average                   Average                      Average



Yes     Yes      Maybe    Yes    Maybe     No      Maybe        No      No
                  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
                    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
           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 . . .
                   ACRE payments vs. traditional payments
                     Simulation of state average results
              WA
                                                                                                   VT
                                MT                                                                           ME
                                              ND
             OR                                          MN                                                        NH
                                                                    WI                                       MA
                      ID                    SD                                 MI                  NY
                                                                                                                    RI
                                     WY
                                                          IA                                  PA              CT
                                              NE                                                        NJ
              NV                                                                    OH                       MD
                                                                     IL       IN                              DE
                           UT                                                            WV
        CA                            CO                                                      VA         DC
                                                 KS           MO
                                                                                   KY

                                                   OK*                        TN                  NC
                     AZ
                                                              AR*                            SC
                                     NM                                       AL
                                                                         MS             GA
                                                 TX            LA
                                                                                         FL
       ACRE payments greater

       Traditional payments greater
*In Oklahoma and Arkansas, ACRE payments are greater           Chart reflects
in some years and traditional payments are greater in
other years. Over the four years, ACRE payments are            average results over
greater in Oklahoma and traditional payments were              2009/10-2012/13
greater in Arkansas.
                    Missouri simulation results



                                    Corn         Wheat      Soybeans        Cotton
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             28.5%       42.7%          37.8%            30.7%
with ACRE payments

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.
         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
                        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
Yields and program information

                           Model
                           assumes
                           actual
                           yields will
                           vary
                           around
                           these
                           averages
Planted and payment acres


                  Base Acres = 243
 Average price assumptions




                                             The model assumes a
                                             distribution around
                                             these average prices




Try different price paths to see what impact it has on payments!
Summary: Average effects




  Can look at total payments or per acre payments.
Summary: Probabilities
Detail by crop
More detail by crop
What if prices are much lower?
    What if prices are much lower?




FAPRI Baseline Prices:
                      FARM Tool

Currently available for download
     http://www.fapri.missouri.edu


Educational effort underway
     Contact Peter Zimmel if you are interested:
        Email: zimmelp@missouri.edu
        Office: 573-884-8787
        Cell: 573-529-9010