Monday, October 27, 2008

ACRE program in the 2008 Farm Bill

Some pretty good writers are trying their best to explain the new revenue-based ACRE farm program option in the 2008 Farm Bill.

But it's not working. This material just does not seem to cross the barrier between the outside air and the interior of my skull.

I feel like one of the king's subjects in the children's fable about the king's new suit, which is supposedly invisible to foolish people. People refuse to admit that the king looks naked, for fear that others will think them a fool. I wonder if the same thing is happening with the ACRE program. Will people think me foolish, if I just admit that I cannot understand this program?

Here is the explanation by Zulauf and colleagues in the new version of Choices Magazine from the Agricultural and Applied Economics Association (AAEA):
The direct payment program pays farmers a fixed dollar amount per historical base acre. This dollar amount does not change with market prices or with production on the farm. Like direct payments, counter–cyclical payments are based on historical production. In contrast, marketing loan payments are based on current production. Both the counter–cyclical and marketing loan programs are price–based programs. Congress specifies the marketing loan rates and counter–cyclical target prices in the Farm Bill. These fixed support rates essentially establish a floor or lower bound on the per unit value of the crop, as payments are triggered when market price drops below them. The creation of a floor reflects the policy objective of traditional price support programs, which is to assist farmers with managing the systemic risk of chronically low market prices that extend over a long period of years. A systemic risk is a risk beyond the control of an individual producer. The combination of direct payment, counter–cyclical, and marketing loan programs will be referred to in this article by the acronym DCP+ML.

In contrast, ACRE’s policy objective is to assist farmers with managing the systemic risk of a decline in revenue of a crop over a short period of years. Revenue is defined as U.S. price times state yield. ACRE’s policy objective is implemented by establishing the following revenue guarantee for each state and crop combination (crops are barley, corn, upland cotton, oats, peanuts, pulse crops, rice, sorghum, soybeans and other oilseeds, and wheat):

(90%) x (2–year moving average of U.S. crop year cash price) x (5–year Olympic moving average [excludes high and low values] of state yield per planted acre)

A state revenue payment is triggered for a given crop and year when actual state revenue (state yield per planted acre times U.S. crop year price) is less than the state’s ACRE revenue guarantee. This difference is the state’s ACRE payment rate. For any crop in any year, the payment rate cannot exceed 25% of the crop’s state revenue guarantee.

ACRE’s state revenue guarantee cannot increase or decrease more than 10% from the prior year’s guarantee. Over time, the guarantee will follow prices and yields up and down. Thus, ACRE’s revenue guarantee is not a floor, implying that ACRE will not provide protection against chronically low prices.

Receipt of an ACRE payment also requires that a farm’s revenue for the crop and year be less than its benchmark revenue for the crop. The latter equals (1) the product of the farm’s 5–year Olympic average yield per planted acre times the 2–year U.S. average price, plus (2) the farm’s insurance premium if the farmer bought insurance for the crop.

The ACRE revenue protection payment is made on acres planted to eligible crops, but total planted acres covered by ACRE are capped at the farm’s total base acres. Total payment a farm receives from ACRE is the sum of (1) 80% of the farm’s current direct payment, (2) ACRE revenue protection payments, and (3) marketing loan payments at a 30% lower loan rate.

This discussion focuses on ACRE’s basic features. Additional details on ACRE are contained in the appendix.
Hmm, that's clear as ... mud. But perhaps it is just me.

Choices, incidentally, is the agricultural economics profession's outreach publication for lay people. We write even more densely for each other.

Here is Anthony Schutz at the Agricultural Law blog:
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)]

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.
Well, Schutz does also say, "I find this statutory text difficult to parse and would welcome a discussion with anyone who cares to parse it with me. " If you'd like to "parse it" with Schutz, as he says, you can find the text of the law here (.pdf). Have fun.

The ACRE program is voluntary, and participation requires farmers to give up a portion of their reliable direct payments. Given the complexity, and the scattered references throughout these explanations to reduced revenue under certain price and production conditions, I am willing to guess that few farmers will adopt the ACRE program.

Like the swindlers who convinced the king they had provided a fine royal suit, because nobody would admit they couldn't see it, perhaps the main contribution of the ACRE program was to provide the illusion of reform and policy development in a Farm Bill that really had little of it.

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