The ACRE Decision
Bruce A. Babcock
Iowa State University
Presented at the North Dakota Corn Growers Association Annual
Convention. Fargo, ND. February 11, 2009
Overview of ACRE
(Average Crop Revenue Election)
• Farmers who choose ACRE
– Must do so for all program crops
– Must do so for remainder of farm bill (2012 crop)
– Lose eligibility for countercyclical payments
– Must give up 20% of direct payments
– Have a 30% lower loan rate
– Get a state revenue guarantee based on 2007/08
prices and 2004 – 2008 yields
North Dakota Planted Acreage
24
22
Million
20
18
16
14
12
10
Early 1980s
Early 1990s
Early 2000s
2008
Share of Acreage by Crop
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Early 1980s
Early 1990s
Early 2000s
2008
ACRE Commodities
• Wheat, corn, grain sorghum, barley, oats,
upland cotton, rice, soybeans, other oilseeds,
peanuts, dry peas, lentils, small chickpeas, and
large chickpeas
• About 90% of North Dakota planted to these
crops
2008 Share of Acreage by Crop
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Wheat
Soybeans
Corn
Oilseeds
Barley
ACRE’s State Revenue Guarantee
• Revenue = Price X Yield
– Yield is state yield per planted acre
– Price is NASS season average price (marketing year
price)
• ACRE Guarantee: 90% of the product of
– Olympic average of state yield previous five years
– Average of NASS price past two years
• ACRE can pay out due to low state yield or low
price
Corn Acres in 2008
Legend
COUNTIES
Corn
0. - 9700
9700 - 23300
23300- 55000
55000 - 109000
109000- 285000
Soybean Acres in 2008
Legend
COUNTIES
acres.SOYBEANS / none
0 - 18000
18000 - 68000
68000 - 125000
125000 - 290000
290000 - 440000
Wheat (Approximate) Acres in 2008
Legend
COUNTIES
acres.WHEAT / none
0 - 28500
28500. - 110000
110000 - 200000
20000 - 260000
260000 - 500000
Barley Acres in 2008
Legend
COUNTIES
Barley acres
0 - 6000
6100. - 16500.
16500.- 32000.
32000.- 66000.
66000. - 130000.
North Dakota Wheat Yields Per Planted Acre
45
40
35
bu/ac
30
25
Actual Yield
20
15
10
5
0
1980
1985
1990
1995
2000
2005
2010
North Dakota Wheat Yields Per Planted Acre
45
40
35
bu/ac
30
25
Actual Yield
20
Historical Average
15
10
5
0
1980
1985
1990
1995
2000
2005
2010
North Dakota Wheat Yields Per Planted Acre and ACRE
Yield "Guarantee"
45
40
35
bu/ac
30
25
Actual Yield
Historical Average
20
Guarantee
15
10
5
0
1980
1985
1990
1995
2000
2005
2010
North Dakota Wheat Yield Payout
(% of ACRE Yield Guarantee)
70%
60%
50%
bu/ac
40%
Payout
30%
Maximum payment
20%
10%
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
0%
Value of Yield Guarantee
• Average payout = 3.5% of guarantee
• At $5.00 per bushel price
– Average payout = $3.96 per acre
– About 12 cents per expected bushel per planted
acre.
North Dakota Corn Yields Per Planted Acre
120
100
bu/ac
80
60
Actual Yield
40
20
0
1980
1985
1990
1995
2000
2005
2010
North Dakota Corn Yields Per Planted Acre
120
100
bu/ac
80
60
Actual Yield
Historical Average
40
20
0
1980
1985
1990
1995
2000
2005
2010
North Dakota Corn Yields Per Planted Acre and ACRE Yield
"Guarantee"
120
100
bu/ac
80
Actual Yield
60
Historical Average
Guarantee
40
20
0
1980
1985
1990
1995
2000
2005
2010
North Dakota Corn Yield Payout
(% of ACRE Yield Guarantee)
45%
40%
35%
Maximum payment
25%
Payout
20%
15%
10%
5%
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
0%
1985
bu/ac
30%
Value of Corn Yield Guarantee
• Average payout = 2.5% of guarantee
• At $4.00 per bushel price
– Average payout = $6.05 per acre
– About 7 cents per expected bushel per planted
acre.
