Wednesday, October 15, 2008

The New Farm Bill - ACRE

ACRE: A brief primer on the new payment mechanism.

The statutory text is available here.

If you see any errors or oversights, please let me know. I find this statutory text difficult to parse and would welcome a discussion with anyone who cares to parse it with me. Forgive me for using "Farmer Joe" in the example. At the time this was written, I did not yet appreciate the role of Joe in our political culture. In the end, perhaps we can add Joe the Farmer to Joe the Plumber and Joe Six Pack.

UPDATE: An excellent tool to understanding this program is available here.

How payments are triggered:

Basically, ACRE payments are triggered when state revenue per acre falls below the target revenue for the state—what is called the "ACRE program guarantee." [§ 1105(b)(2)(A)] That trigger is not, however, complete until the farmer has an individual revenue shortfall as well. That shortfall occurs when the farmer's actual revenue falls below the target revenue for that farmer—what is called the "ACRE farm revenue benchmark". [§ 1105(b)(2)(B)]

Read the rest of this post . . . .
Both the ACRE program guarantee, and the ACRE farm revenue benchmark are calculated from history. That is, state shortfalls and farmer shortfalls are judged in relation to what revenue could reasonably be expected to be. To calculate what the state and the farmer should expect in terms of revenue, we need a measure of historic yields and historic prices. That, in turn, will give us a per acre revenue number that we can compare to the revenue the state and the farmer actually generated per acre.

In order to get the yield, the statute says we look at the past five years' production average, calculated without the highest and lowest values. We do this for the state in calculating the "ACRE program guarantee" under § 1105(d) and we do it for the individual in calculating the "ACRE farm revenue benchmark" under § 1105(f). Then we find price by looking at the average market price for the preceding two years under § 1105(d)(3), which is incorporated to the farmer's benchmark calculation under § 1105(f)(1)(B). The average market price is determined by looking at the average price received for a given commodity on a national basis during the 12 months occurring after harvest—the marketing year.

So let's run some numbers. Let's say the 5 year olympic average for corn is 162 bu./acre in the state. The five-year olympic average for Farmer Joe is 145 bu./acre. The national average market price for the 2006 crop was $3.00/bu. The national average market price for the 2007 crop was $4.20.

This means that, had the program been in effect for the 2008 crop, Farmer Joe would get paid if the actual state revenue fell below the ACRE program guarantee and his individual revenue was below the ACRE farm revenue benchmark. Thus, if actual state revenue falls below $524.88/acre ($3.60 * 162*.9) [the revenue guarantee is set at 90% of the calculated state revenue], Joe would get a payment so long as his revenue falls below $522/acre ($3.60 * 145).

To figure out their actual revenue, we look at the amount of commodity they produced, divide it by their planted acres, and multiply that number by the national average price for that crop. These calculations are described in §§ 1105(c) and (e). That, in turn, tells us if their per-acre revenue is smaller than the per-acre revenue they would have expected based on recent history. Let's say the state had 9 million acres of corn planted and brought in 1.5 billion bushel of corn, while Joe had 1000 acres of corn planted and brought in 130,000 bushel of corn. The yield (bu./acre) for each was 166 bu. and 130 bu. respectively. Let's assumer further that the national average price for corn in the marketing year following the 2008 harvest is $3.20. That would mean that the actual revenue for the state was $531.20 and for the farmer was $416.

Does Joe get a payment? No. State revenue was not short enough. Joe had a shortfall of $106, but he doesn't get a payment.

Let's keep Joe's numbers the same but decrease the state's revenue by decreasing its yield. Let's say the state brought in only 1.3 billion bushel of corn. Thus, its yield was 144 bu./acre. In turn, its actual revenue was $460.80 (144 * 3.20). On these facts, the states revenue is small enough to trigger a payment along with Joe's revenue shortfall.

