What is in this article?:
- Farm-level trigger could bring higher ACRE sign-up
- Revenue Area Affects Expected Payments
- ACRE Payments Against Forgone Payments
- Model-based results show that switching from a state-level trigger for the ACRE program to a trigger closer to the farm level would generally increase expected payments, but the impact would vary by crop, region, and market price.
Revenue Area Affects Expected Payments
Because the ACRE program and several proposed revenue programs use a double trigger—both the State average revenue and the farm’s revenue for a crop must fall below guarantee or benchmark levels—switching the trigger to one more closely aligned with the farm level would change expected program payments. A smaller geographic area would have fewer acres that could have offsetting high and low yields, resulting in greater revenue variability. Such a switch also would likely increase the correlation between the area and farm revenues, increasing the likelihood that they would fall short of guarantees or benchmarks at the same time. As a result, expected payments and risk reduction would generally increase.
To highlight the effect of differences in yield variability, researchers first assumed that the expected crop prices would equal the revenue program guarantee price (crop price used to calculate revenue benchmarks or guarantees). Under that assumption, grain sorghum, cotton, and wheat with their large differences in revenue variability would, on average, see the greatest proportional increases in expected payments among the major crops for which the ACRE program is available. Payments would increase an estimated 28 to 32 percent if a county revenue trigger were used and 13 to 17 percent using a CRD trigger. (A CRD is an aggregation of counties within a State having similar characteristics.) Soybean and corn payments would increase about 16 and 19 percent for a county trigger and 7-10 percent for a CRD trigger. Payments for rice would change little for either trigger.
Not all farms, however, would see average increases in expected payments. When switching from a State trigger to a county-level trigger, farms in counties where revenue variability is high relative to State variability would see higher expected payments. The differences in expected payments would decrease as the difference in variability between the county and the State decreases. Farms in counties with relatively low variability would see smaller increases and could realize lower expected payments.
Switching to a county trigger would result in large percentage increases in payments to participating corn farmers in southern Illinois, southern Iowa, and areas away from the heart of the Corn Belt. Payment increases would be large in northern Iowa and eastern Kansas for soybeans and in the Northern Plains and Kansas for wheat. For cotton and grain sorghum, farms in counties in Texas with high yield and revenue variability would see large increases in payments.
The possible effects of switching to a smaller area trigger in an area-revenue program are more complex than those in the previous analysis, which are based on the simplified assumption that expected crop prices equal the revenue program guarantee price. Under ACRE, the guarantee prices are averages of marketing year average prices in the 2 previous years. The market price expected for the current year could be either above or below the guarantee price, which is an important consideration for producers deciding whether or not to enter into the program. (Note that once a producer enrolls in ACRE, he or she is enrolled in the program through 2012 crops.) For example, the May 2010 wheat price projection in USDA’s World Agricultural Supply and Demand Estimates (WASDE) indicated that the marketing-year average would be about 20 percent below the ACRE guarantee price. In contrast, the May 2011 WASDE price projections for corn and wheat market prices were about 15 percent higher than 2011 ACRE guarantee prices. In general, entry into ACRE would be more attractive to producers in the 2010 wheat situation, when the projected price is, at a point in time close to the end of program signup, projected to be less than the guarantee.
The relationship between the guarantee price and expected market also affects the change in expected payments, and thus potential participation, from switching the area trigger used in the revenue program. This is because the difference in the prices affects the weight of price relative to yield in triggering a revenue payment. Price under ACRE is the same across all areas; therefore, the effect on expected payments of switching the area trigger from the State level would be less when the expected market price is less than the guarantee price. In these instances, the revenue shortfalls would more likely stem from the price decreases. For example, if the expected market price for wheat were 10 percent less than the guarantee price, and if the State trigger were changed to a county trigger, the average expected payment would decrease about 20 percent, compared with 28 percent if the two prices were equal.
If, on the other hand, the expected price were greater than the guarantee price, then yield variability, which changes as the area is adjusted, would become a stronger factor in revenue variability and the effect of switching the area trigger to a smaller geographic area would be heightened. The effect of the difference between expected market price and guarantee price on the change in expected payments as the area trigger is switched would generally be stronger for wheat, cotton, and grain sorghum—crops with greater geographic differences in yield and revenue variability than other crops. For cotton, for example, if the expected price was 10 percent greater than the guarantee price, then the switch to a county revenue trigger would increase the average expected payment by about 60 percent, compared with 28.5 percent when the two prices are equal.