North Dakota Soybean Yields Per Planted Acre
40
35
30
bu/ac
25
20
Actual Yield
15
10
5
0
1980
1985
1990
1995
2000
2005
2010
North Dakota Soybeans Yields Per Planted Acre
40
35
30
bu/ac
25
20
Actual Yield
Historical Average
15
10
5
0
1980
1985
1990
1995
2000
2005
2010
North Dakota Soybean Yields Per Planted Acre and ACRE
Yield "Guarantee"
40
35
30
bu/ac
25
Actual Yield
20
Historical Average
Guarantee
15
10
5
0
1980
1985
1990
1995
2000
2005
2010
North Dakota Soybean Yield Payout
(% of ACRE Yield Guarantee)
40%
35%
30%
Maximum payment
20%
Payout
15%
10%
5%
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
0%
1985
bu/ac
25%
Value of Soybean Yield Guarantee
• Average payout = 6.0% of guarantee
• At $8.00 per bushel price
– Average payout = $6.44 per acre
– About 20 cents per expected bushel per planted
acre.
North Dakota Barley Yields Per Planted Acre
70
60
50
bu/ac
40
Actual Yield
30
20
10
0
1980
1985
1990
1995
2000
2005
2010
North Dakota Barley Yields Per Planted Acre
70
60
50
bu/ac
40
Actual Yield
Historical Average
30
20
10
0
1980
1985
1990
1995
2000
2005
2010
North Dakota Barley Yield Payout
(% of ACRE Yield Guarantee)
70%
60%
50%
bu/ac
40%
Payout
30%
Maximum payment
20%
10%
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
0%
Value of Barley Yield Guarantee
• Average payout = 3.5 % of guarantee
• At $5.00 per bushel price
– Average payout = $6.30 per acre
– About 12 cents per expected bushel per planted
acre.
Value of an ACRE "Yield Guarantee"
7.00
6.00
5.00
$/acre
4.00
3.00
2.00
1.00
0.00
Wheat
Corn
Soybeans
Barley
Value of an ACRE "Yield Guarantee" Relative to Direct
Payments
20.00
18.00
16.00
14.00
$/acre
12.00
10.00
8.00
6.00
4.00
2.00
0.00
Wheat
Corn
Value of Yield Guarantee
Soybeans
Value of Direct Payments
Barley
of Direct Payments
7.00
6.00
$/acre
5.00
4.00
3.00
2.00
1.00
0.00
Wheat
Corn
Soybeans
Barley
First Findings
• Yield portion of ACRE has value
• 20% of direct payments less than the “cost” of
yield portion
• Could entice some farmers to sign up.
• But what about the price portion?
Prices Used to Set ACRE Price Guarantee
12.00
10.00
$/bu
8.00
6.00
4.00
2.00
0.00
Corn
Soybeans
2007
Wheat
2008 Estimated
Barley
Estimated 2009 ACRE Price Guarantee
12.00
10.00
$/bu
8.00
6.00
4.00
2.00
0.00
Corn
Soybeans
ACRE Price
Wheat
Barley
ACRE Guarantees vs Countercyclical Program Guarantee
12.00
10.00
$/bu
8.00
6.00
4.00
2.00
0.00
Corn
ACRE Price
Soybeans
CCP Trigger Price in 2010
Wheat
CCP Trigger Price in 2009
Barley
Second Conclusion
• ACRE price guarantees much higher than CCP
guarantees
• Higher guarantee increases likelihood of a
payout
• How likely is it that price will trigger a payout
under the two programs?