Note how both price and yield have an impact on current and past revenue measures. Given the 5 year averaging for yields, the state level guarantee and the individual benchmark shouldn't fluctuate too quickly in terms of yield changes. But given the 2 year average for prices, the state level guarantee and the individual benchmark could swing a bit wildly. To avoid this problem the statute caps the overall change in the state level guarantee at 10% of the prior year's guarantee, either up or down. § 1105(d)(1)(B).

How payments are calculated:

How much does the farmer get paid? This is found in subsection (g). The first element of the payment is finding the lesser of the difference between the program guarantee and the state revenue or 25% of the program guarantee. On our facts, the difference between the program guarantee and the state's revenue was $64.80 (524.88 – 460.80). 25% of the program guarantee is $131.22 (.25 * 524.88). Thus, the number to use is $64.80. This is the shortfall in per acre revenue for corn on a statewide basis.

Then, that number is multiplied by the % of base acres the farmer has. So, if all of Joe's 1000 acres are base acres, he gets to multiply the $64.80 by 833. Thus, his payment is $53,978.40, so far. But the $64.80 was based on state-wide averages. So the number needs to be adjusted to account for individual farmer's historic yields. To do that, it is multiplied by the quotient obtained by dividing the farmers olympic average yield by the state's benchmark yield (i.e., its olympic average yield). Here, the farmer's average is 145 and the state's is 162, which yields a quotient of .895. That is, in turn multiplied by the $53,978.40 we calculated earlier, yielding a total ACRE payment for Farmer Joe of $48,310.66.

Current Problems

The problem the administration is having right now has to deal with the administration of this program. Note how important it is to figure out the starting price. If the 2006 and 2007 marketing years are used to set this program up, then the price used to calculate the program guarantee and the farm revenue benchmark will be around $3.60. If yields are consistent with the average in 2009, and the 2009 marketing year brings prices averaging $3.30, the governmental outlays will be significant. But not nearly as significant as they would be if the price used to calculate the guarantee and benchmark were $4.88—a real possibility if the 2007 and 2008 marketing years are used.

Additionally, if one were to start with the $3.60 prices, the statute is not built such that the big payments would ensue for the 2010 crop if prices remain depressed. The new 2-year average price would be $4.88 (the 2007 and 2008 marketing years), but the revenue guarantee can only move 10%. Assuming yields are the same, that would mean the price used to set the guaranteed revenue would effectively be $3.96. That still results in a larger payment to farmers, but not one that would rise to the same level as those payments that will be made by starting with the 2007-2008 average price.

Note also, that the 10% limit on increases or decreases also means that the government's outlays that result from starting with a $4.88 average price for the 2009 program year will not diminish in a way that fully captures the drop in commodity prices. So if the price the next year were 3.60 (because the 2009 crop has an average price that is relatively low), the 10% limit would, on the same yield, generate an effective price of 4.40. That, is a somewhat decreased revenue guarantee, but not nearly to the same extent as a true decrease to the 2 year average.

There is much that is complicated about this program and much uncertainty. Many farmers will likely enroll and, I suspect, the administration will end up starting with the 2007-08 crop years' average price for the 2009 crop. If that happens, and prices drop, expect large payments to producers that persist for a few years.

In terms of signing up, setting the prices on the 2007-08 level at the outset will likely (or at least should) draw farmers into the program.

Participation Conditions

To participate in this program, farmers must give up 20% of their direct payments, all counter cyclical payments, and 30% of the loan rate for commodities in that program. However, as I've heard Dr. Barnaby say, the only real cost to a farmer is the 20% direct payment. [presentations on the new farm bill can also be found here] If prices drop to levels that trigger counter cyclical payment or make loan rates relevant, bankruptcy is likely to ensue anyway. So playing this game really involves losing 20% of the direct payments. Notably, as one of my students pointed out, the adjusted-gross-income limitation on direct payments (barring people and entities from getting such payments if they have more than $750,000 in average adjusted gross farm income over a 3 year period [sec. 1604 of the bill]), means that there is little reason for producers at that income level to refrain from entering this program.


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