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To ACRE or Not to ACRE?

Pursuant to the Food, Conservation, and Energy Act of 2008 (P.L. 110-246) (the “2008 Farm Bill”), crop farmers around the county have the option to participate in the Average Crop Revenue Election (“ACRE”) Program or stay with the traditional Direct and Counter-Cyclical (“DCP”) Program. The deadline to elect into the ACRE Program in quickly approaching.  Farmers who wish to elect in the program must sign the CCC-509 ACRE form  provided by the U.S. Department of Agriculture’s (“USDA”) Farm Service Agency (“FSA”) by August 14, 2009.

Two-Step Process: Elect vs. Enroll

The election deadline is just the first step.  Simply because a farmer “elects” to participate in the ACRE program does not mean that he/she is enrolled.  The terms are not synonymous and producers on farms that have elected into the ACRE program must still enroll each year in order to receive ACRE payments by completing a CCC-509 form.

Who is Eligible to Participate in ACRE?

Only farms with covered commodity or peanut base acres can participate in the ACRE Program. The following crops may be eligible for ACRE:

  • Wheat, barley, and oat,
  • Grain, sorghum and corn,
  • Upland cotton,
  • Rice,
  • Soybeans,
  • Other oilseeds including canola, crambe, flaxseed, mustard seed, rapeseed, safflower, sesame seed and sunflower seed,
  • Peanuts, and
  • Pulse crops including dry peas, lentils, and small and large chickpeas (a.k.a. garbanzo beans).

The 2008 Farm Bill requires that farms have more than 10 base acres to participate in either the DCP or ACRE Program unless the farmers are socially disadvantaged (“SDA”) or have limited resources. Interestingly, women are included in the class of SDA farmers.

If a farmer has already enrolled in DCP, farmers can still elect to participate in the ACRE program before August 14, 2009.

The Way Things Were: Traditional Commodity Payment Programs

Traditional commodity program for field crops included three basic types of benefits: (i) direct payments (“DP”), (ii) counter-cyclical payments (“CCP”), and (iii) marketing loan benefits . DPs and CCPs were both made under the Direct and Counter-Cyclical Payment Program (“DCP).

Direct Payments. DPs are fixed annual payments based on a farm’s historical plantings and yields compared to a national payment rates for each crop as specified by the Farm Bill (versus market price). Under this program, farmers have great flexibility in the type of crop they plant but are required to abide by conservation practices.

Counter-Cyclical Payments. CCPs are crop specific and depend upon the national average. When prices (as opposed to revenue) drop below a specified level, farmers participating in the program receive payment based upon the season-average farm price and their farm’s historical yield/acreage. In essence, the new ACRE payments will be in lieu of CCPs.

Marketing Loan Benefits. The Marketing Assistance Loan Program essentially gives eligible farmers a loan at a specified loan rate with the crop as collateral. If market prices are at or above the loan rate, farmers repay the principal of the loan plus interest; however, if the market is below the loan rate, farmers may repay the loan and receive a “marketing loan gain” or request a “loan deficiency payment.”

How ACRE Compares to Traditional Commodity Payment Programs

As opposed to traditional programs, ACRE gives farmers protection against revenue loss for each crop no matter its cause (e.g., price decline, yield loss). It pays farmers when two triggers are satisfied: (i) actual state-level revenue for a crop falls below state guaranteed level (“State Trigger”) and (ii) actual farm revenue is less than the farm ACRE benchmark revenue (“Farm Trigger”). This two-prong test serves as assurance that ACRE payments only be given where the farm experiences an actual revenue loss.

State Trigger: Occurs when actual state-level revenue (“ASR”) for a crop falls below state guaranteed (“SG”) level (ASR < SG)

(Please note: Though the terms provided are commonly used, the abbreviations in the “State Trigger” and “Farm Trigger” sections are for demonstrative purposes only and are not commonly recognized)

ASR = National Average Market Price (“NAMP”) times actual state yield (“ASY”) for a specific crop.

SG = 0.9 X Benchmark State Yield (“BSY”) using 5-yr Olympic average times ACRE Guaranteed Price (“AGP”) using 2-yr national average

*To calculate the “Olympic average” over five years, the highest and lowest years over the last five years are removed and the remaining three years are averaged.

After running these calculations, if the ASR is less than the SG level, then the state trigger is satisfied.

Example: Joe the Farmer planted 100 acres of corn in 2009 on Blackacre. The 2009 National Average Market Price for corn is $4.10 per bushel while the actual state yield (State X) is 130 bushels per acre. After taking out the high and the low years from the last five years and averaging the remaining three years, the benchmark state yield for State X was 165 bushels per acre. The ACRE guaranteed price from the last two years is $4.05 per bushel.

ASR= NAMP X ASY ASR= $4.10/ bu. X 130 bu/acre = $544/acre

SG= 0.9 X BSY X AGP SG= 0.9 X 165 bu./acre X $4.05/bu. = $601/acre

ASR < SG so State Trigger is satisfied

See Dennis A. Shields, A New Farm Program Option: Average Crop Revenue Election (“ACRE”), CRS Report for Congress (March 4, 2009) at 5.

 Farm Trigger: Occurs when actual farm revenue (“AFR”) is less than the farm ACRE benchmark revenue (“FABR”) (AFR < FABR).