– Need to look at 2009/10 projected season average
prices
CBOT Corn Futures:
Projected Marketing Year Price = $4.03
4.50
4.45
4.40
$/bu
4.35
4.30
4.25
4.20
4.15
4.10
4.05
Dec '09
Mar '10
May '10
July '10
Sept '10
ACRE Guarantee and Projected 2010 Prices
12.00
10.00
$/bu
8.00
6.00
4.00
2.00
0.00
Corn
Soybeans
ACRE Price
Wheat
2009 Projected Price
Barley
Price Volatility
• We know that 2009/10 corn prices will not
equal $4.03/bu
• Obtain market-estimated volatility from
option premia
– An at-the-money put option on Dec corn costs 50
cents per bushel
– Price volatility = 33%
Market Estimate of the Distribution of Corn Prices in
2009/10
Average = $4.03
50% chance
0.00
1.00
2.00
3.00
50% chance
4.00
5.00
$/bu
6.00
7.00
8.00
9.00
10.00
Calculating the Chances of a Payout from Farm Programs
90% of ACRE Price
ACRE Price
ACRE put option worth
32 cents per planted
bushel
44% chance
0.00
1.00
2.00
3.00
4.00
5.00
$/bu
6.00
7.00
8.00
9.00
10.00
Calculating the Chances of a Payout from Farm Programs
CCP Trigger Price
CCP put option worth
5.4 cents per base
bushel
6% chance
0.00
1.00
2.00
3.00
4.00
5.00
$/bu
6.00
7.00
8.00
9.00
10.00
What if Market Conditions Collapse
• Suppose projected corn prices drop by 35% to
$2.62
• The ACRE price for 2009 largely locked in
• Maximum 10% annual drop in guarantee in
2010 and beyond
Distribution of Corn Prices in 2009/10
with a 35% Market Collapse
CCP Trigger Price
ACRE price guarantee
LDP + CCP put option
worth 20.1 cents per
bushel
0.00
1.00
ACRE put option worth
$1.10 per bushel
2.00
3.00
4.00
$/bu
5.00
6.00
7.00
If Market Conditions Collapse
• Advantage to ACRE price guarantee even
greater
• Limit on downward movement keeps ACRE
advantage of price protection
• Eventually must be concerned with cap on
payments and payment limitations
Value of Price Guarantee from ACRE and CCP
at Futures-Indicated Price Levels
1.20
1.00
$/bu
0.80
0.60
0.40
0.20
0.00
Corn
Soybeans
ACRE
Wheat
CCP
Barley
Value of Price Guarantee from ACRE and CCP
with 35% Drop in Futures Prices
3.50
3.00
2.50
$/bu
2.00
1.50
1.00
0.50
0.00
Corn
Soybeans
ACRE
Wheat
CCP
Barley
But ACRE Guarantees Revenue
• Cannot simply add up the value of the yield
guarantee and the value of the price
guarantee
– Would understate value of ACRE guarantee
because of double deductible
– Would overstate value of ACRE guarantee if prices
and yields move opposite each other
Total Expected LDP + CCP Payments and ACRE Payments:
Average Price at Futures-Indicated Levels
180
160
140
$ million
120
100
80
60
40
20
0
Wheat
Corn
LDP+CCP
ACRE
Soybeans
Total Expected LDP + CCP Payments and ACRE Payments:
Average Price at 35% Lower Level
450
400
350
$ million
300
250
200
150
100
50
0
Wheat
Corn
LDP+CCP
ACRE
Soybeans
Total Expected Payments from Traditional Programs and ACRE:
Average Price at Futures-Indicated Levels
350
300
$ million
250
200
150
100
50
0
Wheat
Corn
Traditional
ACRE
Soybeans
Total Expected Payments from Traditional Programs and ACRE:
Average Price at 35% Lower Level
600
500
$ million
400
300
200
100
0
Wheat
Corn
Traditional
ACRE
Soybeans
Summary of Findings
• ACRE unambiguously provides more average
support than current farm programs
• The difference in farm support grows as
market price drops
• Reasonably good chance that actual ACRE
payment will be lower than loss in direct
payment because prices will be high
Reasons for Not Choosing ACRE
• Lack of yield history
– FSA could fix this by simply substituting county
average yields
• State yields do not track my yields
– ACRE does not substitute for crop insurance, it
substitutes for CCPs and part of DPs
• Why not use the 20% of direct payments and
buy more crop insurance rather than ACRE?
Additional Benefit from Buying Up in Crop Insurance for
Cass County Wheat Producer
8.00
7.00
6.00
$/acre
5.00
4.00
3.00
2.00
1.00
0.00
65 to 70
70 to 75
75 to 80
80 to 85
Additional Producer Premium from Buying Up in Crop
Insurance for Cass County Wheat Producer
9.00
8.00
7.00
$/acre
6.00
5.00
4.00
3.00
2.00
1.00
0.00
65 to 70
70 to 75
75 to 80
80 to 85
Return per Additional Dollar Paid for Increased Crop
Insurance Coverage
3.0
2.5
2.0
1.5
1.0
0.5
0.0
65 to 70
70 to 75
75 to 80
80 to 85
Return to ACRE per Dollar Given up in Direct Payments
12
10
8
6
4
2
0
Wheat
Corn
High Price
Low Price
Soybeans
A Comparison of Return per Additional Dollar Paid for
ACRE and Crop Insurance
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
65 to 70
70 to 75
Crop Insurance
75 to 80
ACRE
80 to 85