/ACRE_for_FarmBill

Average Crop Revenue Election (ACRE) Versus Traditional Support Programs Analysis of Arkansas Representative Farms Eric Wailes, Jeffrey Hignight, and Brad Watkins Farm Bureau Video Conference July 17, 2008

Analysis is based on our reading of the Commodity Title of the Food, Conservation and Energy Act of 2008.

The ACRE program is complex and there are a number of issues open for interpretation and determination by the Secretary of Agriculture.

We might expect that FSA will interpret changes in the law differently that what has been assumed in the following analysis.

DISCLAIMER

Overview • • • •

Average Crop Revenue Election Program Representative Panel Farms Historical View of ACRE Program Conclusions

As risk management tools…

• Traditional price support programs assist with managing market risks of chronic low market prices of a crop over extended periods of time.

• ACRE assists with managing market risks of a decline in revenue of a crop over a short period of time.

• Crop insurance assists in managing farm specific risks during the production season

Implicit risk management fee of ACRE: 20% of average Direct Payment/Acre Oats Barley Soybeans

$0.20 $1.95 $2.30

Wheat

$3.05

Sorghum

$3.36

Corn Cotton

$4.87 $6.85

Rice Source: Carl Zulauf, Ohio State University

$19.24

Implicit risk management fee of ACRE: 20% of Farm Specific DP/Acre Oats Barley Soybeans

$0.20

Arkansas Rep Farms had ranges of:

$1.95 $2.30

Wheat

$3.05

Sorghum

$3.36

Corn Cotton Rice

Soybeans: Wheat: Cotton: Rice:

$1.42 - $2.54 $3.89 - $4.15 $5.44 - $9.07 $17.97 - $21.97

$4.87 $6.85 $19.24

Data & Methodology • FAPRI 2008 US and World Prices • Representative Panel Farms – Organized by UA and Texas A&M extension economists – Panel of local farmers provide farm level data

• Excel was used to generate simulation – Stochastic simulation was for the 2009-2012 time period based on state and farm prices and yield distributions: 500 sims/year/farm

AR Representative Panel Farms • • • •

ARNC5000 – Leachville ARCR6500 - Osceola ARCR4000 - Pine Bluff ARC6000 - McGehee

• • • •

ARSR3640 - Stuttgart ARWR1200 - Wynne ARHR3000 – Hoxie ARC4200 – Forrest City

UA AG ECON Staff Paper 02 Access at: http://www.uark.edu/depts/agriecon/staff08/html

The ARNC5000 Farm: Leachville • Total cropland: 5000 acres • 1,000 owned, 3,200 share lease, 800 cash lease

• Planted acres - cotton: • 4,500 irrigated, 500 acres dry

• Base Acres – 4,050 irrigated, 450 dry • Direct pay yield: 480 lbs/acre • CCP pay yield: 725 lbs/acre

2009-2012 Results

ARNC5000

BASE ($/acre) 747.30

ACRE ($/acre) 718.72

Difference ($/acre) 28.58

Each farm was simulated 2000 times over the 4 year period

Percent ACRE>BASE 5.6%

ARNC5000: Gross Returns/Ac 100% 90% 80%

0.37

0.42

70% 60% 50% 40%

0.36 0.40

30% 20% 10%

0.27

0.18

0% BASE

ACRE <$500

$500 - $650

>$650

The ARSR 3640 Farm: Stuttgart • Total cropland: 3640 acres • 728 owned, 2912 share lease

• Planted acres – rice, soybeans, wheat: • 1620 lg rice, 1620 irrigated beans, 324 wheat

