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Wednesday, September 21, 2011

If The Safety Net Survives Budget Cuts, How Should ACRE Be Revised?


Agro-Eco-Politics can be an interesting science to follow.  It shapes the Farm Bill, farm policy, and, to a large extent, farm profitability.  And in the past week three major dynamics have been pushing and pulling on agro-eco-politics.  First, the National Corn Growers offered an alternative to the ACRE program which changed its calculations from state yield to crop district yields, and offered to forego direct payments in an effort to fund the new safety net concept.  But Monday, the White House ignored the offer and said it wanted to dismantle direct payments altogether to save money.  But the USDA’s economists had already been studying the concept of triggering ACRE payments with yield averages closer to a farm than a state average.  If the National Corn Growers are able to convince Congress to consider the Agricultural Disaster Assistance Program (ADAP), the USDA analysis will come in handy.

When the National Corn Growers Association proposed the ADAP program there had been a significant indication that direct payments would not survive negotiations on the 2012 Farm Bill.  The NCGA proposed that funding for direct payments be shifted into an improvement of the ACRE program which had suffered from lack of participation.  However the White House on Monday proposed $13.3 billion in cuts from the producer sectors of the USDA budget, including elimination of all funding for direct payments.  Not just eliminate direct payments, but used the funds to reduce overall government spending.  However, the Congress has yet to weigh in on budget cutting, as well as the Farm Bill, and there is no certainty what might happen to direct payments or their budget line item.

Nevertheless, if Congress revamps the ACRE program to serve as a safety net program that was shredded by the White House budget cutters, the ADAP program is on the table for consideration.  One of the major shifts is to change the yield calculation from a state average to the average of a crop reporting district, of which there are about 9 in most Cornbelt states.  The Economics Research Service delved into the concept to see how it would work.  The ERS report looked at the consequences if the ACRE program were based on a national yield and a county yield, as well as for a crop reporting district.

Very few farmers enrolled in the ACRE program.  Only 8% of farms and 13% of acres were enrolled into the program because of its complexities.  In addition to the problems of convincing landowners to participate, many farmers could not calculate a benefit to ACRE, since they had to sacrifice 20% of the benefits of direct payments.  The calculation difficulty is made complicated by the need to establish a relationship between farm yield and state yield and very few farmers could even guess what their state average yield might be for any given commodity.  In the recent past, several calls have been made to shift the calculation to a crop reporting district, and the NCGA put its lobbying clout behind the plan, but was not the first to advocate the change.

In its evaluation, the USDA economists found that shifting ACRE calculations from state yields to something closer to the farm, would generally increase payments and reduce risk.  Their findings include:

• If expected market prices equal revenue program guarantee prices, the increase in payments and risk reduction would be greatest for crops such as wheat, cotton, and grain sorghum—crops with widely varying yield across regions and, thus, large differences in revenue variability whether state, county, or crop reporting district. 
• ERS found that expected payments for wheat would increase 28-32% if the program was triggered by a county yield.  With corn and bean production having less variable yields, the increase in expected payments would be 16-19% less.
• Increases in payments under a county revenue trigger would be largest for the representative corn acres in eastern and southern Illinois and southern Iowa. Increases for soybeans would be largest in northern Iowa and eastern Kansas.
• If the expected price were 10 percent above guarantee price, expected payments for corn would be 13 percent greater under a district-triggered program than under a State-triggered program (versus 10 percent higher when expected price equals guarantee price).
• Changing the level of revenue aggregation used to trigger payments in a program like ACRE would alter expected payments and the reduction in farm revenue risk from the program. Generally, moving to a smaller aggregation, one closer to the farm level, would increase payments and risk reduction.
• If expected market price increases relative to the guarantee, then the difference in payments across levels of aggregation would increase as yield variability becomes a stronger factor in determining revenue vari¬ability and payments; if expected market prices decrease relative to guaran¬tees, expected payments increase but differences decrease when there is a comparison among county, crop reporting district, and state yields.

Based on currently political budget cutting decisions, the future of direct payments is bleak, but whether its funding could be used elsewhere is uncertain.  If there is a safety net to replace ACRE, one proposal uses trigger yields that are county or crop reporting district based, rather than state based.  Payments are higher and the risk is less under those trigger mechanisms which move farther away from a state level.

Posted by Stu Ellis on 09/21 at 12:23 AM | Permalink

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