ACRE Information For Landowners

Immediate Release
 
May 26, 2010
 

Summary

  • Higher price component in ACRE revenue guarantee greatly improves income protection over CCP, even with 25% limit on payment level and reductions in DP and Loan Rate.
  • Yield variations alone may be sufficient to trigger ACRE payment, unlike CCP.
  • Price must decline 10% before an ACRE payment could be made, all things equal; however, price would have to decline 39% before a CCP payment could be made.
  • Favorable income protection may not be realized if individual yield has little correlation with state yield.

Introduction

As producers consider whether to enroll in the Average Crop Revenue Election (ACRE) program for 2010, they must do so for the remainder of the 2008 Farm Bill and must include all eligible crops produced on the farm operation with the same farm number.  A tenant operator must obtain the agreement of his landowner lessor to enroll.  This analysis considers the alternatives of ACRE and the traditional Counter Cyclical Payment (CCP) program and its effects on landowners.

Returns to landowners on leased land are determined by the net earnings of their land.  Under a share rent lease, net returns are the share of crop sales and government payments less the crop expenses, insurance and real estate taxes as specified by the lease.  Under a cash rent lease, landowner net returns are the cash rent less expenses for real estate taxes for the land and property he furnishes and insurance on that property.

ACRE differs from the CCP program; it is designed to fill variations in farm income.  ACRE may provide more income protection than CCP by using a more recent two-year average of national average farm prices, a five-year Olympic average of state crop yields per planted acre and with ACRE payments made on a portion of planted acres, rather than on fixed base acres.  In this analysis, which is described in more detail in the last section, the ACRE program is contrasted with the CCP program to examine the effect on landowner returns using an Iowa corn production example. 

Using the Iowa corn example discussed later, the ACRE Iowa state benchmark revenue is $655, based on a 2-year average farm price of $3.83 per bushel[1] and a state yield of 171 bushels per planted acre.  The revenue guaranteed is 90% of the benchmark, $589, and the maximum payment is limited to 25% of the guarantee, $147 per planted acre.  In contrast, the CCP payment is based on $2.35 effective price and a payment yield, an average of 122 bushels, for a maximum payment of $49 per base acre.  A producer electing ACRE will receive a 20% direct payment (DP) reduction and 30% loan rate reduction.

The analysis compares landowner ACRE and CCP program returns for both share and cash rent agreements under a base 2010 Expected Payout per Planted Acre and three alternatives.  Alternative 1 assumes a yield reduction of 15%, which Iowa has experienced or exceeded five times in 38 years from 1970 to 2008.  Alternative 2 assumes a 40% reduction in price, a level that will trigger a CCP payment.  Alternative 3 assumes a 50% reduction in price, a level that will trigger an LDP in addition to a CCP.

Landowner Returns

The effect on landowner returns is shown in Table 1.  A share rental agreement is assumed to be a 50% division of crop receipts and cash expenses with the landowner paying taxes and insurance on the leased property, estimated to be $9.46 per acre in 2010[2]. There is a direct landowner transmission of the rise and fall of revenue through the share of cash receipts of the crop produced.  Landowner returns are slightly better for the traditional program, where there is no reduction in direct payments in the base 2010 Expected Payout, but as revenues fall, albeit by increasingly dramatic degrees of 15%, 40% and 50%, the ACRE program shows its advantage in supporting revenue to both tenant and landowner.  No determination is made to illustrate at what incremental decline in income ACRE returns exceed CCP returns.

Cash rent landowner returns are very straightforward: the $175 per acre rate[3], less $9.46 for taxes and insurance. The landowner receives a net return of $166, regardless of the level of revenue earned by the tenant, who bears all the market and yield risk.  The potential benefit of ACRE to the landowner may be seen in Net Returns for the Operator.  Again, except for the base 2010 Expected Payout, operator ACRE net returns are superior to CCP net returns, by $21, $112 and $28 for Alternatives 1, 2 and 3, respectively.  This suggests that the operator would be less likely to seek a reduction, or seek only a smaller reduction, in the cash lease rate as prices decline from peak levels.  Tenant operators might feel confident to bid somewhat higher rates with the comfort that ACRE might protect them as prices decline from peak levels. 

