Operating Under a New Farm Bill
and a Challenging Market
Darren Hudson
Larry Combest Chair of Agricultural Competitiveness
Dept. Agricultural & Applied Economics
Texas Tech University
Presentation to COOP Directors Development Program
February 9, 2009
Amarillo, TX
Objectives
• Look at new farm bill ACRE provision for Texas agricultural
products
• Examine some current trends in agricultural markets
Some Background
• Average Crop Revenue Election (ACRE) added as a
program option for producers in 2008 Farm Bill.
• Beginning with 2009 Crop, producers have option of
selecting ACRE or CCP for each “farm” (FSA unit
number)
– Once the election to move to ACRE is made, cannot go back to
CCP
• Complex decision with many variables.
– Ultimately about total farm income
Some Background
• ACRE is an average revenue guarantee based on two
benchmarks—farm level and state level revenue
• Provides a payment to farmers when:
1. State-level revenue for a commodity falls below the statelevel revenue guarantee AND
2. Farm-level revenue falls below that farm’s revenue
benchmark.
Key Differences Between ACRE and
CCP
Program
CCP
ACRE
Loan Rate
52¢/lb
36.4¢/lb
Direct Payment Rate
6.67¢/lb
5.336¢/lb
Both payment programs (CCP and ACRE) are based on
83% of base acres for the 2009-2011 crops and 85% of
base acres for the 2012 crop.
Review of CCP Calculation
Procedure
n:
o
t
t
o
C
For
For all commodities, the maximum CCP payment rate is when
the market price is at or below the loan rate. For the case of
cotton above, that is 12.6¢/lb.
ACRE Calculations
• The ACRE benchmark state yield is
derived by finding the “Olympic year”
average yield for the state:
ACRE Calculations
• ACRE State Revenue Guarantee
– Average of 2 recent year’s MYA price X ACRE benchmark
state yield X 90%
• ACRE State Actual Revenue
– State average yield per planted acre X the higher of MYA
price or (0.7 X loan rate)
State Level Trigger
• If ACRE Actual State Revenue less than ACRE
State Revenue Guarantee
– All farmers in the state with that crop meet the first condition
for receiving ACRE payments
State Level Trigger--Cotton
Year
MYA Price
State Yield
(lb/ac)
Olympic
Average
State Yield
(lb/ac)
State
Revenue
Guarantee
($/ac)
State Actual
Revenue
($/ac)
Trigger Met?
-----Irrigated----02/03
0.43
696.78
562.85
187.91
302.33
NO
03/04
0.60
454.40
578.43
268.13
270.91
NO
04/05
0.43
842.38
522.52
240.78
360.37
NO
05/06
0.47
918.26
578.06
234.35
434.43
NO
06/07
0.46
877.80
703.30
296.86
408.09
NO
07/08
0.57
1043.48
805.66
376.72
599.17
NO
-----Dryland----02/03
0.43
200.46
236.30
78.89
115.85
NO
03/04
0.60
349.86
220.06
102.01
187.94
NO
04/05
0.43
121.65
262.08
120.77
215.65
NO
05/06
0.47
316.36
262.08
106.25
251.35
NO
06/07
0.46
216.06
362.11
152.84
81.57
YES
07/08
0.57
219.06
362.11
169.32
382.80
NO
State Level Trigger--Sorghum
Year
MYA Price
State Yield
(lb/ac)
Olympic
Average
State Yield
(lb/ac)
State
Revenue
Guarantee
($/ac)
State Actual
Revenue
($/ac)
Trigger Met?
-----Irrigated----02/03
4.14
72.70
71.77
245.44
300.98
NO
03/04
4.26
66.00
71.30
269.51
281.16
NO
04/05
3.19
77.40
69.90
234.34
246.91
NO
05/06
3.33
85.90
70.00
205.38
286.05
NO
06/07
5.88
78.00
72.87
302.00
458.64
NO
07/08
6.95
88.00
76.03
438.98
611.60
NO
-----Dryland----02/03
4.14
45.50
53.53
183.08
188.37
NO
03/04
4.26
49.00
50.13
189.50
208.74
NO
04/05
3.19
59.00
51.37
172.21
188.21
NO
05/06
3.33
54.60
51.17
150.12
181.82
NO
06/07
5.88
40.00
49.70
205.98
235.20
NO
07/08
6.95
60.00
49.70
286.94
417.00
NO
State Level Trigger--Wheat
Year
MYA Price
State Yield
(lb/ac)
Olympic
Average
State Yield
(lb/ac)
State
Revenue
Guarantee
($/ac)
State Actual
Revenue
($/ac)
Trigger Met?
-----Irrigated----02/03
3.56
38.80
49.17
140.27
138.13
YES
03/04
3.40
46.30
48.23
151.07
157.42
NO
04/05
3.40
46.20
47.00
143.82
157.08
NO
05/06
3.42
49.10
44.83
137.59
167.92
NO
06/07
4.26
35.00
47.20
163.12
149.10
YES
07/08
6.65
56.00
43.77
214.87
372.40
NO
-----Dryland----02/03
3.56
26.10
29.20
83.31
92.92
NO
03/04
3.40
23.10
29.20
91.45
78.54
YES
04/05
3.40
26.90
27.37
83.74
91.46
NO
05/06
3.42
27.90
26.60
81.64
95.42
NO
06/07
4.26
19.00
26.97
93.20
80.94
YES
07/08
6.65
33.00
25.37
124.54
219.45
NO
State Level Trigger--Corn
Year
MYA Price
State Yield
(lb/ac)
Olympic
Average
State Yield
(lb/ac)
State
Revenue
Guarantee
($/ac)
State Actual
Revenue
($/ac)
Trigger Met?
