ECONOMICS. Impact of Average Crop Revenue Elections on Arkansas Crop Producers Financial Position

Transcription

1 ECONOMICS Impact of Average Crop Revenue Elections on Arkansas Crop Producers Financial Position J.A. Hignight, E.J. Wailes, and K.B. Watkins ABSTRACT The last two years of increased commodity prices and now the prospect of lower market prices have increased the probability that Average Crop Revenue Elections (ACRE) will provide a higher pay out in Arkansas than the traditional programs for all commodities except cotton. Cotton s ACRE price is around loan rate while the other commodities are well above their loan rate. Uncertainty exists with what market prices and state yields will do in the future and if any payments in ACRE will be more than the loss of direct payments, Counter-cyclical Payments (CCPs) and Loan Deficiency Payments (LDPs) over the next four year. Farm yields and their correlations with state yields must be considered due to the fact ACRE only pays if both state and farm guarantee levels are triggered. A state payment could be triggered while a farm payment may not be triggered and vise versa. Another consideration is how closely base acres match actual production acres. For example, if a farm has cotton base acres and now plants corn or soybeans it is probably better to stay in the traditional program since it is highly likely CCPs will occur for cotton. From the current data and analysis, ACRE does look favorable for all commodities except cotton. It is important for each farmer to look at their own operation and base acreage to determine which program will work best on their farm. INTRODUCTION The USDA announced on 22 December 2008 that producers could begin signing up for either the 2009 Traditional (direct and counter-cyclical payments, DCP) commodity programs or ACRE program and have until 14 August to decide. The decision of which 289

2 AAES Research Series 571 program to sign up for should be based on an understanding of the programs and which program will benefit the producers the most. This analysis looks at the most current data available (February, 2009) and simulates outcomes for both the Traditional and ACRE programs at the state level for cotton, rice, grain sorghum, soybeans, corn, and wheat for Arkansas representative farms. It is a comparison of a base acre of the specific commodity to that commodity being planted and enrolled in the ACRE program. ACRE is designed to provide a revenue guarantee that changes year to year based upon the moving two-year average U.S. crop price and the 5-year Olympic state yield. The revenue guarantee cannot change more than 10% plus or minus compared to the previous year s guarantee. If a payment is triggered on the state level it cannot be more than 25% of the revenue guarantee for the year. Participants in ACRE must take a 20% reduction of direct payments and 30% reduction of loan rates. After a state payment is triggered a farm level guarantee must be triggered as well. It is possible that the state could trigger a payment but the farm does not. Determining how well the farm level yields are correlated with the state average yield must be analyzed by the individual farmer in the decision making process. The ACRE program is a one-time sign up and the producer is locked in for the life of the 2008 Farm Bill. The program can be signed up for the years 2009 to Future payments in both the Traditional and ACRE programs are not known with any certainty. ACRE payments will depend upon the National Agricultural Statistics Service national seasonal average market price and state yield for each commodity. Loan Deficiency Payments (LDPs) and CCPs are also determined each year based upon the U.S. seasonal average market price. PROCEDURES Yield distributions for the crops were created using variation from trend over the past 20 years. Trend was also used to create the predicted yield in 2009 to 2012 which the historical variation will be simulated around. Price distributions came from the previous 10 crop-years average market price adjusted for inflation. These price distributions were used to simulate variability around the predicted crop prices from 2009 to Policy parameters come from the two commodity programs available to producers during the 2008 Farm Bill. The simulated years had 500 iterations using yield and price distributions along with the policy parameters to generate revenue per acre for both the Traditional DCP and ACRE programs. Previous ACRE analysis in Hignight et al. (2008) simulated the representative panel farms constructed based on data collected by economists from the Arkansas Cooperative Extension and Agricultural Food and Policy Center of Texas A&M. In the analysis, the representative farms showed low probabilities ranging from 6% to 27% that the specific farm would be better off in ACRE than the Traditional DCP program. This analysis looks at the state level impact of participation in the ACRE program relative to staying in the DCP program for the period 2009 to 2012 using stochastic methods to capture the variability in state yields and prices. 290

3 B.R. Wells Rice Research Studies 2008 RESULTS AND DISCUSSION Relative to preliminary analysis conducted and reported in August 2008, current data and market conditions indicate that the prospect of an ACRE payment has increased for the upcoming year unless market prices start to climb again. Producers of all program commodities produced in Arkansas except cotton could increase their financial position by signing up for the ACRE program. Table 1 presents the current data to compare the commodities in Arkansas for the Traditional and ACRE program. The cotton ACRE price guarantee is 5 cents above loan rate and has a revenue guarantee of $539/acre. The rice program in the 2008 farm bill is now separated between long- and medium-grain. The ACRE price for long-grain rice is $13.33/cwt and $17.40/cwt for medium-grain rice. Long-grain s revenue guarantee is $821/acre and medium-grain is $1,081/acre. Grain sorghum has an estimated ACRE price of $3.63/bu and a revenue guarantee of $280/acre. Soybeans have an ACRE price of $9.68/bu and a revenue guarantee of $316/acre. Corn has an ACRE price of $4.05/bu and a revenue guarantee of $538/acre while wheat has an ACRE price of $6.59/bu and a revenue guarantee of $320/acre. The ACRE price is determined by the following 2-year market price and 2008 market price will not be finalized until after the current marketing year. The State Yield Average is determined by the 5 previous years and NASS finalized the 2008 state crop yields in January. The guarantee levels are subject to change based upon the finalized calculations as determined by the Secretary of Agriculture. Table 2 presents each commodity s mean revenue on the State level for 2009 to 2012 based on estimated prices for the time period. The estimated price was simulated using historical variation. Cotton was the only crop that clearly does not favor participation in the ACRE program. Over the four years, there is a possibility of an ACRE payment each year but the amount never surpasses payments in the Traditional program. Long-grain rice averaged a 28% probability of earning more payments in the ACRE program compared to the Traditional program. The highest probabilities of an ACRE payment greater than the Traditional program are in 2009 and Medium grain rice averaged a 41% probability that ACRE will pay more than the Traditional program from 2009 to Grain sorghum averaged a 38% probability that ACRE will pay more than the Traditional program during the four years. As with the other commodities, the probability of a payment is greatest in the first two years and decreases over time. Soybeans averaged a 40% probability of receiving more payments under the ACRE program than the Traditional program over the four years. In 2009, the probability is 58% for the year that ACRE payments will be larger than Traditional payments and the probability decreases to 27% in Corn has a 37% probability that ACRE payments will be greater than the Traditional program over the four years. The probability of a ACRE payment greater than Traditional in 2009 is 50% and decreases to 27% in Wheat ACRE payments had a 40% probability of paying more than the Traditional program during the four years. The highest probability of ACRE being greater than Traditional programs is in 2009 at 65% and the probability decreases to 18% in The last two years of increased commodity prices and now the prospect of lower market prices have increased the probability that ACRE will provide a higher pay out 291