Individual crop yields may vary independently from state yields crop, however, and may result in an inadequate ACRE payment when the producer has suffered a crop loss.  State yields may also rise sufficiently to reduce the payment that a reduction in price would otherwise cause.

Table 1: Operator Net Returns Share & Cash Rent, Traditional CCP Program vs. ACRE

Share Rent

 

 

 

 

 

Net  Returns

 

Cash

Gov't pmt

Cash

Operator

Landowner

 

Receipts

CCP

ACRE

Expenses

CCP

ACRE

CCP

ACRE

Difference

Base

327

14

11

189

152

149

183

180

-3

Alt 1

278

14

24

189

103

113

134

144

10

Alt 2

196

16

72

189

23

80

55

111

56

Alt 3

163

58

72

189

33

47

64

78

14

Cash Rent

 

 

 

 

 

 

Net  Returns

 

Cash

Cash

Gov't pmt

Cash

Operator

Landowner

 

Rent

Receipts

CCP

ACRE

Expenses

CCP

ACRE

CCP

ACRE

Base

175

654

28

22

337

170

164

166

166

Alt 1

175

556

28

48

337

72

92

166

166

Alt 2

175

391

33

145

337

-87

25

166

166

Alt 3

175

327

117

145

337

-68

-40

166

166

NOTE: Table may not add because of rounding.

Analysis: ACRE-Traditional Counter Cyclical Program Comparison

Factors other than lease arrangements also affect landowner net returns, such as soil productivity, commodity prices and government support programs, as well as the management skill of the tenant operator.  This analysis examines the effect of the ACRE program on the net earnings of Iowa farmland planted to corn, relative to the traditional CCP program.   Soil productivity, commodity market outlook and management skill are held constant to examine the effect of the selection of farm programs available in 2010 and of alternative yield and price outcomes.  This analysis, shown in Table 2, assumes a familiarity with both ACRE and CCP programs and provides sufficient details for the analysis.  Further, it is also assumed that farm yield and state yield have the same variations, that the individual farm has a qualifying loss (below the farm’s benchmark revenue) and that base acres equal planted acres.

As stated in the Introduction, in this analysis, the revenue guarantee is 90% of the state benchmark revenue.  If the 90% guarantee is applied to the $3.83 per bushel price component, equal to $3.45, a comparison can be made to the $2.35 corn effective price, the level at which market price protection begins after subtracting the corn direct payment rate, $0.28, from the corn target price, $2.63.  The ACRE guarantee is calculated every year, based on the recent data added by the previous crop year, but is limited is to a 10% increase or decrease from the prior year.  Consequently, the lowest the price component, multiplied, by the 90% guarantee level, could decline by the last year of the 2008 Farm Bill, 2012, is $2.76, $0.41 greater than the effective price for calculating the counter cyclical payment rate.

In the base 2010 Expected Payout per Planted Acre, the revenue components are totaled.  The direct payment is reduced 20% for the ACRE participant, $6 per acre at 85% per base acre.  Crop receipts per acre are the same, $654, assuming a 170.2 bushel yield per planted acre, the simple 2004-2009 average of planted yields, and a $3.84 2010 season average market price.  No ACRE, CCP or LDP payments are made.  Total ACRE revenues net of cash production expenses are $339 per acre, $6 less than those using the CCP program. 

In Alternative 1, a 15% reduction in both farm and state yield per planted acre, to 144.7 and 145.4 bushels, respectively, is assumed.  Crop receipts per acre decline $98 in both programs, to $556; state revenue is $34 below the guarantee resulting in a payment on 83.3% of planted acres, or $26.   The revenues net of cash production expenses under Alternative 1 are $267 for ACRE participants compared with $247 for CCP participants, who receive no CCP payment.  The 15% yield loss is also not enough to trigger a crop insurance indemnity for all but the very highest levels of coverage.

