Published: November 30, 2007 12:20 pm            

Farm Programs: An inside look at the Average Crop Revenue program

Originally published in the November 30, 2007, print edition.

Introducing a so-called “revenue coverage” type farm program as an alternative to the current counter-cyclical payment approach to provide producers with a “safety net” for crop production was part of the U.S. House farm bill, is likely to be part of the U.S. Senate farm bill and is generally supported by the Bush administration.

The “revenue” approach to CCPs would base those potential payments on both “price” and “yield.” Current CCPs are based on the 12-month national average price for a given grain commodity, compared to pre-set “target prices.”

The farm bill passed by the U.S. House offers producers a one-time opportunity to choose between the current method of calculating CCPs and a newly proposed “Revenue Counter-Cyclical Program” for the 2008-12 crop years. The proposed RCCP option is similar to the RCCP that was proposed earlier by the Bush administration to replace the current CCPs. The proposed RCCP would set national target revenue amounts and national target yields per acre for each commodity, as follows:

• Corn = $344.12 per acre revenue; and 114.4 bushels per acre
• Wheat = $149.92/acre revenue; and 36.1 bu./acre
• Soybeans = $231.87/acre revenue; and 34.1 bu./acre

ACR program details

The farm bill proposal currently being considered by the U.S. Senate would give producers the opportunity to opt for the Average Crop Revenue program, in lieu of the current direct and CCP program payments.

Following are key details of the proposed ACR program.

Beginning with the 2010 crop year, producers would have the choice of staying with the current direct payment and CCP program, or switching to a new ACR program. The decision of enrolling in the ACR program or the current program at Farm Service Agency offices could be made and switched each year. The U.S. House farm bill gave producers a one-time opportunity to switch to “revenue-based” CCPs.

Under ACR, producers would receive a “fixed” (direct) payment of $15/acre for all crops, based on the lesser of the total crop base acres on a farm, or the average acres planted to eligible program crops from 2002-07. Current direct payments are crop specific and are based on crop base acres that were established for the 2002 farm bill.

Most current direct payment amounts in Minnesota range from $23 to $30 per base acre for corn; $11 to $14 per base acre for soybeans; and from $14 to $18 per base acre for wheat.

Under the ACR program — as passed by the U.S. Senate ag committee — there would be no “price-based” CCPs as currently exist, and there would be no “non-recourse” marketing loans or loan deficiency payments. All Commodity Credit Corp. loans would “recourse” loans, with the only repayment options being repayment of loan principal plus interest, or forfeiting the grain to the CCC at the end of the nine-month loan period.

Note: There are proposals in the U.S. Senate to keep the current CCC loan and LDP program in place, with some modifications.

How ACR would work

Here is how the proposed ACR program would work.

• The starting point for ACR would be calculating the per acre average state revenue for each crop on an annual basis.
• The state trend yield would be based on a linear regression trend yield for the planted acres specific crop from 1980-06.
• The pre-planting price would be the average of the federal crop insurance pre-planting price for the current year and the previous two years for a given crop.
• The per-acre state revenue target = (trend yield) x (pre-planting price) x (0.9).
• The per-acre actual state revenue = (state average yield) x (FCIC harvest price).
• The final ACR payment is adjusted to reflect the ratio of the producer’s Actual Production History for a given crop compared to the state trend yield, and adjusted to 90 percent.
• The revenue portion of ACR on a farm = (state revenue target) minus (actual state revenue) x (acres planted to a crop) x (APH ratio) x (0.9).
• The revenue portion of ACR payments paid to the producer would be reduced by the amount of any crop insurance indemnity payments received. The crop insurance provider would receive the amount of the indemnity payments that were paid.

An example of the program

The following is an example of the ACR program as currently proposed.

Assumptions

Crop: Corn
Acres: 500
Current FSA corn base: 500 acres
Current program yield: 118 bu./acre
State trend yield: 150 bu./acre
Pre-planting corn price: $3.25/bu.
Actual state yield: 140 bu./acre
FCIC harvest price: $3/bu.
Producer APH yield: 160 bu./acre
Crop insurance indemnity: $15/acre

Estimated ACR payment (as proposed)

Fixed payment = $15/acre x 500 acres = $7,500
Crop insurance indemnity = $15/acre x 500 acres = $7,500
State revenue target = 150 bu./acre x $3.25/bu. x 0.9 = $438.75/acre
Actual state revenue = 140 bu./acre x $3/bu. = $420/acre
APH ratio = 160 bu./acre APH divided by 150 bu./acre = 1.07
ACR revenue portion = $18.75/acre ($438.75 - $420) x 500 acres x 1.07 x 0.9 = $9,028.12 ($1,528.12 to producer and $7,500 to crop insurance)
Total ACR payment to producer = $7,500 (Fixed) + $1,528.12 = $9,028.12
Total producer payment = $9,028.12 (ACR) + $7,500 (Insurance) = $16,528.12

Estimated payment with current program

Direct payment = 500 acres x 118 bu./acre x $0.28/bu. x 0.85 = $14,042

CCPs and LDPs = 0

Crop insurance indemnity = $15/acre x 500 acres = $7,500

Total producer payment = $14,042 (Direct) + $7,500 (Insurance) = $21,542

Program advantages

Advantages of the proposed ACR program to producers:

• Better crop revenue protection in years with low crop yields, and average or higher crop prices. Current “safety net” payments are triggered by lower than average prices.

• The price guarantees with ACR are based on a three-year rolling average that is adjusted each year, and should be more reflective of changes in year-to-year grain market prices. Current CCPs are based pre-set “target prices” for each crop.

• ACR payments could be made following harvest, once final statewide average yields are known. Current CCPs for corn and soybeans are not finalized until Sept. 1 in the year following harvest.

• The ACR program should help lower crop insurance premiums for most producers.

Program disadvantages

Disadvantages of the proposed ACR program to producers:

• The ACR program would result in a loss of annual guaranteed direct (fixed) payments on corn base acres for most producers, compared to the current farm program.

• Reduced crop revenue with ACR in years with higher-than-average yields, but low prices, such as occurred with corn in 2005. Many producers received substantial CCP and LDPs on the 2005 corn crop, but would have received little under the proposed ACR program.

• ACR does not provide protection when a producer has a lower farm yield than the state average yield, because all ACR payments are based on the state average yields. Producers would still need crop insurance to protect for crop losses at the farm level.

• ACR would result in the loss of “non-recourse” CCC loans that can be released at the “posted county price,” or for potential LDPs, which could have a major impact, if we get into another period of grain surpluses and low grain prices.

Concerns about the program

Other concerns with the proposed ACR program include:

• Some worry that the ACR program could be dis-incentive for producers to purchase crop insurance, which could lead to problems when producers have localized crop losses, and could severely impact the crop insurance industry.

• There may be some World Trade Organization concerns with the proposed ACR payments, especially if producers can choose the ACR program on an annual basis, based on changing global markets and crop prices.

• There is some concern that the federal government could end up with large amounts of forfeited grain with the “recourse” CCC commodity loan provisions under the proposed ACR program, if we get into a period of low grain prices again.

• Farm organizations are split on the introduction of the ACR program as a farm program choice. Support for ACR is stronger as long as it remains “optional.”

        

• Click to discuss this story with other readers on our forums.