• Base Acres: • 1620 rice, 1620 beans, 235 wheat

• Direct pay yield: • 55 cwt rice, 29 bu beans, 44 bu wheat

• CCP pay yield: • 59 cwt rice, 36 bu beans, 44 bu wheat

2009-2012 Results

ARNC5000 ARSR3640

BASE ($/acre) 747.30 443.59

ACRE ($/acre) 718.72 438.72

Difference ($/acre) 28.58 4.87

Percent ACRE>BASE 5.6% 21.2%

ARSR3640 100% 90%

0.16

0.14

0.50

0.47

0.34

0.39

BASE

ACRE

80% 70% 60% 50% 40% 30% 20% 10% 0%

<$400

$400 - $500

>$500

The ARC4200 Farm: Forrest City • Total cropland: 4200 acres • 1000 owned, 1700 share lease, 1500 cash lease

• Planted acres – cotton, beans, corn • 2600 irrigated cotton, 1200 dryland beans, 400 corn

• Base Acres – • 780 cotton, 780 beans

• Direct pay yield: • 500 cotton lbs/acre, 20 bu beans

• CCP pay yield: • 825 cotton lbs/acre, 25 bu. beans

2009-2012 Results

ARNC5000 ARSR3640 ARC4200

BASE ($/acre) 747.30 443.59 538.47

ACRE ($/acre) 718.72 438.72 527.98

Difference ($/acre) 28.58 4.87 10.49

Percent ACRE>BASE 5.6% 21.2% 27.1%

ARC4200 100% 90%

0.16

0.18

80% 70% 60%

0.38

0.41

50% 40% 30% 20%

0.40

0.46

BASE

ACRE

10% 0%

<$500

$500 - $600

>$600

2009-2012 All Farm Results

ARNC5000 ARCR6500 ARCR4000 ARC6000 ARSR3640 ARWR1200 ARHR3000 ARC4200

BASE ($/acre) 747.30 551.10 495.96 613.48 443.59 575.25 552.18 538.47

ACRE ($/acre) 718.72 527.57 481.90 596.51 438.72 565.48 539.52 527.98

Difference ($/acre) 28.58 23.52 14.06 16.97 4.87 9.77 12.66 10.49

Percent ACRE>BASE 5.6% 8.6% 15.9% 13.0% 21.2% 23.3% 16.1% 27.1%

Historical Perspective 1980-2007 Years Payment Years ACRE DP Loss Occurred ACRE>DP ($/acre) ($/acre) Corn 6 5 4.29 4.87 Cotton 5 5 9.06 6.79 Grain Sorghum 7 5 3.83 3.37 Soybean-Irr 9 8 5.25 2.30 Soybean-NonIrr 12 12 6.48 2.30 Rice 8 6 12.90 19.26 Wheat 7 7 4.44 3.05 Source: Kansas State University AgManager.info website: http://www.agmanager.info/default.asp

Difference ($/acre) -0.58 2.27 0.46 2.95 4.18 -6.36 1.39

ACRE Analysis versus Base • Preliminary results of analysis by us and others suggest there are no ‘rules of thumb’ • The ACRE decision has many moving parts: farm yield, state yield, marketing year price and expected future price.

• And the correlation of moving parts

Irrigated/non-irrigated programs for Arkansas? â&#x20AC;˘ Arkansas has 2 major crops that historically have had significant non-irrigated acres: cotton and soybeans. â&#x20AC;˘ What is the likelihood of having separate ACRE programs?

25% non-irrigated acreage pattern in Arkansas

Cotton

Soybeans

25%

2007

2005

2003

2001

1999

1997

1995

1993

1991

% 80 70 60 50 40 30 20 10 0

Conclusions • Arkansas Representative Panel Farms – BASE average revenue was larger than ACRE a higher percent of the time for all Arkansas representative farms – ACRE did have larger revenue than BASE during for some of the simulations for all Arkansas farms – The relative importance on farms with cotton and rice and their loss of direct payment is dominant in the analysis.

Conclusions â&#x20AC;˘ It is important for each producer to carefully consider their own circumstances before committing to the ACRE program. â&#x20AC;˘ ACRE is not a risk management substitute for crop insurance

Conclusions • ACRE most benefits farms with high yield variability • ACRE does not provide a support floor and farmers will have to adjust to lower market revenues.

• ACRE will likely be Amber box in the WTO

Thank You