Alternatives to a State-Based ACRE Program: Expected Payments Under a National, Crop District, or County Base
by
Robert Dismukes, Keith H. Coble, David Ubilava,
Joseph Cooper, and Christine Arriola
Economic Research Report No. (ERR-126) 42 pp, September 2011
This report simulates crop revenue variability to examine
expected program payments and consequences on farm-level risk if
the area trigger were changed from the State level to a national,
Crop Reporting District, or county level. The analysis is national
in scope and covers seven crops: corn, soybeans, wheat, cotton,
grain sorghum, long-grain rice, and medium/short-grain rice, which
accounted for 98 percent of the value in 2010 of crops for which
ACRE was available. We analyze how the change in revenue program
benefits would vary across crops and regions and how benefits from
the revenue programs would stack up against benefits from direct
payment and price-based commodity programs (countercyclical,
marketing loan guarantees) available under the 2008 Farm Act.
What Is the Issue?
Enacted in 2008, the Average Crop Revenue Election or ACRE
program uses a combination of State- and farm-level revenue
guarantees or payment triggers that are established from recent
prices and yields. At the initial enrollment deadline for ACRE in
August 2009, only 8 percent of farms with about 13 percent of
eligible base acres elected to participate, despite the program's
unique ability to align guarantee prices with increases in field
crop prices. In 2010, the second year in which ACRE was available,
few additional acres were enrolled. The ACRE participation decision
is complex. Prospective enrollees must weigh the benefits of ACRE
relative to those of other programs that must be forgone and learn
about a markedly different program that uses both farm-and
State-level revenue triggers. Switching the aggregate (State)
revenue trigger to a lower level, one closer to the farm level, has
been suggested as a way to make ACRE more attractive to
producers.
What Did the Study Find?
Changing the aggregate level of revenue used to trigger payments
in a program such as ACRE would change expected benefits and,
perhaps, enrollment levels. Moving from ACRE's State level to one
closer to the farm level would generally increase payments and
reduce risk.
- If expected market prices equal revenue program guarantee
prices, the increase in payments and risk reduction would be
greatest for crops such as wheat, cotton, and grain sorghum-crops
with widely varying yield across regions and, thus, large
differences in revenue variability across levels of aggregation.
The average expected payments for these crops would increase 28-32
percent if the revenue program trigger were changed from State to
county. Corn and soybean production is more concentrated
geographically with less varied yields, so the increase in expected
payments would be less, 16-19 percent. Payments for rice would
change little if the aggregate revenue trigger were changed because
most of the crop is irrigated, with price largely determining
revenue variability.
- The relationship between expected market price in the covered
year and the revenue program guarantee price affects the changes in
expected payments under alternative levels of revenue aggregation.
If the expected market price increases relative to the guarantee,
then difference in expected payments across levels of aggregation
would increase as yield variability becomes a stronger factor in
determining revenue variability and payments; if the expected
market price decreases relative to the guarantee, expected payments
increase but differences in payments across levels of aggregation
decrease.
- Because revenue benchmarks or guarantees used in the revenue
programs are designed to change over time, it is important to
consider the different crop guarantee price scenarios in evaluating
the benefits of a revenue program relative to price-based programs.
If crop prices continue to increase, guarantees and expected
payments under ACRE or a similar program would increase, while
expected payments under programs that are based on legislatively
fixed targets would decrease. And as the crop's price increases,
the size of the direct payment for a crop decreases relative to the
expected payment from the revenue program Changes in prices, and
thus revenue program guarantees, appear to be much more important
than level of aggregation/trigger to producers weighing the revenue
election.
- Risk reduction from a program that uses an aggregate revenue
trigger depends greatly on the correlation between the aggregate
measure of revenue and actual farm revenue. While risk reduction
increases as the level of aggregation used in the revenue program
diminishes, farm-level revenue is largely uncorrelated with revenue
at even the smallest level of aggregation, the county. In addition,
expected payments and risk reduction are limited by the cap of
revenue program payments at 25 percent of the guarantee.
While a county-level revenue program would generally produce
larger expected payments and risk reduction for participants than a
State-level program, it would increase government administrative
costs as program benchmarks and guarantees would need to be
determined for a greater number of aggregate units.
How Was the Study Conducted?
To study the effects of changing the aggregation level used for
the trigger in a revenue program, we constructed three hypothetical
revenue program alternatives that maintain the structure of the
ACRE program but substitute national-, district- and county-level
revenue for the State-level revenue trigger. The study used data
from USDA's National Agricultural Statistics Service and Risk
Management Agency to construct a model that simulates random
yields, prices, and revenues at farm and national, State, Crop
Reporting District, and county levels. The model is national in
scope and represents about 95 percent of the 2010 planted U.S.
acres of corn, 89 percent of soybean acres, 89 percent of wheat
acres, 84 percent of cotton acres, 74 percent of the grain sorghum
acres, and more than 90 percent of rice acres.