The purpose of the Average Crop Revenue Election (ACRE) program is to help protect the farm against a drop in crop revenue.

“Anything that lowers revenue risk has some value,” says Andy Swenson, North Dakota State University Extension Service farm management specialist. “The cost of ACRE will probably be a sacrifice in direct payments of around $2 per acre in North Dakota, so producers are wondering whether this cost and the effort to enroll in ACRE are worth it.”

Swenson says it is important to understand that the ACRE program is not a crop revenue insurance policy whose indemnity payment is determined at the farm level. It is determined at the state level.

“Therefore, we may have to think big, real big, to better understand ACRE,” Swenson says. “Let’s assume we are the largest farmer in North Dakota. In fact, we are the only farmer. Would I pay $2 an acre for a crop revenue policy to insure me at 90 percent of expected revenue even if (as with ACRE) the smallest acreage used to determine loss was the entire state of North Dakota and indemnity payments were capped at 25 percent of the revenue guarantee and only paid on 83.3 percent of the insured acres?”

A 25-year analysis from 1984 through 2008 shows that the annual ACRE payments for six crops (wheat, barley, soybeans, corn, sunflowers and flax) would have averaged nearly $3.50 per acre. Looking at this history, the cost of the ACRE program would have been a bargain.

However, it is not that simple. There is a complicating factor.

“Our farm consists of many subgroups of land called FSA units and let’s say our ‘policy,’ like ACRE, imposes a second criterion that must be met before payment is made,” Swenson says. “It states that the indemnity triggered by a revenue shortfall at the state level will be paid only on crop acreage in those FSA units that also have a shortfall in revenue.”

However, there is a different, more farmer-friendly formula to determine a revenue shortfall by FSA farm unit than that used for the state. The concept is similar because the actual revenue of a crop on the FSA farm unit must be lower than the farm benchmark revenue for that crop. However, the farm benchmark revenue is 100 percent of the expected revenue (five-year Olympic average farm yield multiplied by the two-year national average market year price), not 90 percent. It also includes the per-acre cost of crop insurance.

Unfortunately, some crops in FSA farm units may have unusually high yields relative to their five-year history and would not calculate out as a revenue shortfall. Therefore, that FSA unit would not be eligible to receive the indemnity payment on the crop for which it was calculated at the state level. How often will this situation occur? Even if one-quarter of the FSA farm units failed the revenue shortfall requirement, the average annual ACRE payment over all the acres would have been about $2.60 during the past 25 years.

Actually, an analysis based on long-term averages may not be the best way to approach the current ACRE decision because 1) ACRE sign-up is for a relatively short period of years and 2) revenue in recent years, 2007 and 2008, have been very atypical.

One thing historic analysis has shown is that ACRE payments typically would have been bunched in multi-year stretches after periods of high crop revenue. For example, wheat would have triggered ACRE payments in 1986-1988 and 1997-2000 following periods of high crop revenue. Currently, we are coming out of the two highest crop revenue years in history, so it could be ideal timing for ACRE enrollment.

It is important to note that the crop revenue “policy” in the above example has a clause that states the revenue guarantee cannot change more than 10 percent from the previous year, which is the same as the ACRE program. This is a valuable condition to have in a policy offered when the revenue guarantee is at a historic high. It makes sure that the revenue guarantee will stay high for a few years.

There still is much indecision about “paying” approximately $2 per acre per year for ACRE. One concern may be that circumstances arise that may increase the cost. Besides a known cost of about $2 (20 percent of a direct payment), a producer also opts out of the counter-cyclical payment program and has the marketing assistance loan rate reduced by 30 percent when he or she enrolls in ACRE. Prices are unlikely to drop low enough to activate these other opportunity costs of enrolling in ACRE. If they did, ACRE payments most likely would compensate because lower prices also would lower actual state revenue.

“Think big when evaluating ACRE,” Swenson says. “The big picture is that recent crop income far surpasses anything we have seen in the past and this is reflecting in the high state revenue guarantees offered by ACRE. The cost of ACRE is minimal and it is probable that significant benefits will be triggered sometime during the next four years. If a payout is not triggered, that means revenue has remained high and losing a portion of the direct payment should not be a burden. However, if revenues drop, ACRE could provide significant benefits when the farm needs it.”

An ACRE analyzer for North Dakota and Minnesota is available on the Web at http://www.ag.ndsu.nodak.edu/aginfo/farmmgmt/farmmgmt.htm to help producers evaluate whether to sign up for the program.

Information regarding ACRE can be found on the USDA’s Web site at http://www.fsa.usda.gov/dcp.

NDSU Agriculture Communication