AFR = Actual Planted Yield (“APY”) X AGP

FABR = Benchmark Farm Yield (“BFY”) using 5-yr Olympic average times AGP + 2009 Producer-Paid Crop Insurance Premium (“CIP”)

Please note, however, that crop insurance is not required in the ACRE Program but it may enhance a farmers ability to meet the “Farm Trigger.”

Example: Joe the Farmer did not have a great year since it was a late and wet spring and early summer. He only yielded 110 bushels per acre. After taking away Joe’s best and worst yields from his last five years, his benchmark farm yield is 180 bushels per acre. Joe paid $25/acre for crop indemnity insurance.

AFR = APY X AGP

AFR = 110 bu. X $4.10/bu. = $451/acre

FABR = BFY X AGP + CIP

FABR = 180 bu./acre X $4.05/bu. + $25/acre = $754/acre

AFR < FABR so Farm Trigger is satisfied. See id.

Since both State and Farm Triggers were met, an ACRE payment will be made.

Payment Calculation

Once both the state and farm triggers are met, the ACRE per-acre payment rate is the lesser of:

ASR minus AG (from State Trigger) and

ASR times 25% (maximum ACRE payment).

Joe’s Example: The ASR minus AG is $68 ($601/acre minus $533/acre) and ASR times 25% equals $150/acre. $68/acre would be the per-acre payment rate.

The farmer’s payment for each crop is as follows:

= 0.833 (0.85 in year 2012) X farm’s planted area X [farm’s 5-yr yield divided by state 5-yr yield] X per-acre payment rate

Joe’s Example: 0.833 X 100 acres X  [180 bu/acre divided by 165 bu/acre] X $68/acre = $6,188

Thus, Joe would receive $6,188 under the ACRE program.

Iowa State Extension and the FSA have useful excel programs to assist farmers and ranchers with making a decision on their farm.

ACRE Tradeoffs

Like most things in life, most good things come at a price. Farmers who enroll in the ACRE program agree to the following: (i) forgoing all CCPs, (ii) 20% reduction in DPs, and (iii) a 30% reduction in marketing assistance loan rates.

Some Caveats

All landowners must unanimously agree to enroll in ACRE. All owners and tenants must complete the written form to enroll in ACRE on any “farm.” This includes all owners and tenants.

Enrolling in ACRE locks you in for the life of the 2008 Farm Bill. If you enroll this August, you will be committed to the ACRE program through 2012, the end of the 2008 Farm Bill. However, you may choose to enroll next year by June 1 which will only commit your farm for two years.

Farmers participating in ACRE must annually report acreage and production to FSA. Farmers who fail to produce such records may be ineligible to receive ACRE payments.

ACRE contains some payment limitation provisions. DPs are limited to $40,000 per person or entity minus 20% reduction and ACRE payments are limited to $65,000 plus 20% DP reduction. Additionally, persons or legal entities whose average nonfarm adjusted-gross income (”AGI”) exceeds $500,000/ yr or farm AGI exceeds $750,000 are not eligible for DP, CCP, or ACRE payments.

More Information on ACRE

The ACRE Program and how it compares to the more traditional DCP program is extremely complicated. This blog provides a cursory overview of the ACRE Program and does not delve into many complex issues that are important to consider when deciding whether ACRE is a better fit for any one crop farmer. For the majority of U.S. farmers, it is advantageous to enroll in the ACRE Program under the current crop markets (particularly in light of our wet spring and early summer for most parts of the U.S.).  However, farmers are strongly encouraged to seek the advice of local counsel, local extension agent, or state FSA office for a specific recommendation for his/her farming operation.

There are some particularly useful online information that can help farmers thoroughly understand the ACRE Program.  For example, the FSA has a myriad of helpful information available online here.  Furthermore, the following three webinars from the University of Illinois’s Farmdoc provide a wealth of information and are available online here through August 31, 2009 (though the examples are Illinois specific, the concepts discussed can be easily applied to farmers around the country):

1.  University of Illinois– 40 min. webinar by Gary Schnitkey and Nick Paulson from the University of Illinois discussing: 1) the benefits of ACRE, 2) details of ACRE payments and 3) the sign-up process. Offers some great illustrations on how the state and farm triggers are calculated and gives some basic examples of payment calculations.

2.  Illinois Farm Bureau 45 min. webinar by Doug Yoder offers great examples on corn, soybeans and wheat to calculate the 5-yr Olympic farm average for a particular crop when that farmer did not grow that crop for each of the five previous years.

3. Illinois Farm Service Agency—50 min. webinar from Stan Wilson who very thoroughly explains the ACRE program with flowcharts and detailed discussion of making changes and cancellations to ACRE.

Additionally, Michigan Farm Bureau and Michigan State University are scheduled to have a webinar from 9:30am to 12pm on July 31, 2009.  The agenda can be found here.  Please contact Bob Boehm for more information at 800/292.2680.

On a final note, due to the commitment of the ACRE Program for the length of the 2008 Farm Bill, crop farmers should not take this decision lightly.  Farmers should collect all the information that he/she can before enrolling in the ACRE Program.

 

Disclaimer:
"This blog is for informational purposes only and is not intended to create an attorney-client relationship. It is recommended that you speak to an attorney licensed in your jurisdiction before relying on the information in this blog."

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