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FEFO 09-11
July 20, 2009


HISTORICAL ANALYSIS OF ACRE

 

We conducted an historical analysis of the Average Crop Revenue Election (ACRE) program using data from 1977 through 2007. This analysis provides indications of:

  • The frequency of ACRE payments
  • The size of ACRE payments, and
  • The frequency farm triggers are met.

Historical analyses may not totally be reflective of future results as future economic conditions will not match historical conditions. However, historical analyses will provide useful gauges of ACRE performance. Analyses first will be presented for the size and frequency of state ACRE payments for corn, soybeans, and wheat. Then, analyses will be presented for the number of times the farm trigger are met for corn and soybeans.

State Guarantees and Payments

ACRE has a state trigger that must be met before ACRE payments are received. For the state trigger to be met, state revenue must be less than the state guarantee. The state guarantee equals the ACRE guarantee price x the benchmark state yield x .90. The guarantee price is the average of the previous two marketing year average prices for the nation. The benchmark yield is the Olympic average (eliminate the high and low yields) of the previous five state yields. The guarantee cannot move by more than 10% from the previous year's guarantee. State revenue equals the current year's market average price times the state average yield.

If the state trigger is met, there will be a “state Acre payment” equal to the difference between the state guarantee and state revenue, capped at 25% of the state guarantee. A farm's ACRE payment will vary from the state ACRE payment. The farm payment will equal the state ACRE payment times .833 (.85 in 2012) times the five-year farm's benchmark yield divided by the five-year state benchmark yield, given that the sum of planted acres on a farm is less than 1.2 times the base acres.

We estimated how often the state trigger would have been met and the size of ACRE payments for corn, soybeans, and wheat. Results are presented below.

figure 1

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Corn State Guarantee and Payments
(Table 1):

Table 1 presents results for corn in Illinois. Points are:

  • The state level trigger would have been met for corn in Illinois in 10 out of 31 years, or 32% of the years. Because of higher price variability, it is likely that the payment percentage will be higher in the future than in the past.
  • As a percent of the guarantee, the ACRE payment would have averaged 3.4%, including those years in which ACRE would not have made a payment. In years they occur, ACRE payments would have averaged 10.6% of the guarantee. The guarantee in 2009 will be about $650 per acre. Given that history holds, past performance indicates that the average ACRE payment in Illinois will average $18 per acre ($650 x .034 x .833). This assumes that the farm's average yield equals the state average yield. In years ACRE payment occurs, the payment would average $57 per acre ($650 x .106 x .833). These payments will vary across farms depending on the ratio of historical farm's yield to historical state yields. It is likely that payments will be higher in the future due to higher price volatility.
  • The guarantee from one year to the next would have been capped at 10% in 18 out of 31 years.

figure 1

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Soybeans State Guarantee and Payments
(Table 2):

Points relative to soybeans in Illinois are:

  • The ACRE state trigger would have been met in 5 out of 31 years, or 16% of the years. Because of higher price variability, it is likely that the payment percentage will be higher in the future than in the past.
  • As a percent of the guarantee, the ACRE payment would have averaged 1.9%. In years they occur, ACRE payments would have averaged 11.8%. The guarantee in 2008 will be about $425 per acre. This would result in an average payment across of $7 per acre ($425 x .019 x .833). In years the payment occurs, the payment would be $41 per acre ($380 x .118 x .833). Similar to corn, payments will vary across farms depending on the ratio of farm yields to state yields. It is likely that payments will be higher in the future due to higher price volatility.
  • The guarantee from one year to the next would have been capped at 10% in 12 out of 31 years.

figure 1

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Wheat State Guarantee and Payments
(Table 3):

Points relative to wheat in Illinois are:

  • The ACRE state trigger would have been met in 8 out of 31 years, or 26% of the years. Because of higher price variability, it is likely that the payment percentage will be higher in the future than in the past.
  • As a percent of the guarantee, the ACRE payment would have averaged 4.9%. In years payments occur, ACRE payments would have averaged 19.1%. The guarantee in 2008 will be about $365 per acre. This would result in an average payment across all years of $15 per acre ($365 x .049 x .833). In years the payment occurs, the payment would be $58 per acre ($365 x .191 x .833).
  • The guarantee from one year to the next would have been capped at 10% in 20 out of 31 years.

 

 

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Farm triggers

To be eligible for ACRE payments, a farm trigger must be met. The farm trigger is met when farm revenue is less than a farm guarantee. Farm revenue equals the farm's yield times the market-year-average price. The farm guarantee equals a five-year Olympic average yield for the farm times the ACRE guarantee price plus farmer-paid insurance premium.

Tables 4 and 5 shows the percent of farms enrolled in FBFM meeting the guarantee in Northern, Central, and Southern Illinois for corn and soybeans. Given no insurance payment, between 78 and 86 percent of farms meet the farm trigger criteria for corn (Table 4).

 

 

 

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These percents increase between 5 and 10% when a $20 crop insurance payment is included in the guarantee. Given no insurance payment, between 81 and 93 percent of farms meet the farm trigger criteria for soybeans (see Table 5). Percentages increase to between 90 and 98 percent if a $20 per acre insurance premium.

Summary

Given historical conditions, ACRE would have made sizable payments. For a typical Illinois farm, these payments would have averaged $18 per acre for corn, $7 per acre for soybeans, and $14 per acre for wheat. These average payments exceed what a typical farm has to give up in direct payments to enroll in ACRE.

Currently, projections of commodity prices are below benchmark prices. This suggests that the chance of ACRE payments in 2009 is higher than the above historical averages. It also suggests that 2009 could be a high payment year for ACRE.

Acknowledgements

Data used in this study comes from the local Farm Business Farm Management (FBFM) Associations across the State of Illinois . Without their cooperation, information as comprehensive and accurate as this would not be available for educational purposes. FBFM, which consists of 6,000 plus farmers and 60 professional field staff, is a not-for-profit organization available to all farm operators in Illinois . FBFM field staff provides on-farm counsel with computerized recordkeeping, farm financial management, business entity planning and income tax management. For more information, please contact the State FBFM Office located at the University of Illinois Department of Agricultural and Consumer Economics at 217-333-5511 or visit the FBFM website at www.fbfm.org .

Submitted by: Gary Schnitkey and Nick Paulson, Department of Agricultural and Consumer Economics, University of Illinois
.

Department of Agricultural and Consumer Economics    College of Agricultural, Consumer and Environmental Sciences
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