-----Irrigated----02/03
2.32
187.40
167.80
323.94
434.77
NO
03/04
2.42
180.70
172.83
368.65
437.29
NO
04/05
2.06
193.00
178.20
359.25
397.58
NO
05/06
2.00
179.00
182.37
333.18
358.00
NO
06/07
3.04
179.00
182.37
413.61
544.16
NO
07/08
4.00
200.00
184.23
583.65
800.00
NO
-----Dryland----02/03
2.32
64.80
82.90
160.04
150.34
YES
03/04
2.42
73.30
75.73
161.54
177.39
NO
04/05
2.06
92.50
78.57
158.39
190.55
NO
05/06
2.00
70.60
78.93
144.21
141.20
YES
06/07
3.04
72.00
73.30
167.15
218.88
NO
07/08
4.00
99.00
71.97
227.99
396.00
NO
Example of Cotton Farms
Cotton Production
Type
Base Acres
Payment Yield (lb/ac)
Irrigated (Farm 1)
121.2
411
Irrigated (Farm 2)
120.3
398
Dryland (Farm 3)
18.3
134
Dryland (Farm 4)
32.6
166
Farm Level ACRE Analysis—Irrigated
Year
Actual Farm
Yield (lb/ac)
Five Year
Olympic Avg.
Farm Yield (lb/ac)
ACRE Farm
Benchmark
Revenue ($/ac)
Actual Farm
Revenue ($/ac)
Second Trigger
Met?
----------Farm 1---------02/03
672.00
518.00
203.26
291.58
NO
03/04
0.00
569.33
304.41
0.00
YES
04/05
1098.00
408.33
222.73
469.72
NO
05/06
1016.00
460.67
218.62
480.67
NO
06/07
737.00
574.33
283.67
342.63
NO
07/08
25.00
808.33
434.43
14.36
YES
----------Farm 2---------02/03
703.00
518.00
204.31
305.03
NO
03/04
0.00
348.33
191.57
0.00
YES
04/05
1036.00
410.00
190.70
443.20
NO
05/06
942.00
237.33
197.03
445.66
NO
06/07
578.00
579.67
273.66
268.71
YES
07/08
910.00
659.33
399.98
522.52
NO
Farm Level ACRE Analysis—Dryland
Year
Actual Farm
Yield (lb/ac)
Five Year
Olympic Avg.
Farm Yield (lb/ac)
ACRE Farm
Benchmark
Revenue ($/ac)
Actual Farm
Revenue ($/ac)
Second Trigger
Met?
----------Farm 1---------02/03
216.00
276.33
116.13
93.72
YES
03/04
0.00
234.00
132.62
0.00
YES
04/05
1141.00
234.00
134.89
488.12
NO
05/06
1181.00
234.00
116.99
558.73
NO
06/07
158.00
534.67
265.55
73.45
YES
07/08
0.00
505.00
277.16
0.00
YES
----------Farm 2---------02/03
0.00
103.00
51.54
0.00
YES
03/04
427.00
103.00
70.02
254.58
NO
04/05
0.00
108.33
55.47
0.00
YES
05/06
609.00
74.00
47.89
288.12
NO
06/07
13.00
182.00
97.96
6.04
YES
07/08
616.00
146.67
89.29
353.71
NO
Average Revenue Analysis
Farm
Farm Revenue
Under CCP
Farm Revenue
Under ACRE
Average %
Difference
Farm 1 (Irrigated)
44,748
34,416
30%
Farm 2 (Irrigated)
52,116
41,772
25%
Farm 3 (Dryland)
4,889
3,949
24%
Farm 4 (Dryland)
5,671
5,220
9%
Average farm revenue over the 2002-2008 period under either the ACRE or
CCP programs, with all other farm program payments included.
The averages are significantly different, indicating higher average returns
for CCP. The variances are not significantly different, indicating that CCP
is no more risky (in terms of revenue) than ACRE.
Upshot
• ACRE not a particularly appealing
alternative for Texas agriculture.
• State size means state average “masks” a
lot of underlying heterogeneity in state
yields.
• Geographic diversity in state agriculture
limits correlation between farm and state
level yields.
A View of the Markets
A View of the Market
A View of the Markets
Relative Prices
Corn Price
Cotton Price
6.00
0.70
4.05
0.55
Ratio
Month
=
8.57
Sep
=
5.36
Dec
Although the absolute prices still favor corn, the relative price differences
have moderated some.
Water Requirements
Ethanol
Ethanol
Ethanol
Source: Revised Renewable Fuel Standard for 2008, Issued Pursuant to Section 211(o) of the Clean Air Act as Amended by the Energy Independence and Security Act of 2007. Federal Register 73, 31(Feb. 2008):8665‐8667.
Ethanol
Ethanol
Capacity is now above RFS. Anecdotal evidence suggests that plant building
cost was somewhere around $2/gal capacity in 2007 and now auctions of
bankrupt plants cannot meet minimum bids of $0.80/gal capacity
Ethanol
Conclusions
• ACRE is not a likely program choice for most Texas
agricultural producers
• Water/drought situation points toward more alternative
crops than corn; business risk puts pressure on cotton
plantings
• RFS has created a structural shift in corn (and, by
consequence, other markets), but we have about maxed
out the impact of RFS without further expansion of
mandate
• Farm safety net remains strong and farm economy
appears to be weathering economic downturn reasonably
well