Simulated ACRE Payments and Risk Reduction Point to Midwest as a Potential Winner
USDA’s Average Crop Revenue Election Program (ACRE) is an alternative to price-based commodity programs. Begun in 2009, the program uses a combination of State- and farm-level revenue guarantees that are determined from recent historic prices and yields. The ACRE program makes payments to producers when both State average revenue and farm revenue for a crop fall below recent historic levels.
Expected ACRE payments and the consequent risk reduction levels are important to producers considering participating in ACRE. Payments and risk reduction vary across regions because of differences in crop revenue variability and levels of expected revenue. Revenue variability depends on the variability of prices and production (yields multiplied by acres) and interactions between the two. Because crop prices depend largely on world markets, price variability for a crop is similar across much of the United States. Yields, in contrast, depend on weather, crop diseases, insects, and other factors that can affect wide areas but are often localized.
ERS simulations of crop revenue variability indicate that, for producers choosing to participate in ACRE, expected payments and risk reduction would tend to be highest in the most productive crop regions, which are characterized by consistently high yields and high levels of expected revenue. The Midwest region, for instance, has high average corn and soybean yields and, therefore, high expected revenue for these crops, but the relative variability of both yield and revenue is low. Because the expected revenue is high, even a small deviation from the expected revenue in this region would translate to higher payments than in a region where the expected revenue is low. Because of the double trigger for ACRE payments—State average revenue and farm revenue for a crop below recent historic levels—these payments are more effective in reducing risk, or revenue variability, for a farm producing a given crop if the variability of the farm’s revenue is closely correlated with the State-level revenue variability. While the farm-State revenue correlation differs across crops, States, and farms within States, it is, on average, stronger for corn and soybeans than for wheat and cotton.
Differences—across crops and regions—in expected ACRE program benefits depend on the relative importance of the price and yield components of revenue variability, which can shift from year to year as historic and uncertain future prices and yields shift. If, for instance, market prices for the coming year are expected to vary around a level that is above the guarantee price in ACRE, yield, rather than price, would likely be the stronger factor driving ACRE payments and ACRE benefits would tend to shift toward farms in areas with high yield variability.
ACRE Program Payments and Risk Reduction: An Analysis Based on Simulations of Crop Revenue Variability, by Robert Dismukes, Christine Arriola, and Keith H. Coble, USDA, Economic Research Service, September 2010