Explaining ACRE vs Counter Cyclical Programs: How to Talk with Land Owners

As I have traveled around the state speaking on the differences between the traditional direct counter-cyclical payment (DCP) and the new average crop revenue election (ACRE), one of the more common questions I received was “How do I explain this to the landowners of the farms I cash rent?” After reflection and speaking with a few land owners, I offer the following suggestions.

Many land owners do not understand the economics of farming. What they see and hear are higher grain prices and coffee shop rumors of high insurance indemnities being received by farmers. These pieces of information lead to the assumption there is plenty of money available for steady or increasing land rental rates. What is not known by many landowners is the expense side of the equation such as high input costs for seed, fertilizer, and pesticides. Therefore, it is important to educate your landowners on the economics of farming by explaining your crop production budget. One great help would be to access the OSU Enterprise Budgets from

http://www-agecon.ag.ohio-state.edu/programs/farmmanagement/Budgets/crops-2009/index.htm

for corn, soybeans, and wheat.

Using the OSU Extension Enterprise Budgets prepared in January 2009, the estimated variable cost of production for corn was $398 per acre (150 bu/a), soybeans was $227 per acre (48 bu/a), and wheat was $223 per acre (67 bu/a). The following graph shows the level of revenue per acre before any payments are triggered for the Counter Cyclical and ACRE components of the farm program. This does not mean that the trigger levels shown are the level of income guaranteed by the farm programs, it just indicates when payments will begin. However, the ACRE program does make payments at a revenue level higher than the variable cost of production for all three crops. So why is this important to a landowner?

One of the main concerns landowners have is if their tenant will pay the rent in full and on time. If the revenue per acre remains high, the probability of this happening also remains high. In times of financial stress, unexpected revenue declines due to poor weather or low prices (or both) often create financial problems. Many farmers have reduced their risk by purchasing crop insurance. The ACRE election also reduces risk by providing income when revenue levels significantly decline. The graph below represents the revenue per corn acre when an average yield (150 bu/a) is produced with various annual market price scenarios. Also included on the chart is a graph of the variable cost of production ($398 per/a estimated) plus land rent ($130 per/a) for a total expense of $528 per/acre.


As of 5/5/09, the fall cash price in Upper Sandusky was approximately $4.00 per bushel. According to the graph, this price would give an approximate return of $90.00 per acre over variable costs and land rent to go toward the fixed costs of equipment, labor and management. But what if the 2009 average market price declines to around $3.10 per bushel? Under that scenario, farms enrolled in ACRE would receive a payment of $84 per acre more than farms enrolled in the Counter Cyclical program. Even at $2.50 corn prices, this example farm would generate sufficient revenue to cover variable costs of production and land rent. Estimating revenue lines for soybeans and wheat result in a similar scenario where variable costs and land rent could be covered under low prices/yield conditions. Under the assumptions used to create this scenario, farmers enrolled in ACRE would be in a better revenue position under ACRE than Counter Cyclical thus more likely to meet their financial obligations such as land rental payments.

With this stated, there are still several other considerations that farmers will need to take into account such as payment limitations. Under ACRE , the amount of Direct Payment is reduced from $40,000 to $32,000 which equals approximately $3.75 per acre (most farmers are not hitting the payment limitation maximum amount for direct payments). Under high revenue situations farmers who elect ACRE will actually receive less farm program payments. However, under low revenue situation, farmers enrolled in ACRE can receive additional payments per acre with a maximum payment of $73,000.

The decision to elect ACRE or remain with the tradition Counter Cyclical program is a difficult decision for most farmers and landowners. Everyone is strongly encouraged to spend time with one of the payment calculators such as the one from the University of Illinois found at

http://www.farmdoc.uiuc.edu/fasttools/index.asp

to determine the best option for their farm. Base acres, yield levels, crops planted, and expected price and yields are all critical components in determining what farm program option will be the right option for your farm. If you need or want assistance with one of the farm program calculators, please contact your local OSU Extension office.

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