In Alternative 2, an assumed 40% reduction in the season average corn price is considered; it results in a $2.30 price, sufficient to trigger a CCP payment of $0.05 per bushel, or $5 per base acre. In contrast, the ACRE state revenue falls $196 below the guarantee, but is limited to a maximum $147 payment, which adds $123 to revenue per acre when paid on 83.3% of planted acres.  The resulting revenues net of cash production expenses are $200 for ACRE participants vs. $88 for CCP participants.

Alternative 3 illustrates the effect of a 50% decline in price to $1.92, a level where those who have not elected ACRE can expect to receive LDPs, here assumed to occur at an average of $0.25 below the season average farm price.  The decline in crop receipts to $327 plus the maximum ACRE payment results in a $135 revenue net of cash production expenses, a $28 advantage over CCP participants, in spite of a maximum $41 CCP and an average $48 LDP per planted acre.

Table 2: Iowa Corn: Traditional vs. ACRE

 

Traditional

ACRE

Difference

Program Status

Base

Optional

 

Program loss requirement

None

Farm revenue loss

 

Payment Basis

National Price

State Revenue

 

Payment Acreage

85% Base

83.3% Planted Acreage (85% 2012)

 

Direct Payment, $/A

27.63

22.11

-5.53

Maximum payment $/Acre

48.80

147.36

98.56

Payment Components

 

 

 

 Price (Target) April '09*

2.63

2-yr Moving Avg (3.83) x 90%=3.45

 

Yield

Farm CCP Pmt Yield/HA

State 5-yr Olympic Avg

Yield/Planted A  = 171.0

 

Producer Protection

 Effective Price, $/bu.

Revenue Guarantee, $/Planted Acre

 

   for 2009

2.35

589.44

 

Cash production expenses, $/A**

336.64

336.64

 

2010 Expected Payout per Planted Acre

Price projection, April '10***

3.84

3.84

 

Cash Receipts $/A

653.57

653.57

 

CCP/ACRE Payment, $/A

0.00

0.00

 

  Total Gross Revenue

681.20

675.67

-5.53

  Revenue Net of Cash Expenses

344.56

339.03

-5.53

Alternative 1: Yield declines 15%, 144.7 bu.

 

 

Yield declines 15%, 144.7 bu.

 

 

 

Cash Receipts $/A

555.53

555.53

 

CCP/ACRE Payment, $/A

0.00

26.07

26.07

  Total Gross Revenue

583.16

603.71

20.54

  Revenue Net of Cash Expenses

246.52

267.07

20.54

Alternative 2: Price declines 40%, $2.30

 

 

Price declines 40%, $2.30

2.30

2.30

 

Cash Receipts $/A

391.46

391.46

 

CCP/ACRE Payment, $/A

5.19

122.75

117.57

  Total Gross Revenue

424.28

536.32

112.04

  Revenue Net of Cash Expenses

87.64

199.68

112.04

Alternative 3, Price declines 50%, $1.92

 

 

Price declines 50%, $1.92

1.92

1.92

 

Cash Receipts $/A

326.78

326.78

 

CCP/ACRE Payment, $/Pmt A

41.48

122.75

81.27

LDP

47.66

0.00

-47.66

  Total Gross Revenue

443.55

471.64

28.09

  Revenue Net of Cash Expenses

106.91

135.00

28.09

*April  2010 WASDE, avg. price for 2008, projected avg. price for 2009

 

**Cash Production costs based on ERS 2010 projections

 

 

***Based on April 29 settle Dec 2011 Corn futures contract CBOT


For more ACRE information check out the University of Illinois On Demand Webinar titled “The Economics of the 2010 ACRE Decision”

[1] Based on April 2010 WASDE average corn price for 2008 and average projected price for 2009.

[2] Based on USDA/ERS production costs and returns estimates and cost-of-production forecasts for 2009 and 2010. 

[3] Based on NASS surveys for 2009 and assumed to continue in 2010.


March 17, 2010 1:55 PM
On the road to North Platte, Shooters tonite! Happy St Pattys Day!

 
 
 


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