4 AAES Research Series 571 in Arkansas than the Traditional programs for all commodities except cotton. Cotton s ACRE price is around loan rate while the other commodities are well above their loan rate. Uncertainty exists with what market prices and state yields will do in the future and if any payments in ACRE will be more than the loss of direct payments, CCPs and LDPs over the next four year. Farm yields and their correlations with state yields must be considered due to the fact ACRE only pays if both state and farm guarantee levels are triggered. A state payment could be triggered while a farm payment may not be triggered and vice versa. Another consideration is how closely base acres match actual production acres. For example, if a farm has cotton base acres and now plants corn or soybeans it is probably better to stay in the traditional program since it is highly likely CCPs will occur for cotton. From the current data and analysis, ACRE does look favorable for all commodities except cotton. It is important for each farmer to look at their own operation and base acreage to determine which program will work best on their farm. SIGNIFICANCE OF FINDINGS Arkansas rice producers must make important farm program decisions regarding participation in the traditional DCP program or the new ACRE program developed in the 2008 Food, Conservation, and Energy Act. This research suggests that as a result of volatile price movements over the past year that producers need to carefully examine their program participation decision. Changes in national and local prices for crops since August 2008 that have been used in this study indicate that the appropriate decision for each farm must be made after a careful review of the state and farm-level trigger mechanisms that affect federal price and income support for that farm. ACKNOWLEDGMENTS The authors wish to thank the Arkansas Rice Research and Promotion Board which has provided funding for the annual development and maintenance of the Arkansas Representative Farms and the analysis presented in this report. LITERATURE CITED Hignight, J.A., E.J. Wailes, K.B. Watkins, and T. Griffin Comparative analysis of the 2008 Farm Bill price-based counter-cyclical program and Average Crop Revenue Election (ACRE) Program for Arkansas representative panel farms. Agricultural Economic and Agribusiness Staff Paper SP

5 B.R. Wells Rice Research Studies 2008 Table 1. Farm program direct, counter-cyclical, loan, and ACRE guarantees in Long- Medeiumgrain grain Grain Soy- Cotton rice rice sorghum beans Corn Wheat ( /lb) -----($/cwt) ($/bu) Traditional Programs Direct payment rate CCP target price z Loan rate y ACRE Direct payment rate Loan rate ACRE price x (lb/acre) ---(cwt/acre) (bu/acre) State average yield w 1, Revenue guarantee v , (lb/acre) ---(cwt/acre) (bu/acre) Base history estimates u Direct payment yield CCP yield z Target prices change for some commodities in 2010 to y Loan rates change for some commodities in 2010 to x Estimated price based upon current NASS data. w Estimated yield based upon current NASS data. v Based upon estimated State Average Yield and 90% of ACRE Price. u Estimated average base yield. 293

6 AAES Research Series 571 Cotton Table 2. Simulated results from the Traditional and ACRE programs, AVG z Traditional ACRE ACRE payment is received 58% 22% 17% 16% 28% ACRE > Traditional 0% 0% 0% 0% 0% y Long-grain rice Traditional ACRE ACRE payment is received 77% 80% 41% 22% 55% ACRE > Traditional 57% 47% 7% 3% 28% Medium-grain rice Traditional 1,382 1,205 1,186 1,204 1,244 ACRE 1,371 1,265 1,233 1,237 1,277 ACRE payment is received 31% 64% 60% 41% 49% ACRE > Traditional 15% 63% 52% 34% 41% Grain sorghum Traditional ACRE ACRE payment is received 47% 41% 33% 35% 39% ACRE > Traditional 46% 39% 32% 34% 38% Soybeans Traditional ACRE ACRE payment is received 59% 45% 32% 28% 41% ACRE > Traditional 58% 44% 31% 27% 40% Corn Traditional ACRE ACRE payment is received 52% 44% 29% 29% 39% ACRE > Traditional 50% 42% 28% 27% 37% Wheat Traditional ACRE ACRE payment is received 67% 54% 30% 21% 43% ACRE > Traditional 65% 50% 28% 18% 40% z The average of revenue and government payments per acre from y The probability the sum of ACRE payments are larger than the Traditional payments. 294