COMMODITY PROGRAM
IMPACTS AND ANALYSIS
FOR MIDWEST PRODUCERS
Carl Zulauf
Ag. Economist, Ohio State University
Presentation at “Farm Bill Education
Conference,” Kansas City, Missouri
July 8, 2008
July 28, 2017
Carl Zulauf, Ohio State University
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Policy Objectives of Farm Support and
Risk Management Programs

Traditional Price Support Programs: assist with
managing systemic risk of chronic low market prices
over an extended period of years

Crop Insurance: assist with managing farm specific crop
production risk (called idiosyncratic risk) that occurs
between planting and harvest

ACRE (Average Crop Revenue Election): assist with
managing systemic risk of a decline in revenue (price
time yield) of a crop over a short period of years

SURE (Supplemental Revenue Assistance): assist with
managing whole farm losses due to adverse weather and
associated with the deductible part of crop insurance
July 28, 2017
Carl Zulauf, Ohio State University
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Incidence of U.S. Systemic Yield, Price, and
Per Acre Revenue Risk between Planting and
Harvest, 1974-2006
Share of Years U.S. Yield, Price, and Revenue per Acre Declined from
Planting to Harvest, 1974-2006
Crop
Corn
Cotton
Sorghum
Soybeans
Wheat
Share of Years
Yield Declined at
least
10%
25%
12%
15%
32%
15%
15%
3%
0%
3%
0%
3%
Share of Years
Price Declined at
least
10%
25%
44%
26%
44%
32%
35%
6%
9%
6%
0%
6%
Share of Years
Revenue Declined at
least
10%
25%
38%
27%
36%
24%
36%
0%
12%
15%
0%
9%
Systemic price and revenue risk is much greater at 10% than is systemic yield risk.
Systemic risk is much less at 25%.
Pre-planting and harvest revenue insurance prices were used (October for corn and July-August Chicago contract
for wheat). Yields were from the U.S. Department of Agriculture, National Agricultural Statistics Service. An Olympic
moving average (removes high and low yield) for the 5 previous crop years was used to estimated expected
yield. Yields were converted to a planted acre basis.
July 28, 2017
Carl Zulauf, Ohio State University
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SURE: Thumbnail Sketch
Assumes: crops for which crop insurance exists and use of insurance values in
SURE’s calculations
► SURE’s coverage unit is entire farm (all crops; all counties)
► To be eligible for SURE, a producer must purchase insurance for all insurable crops
► To receive a SURE payment, a producer must farm in a declared disaster (or contiguous)
county, or have adverse weather reduce farm’s total production 50% or more
► SURE’s payment = [60% of (farm’s SURE guarantee minus farm’s total crop revenue)]
▲ Guarantee per planted (and prevented planted) acre is basically 115% of the selected
per acre insurance coverage level. Value summed for all insured crops.
 Guarantee per crop is capped at 90% of crop’s expected revenue (essentially 100%
insurance coverage value per acre). Value summed for all insured crops.
▲ Farm’s revenue is the sum for all crops of [(A) insurance indemnities, (B) prevented
planting payments, (C) other Federal disaster aid for the same loss, (D) 15% of direct
payments, (E) counter-cyclical, ACRE, and market loan payments, and (F) the value of
a crop based on harvested acres, actual yields, and U.S. season average cash price
adjusted for local/regional quality losses and excess moisture from adverse weather
For a more detailed presentation on SURE see Carl Zulauf, “Supplemental Agricultural Disaster
Assistance in Food, Conservation, & Energy Act of 2008.,” AEDE-RP—0107-08, May 2008, available at
http://aede.osu.edu/resources/docs/display.php?cat=21
July 28, 2017
Carl Zulauf, Ohio State University
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SURE: Some Initial Thoughts on Implications
1. SURE is an incentive to buy up to 75% crop insurance
coverage, but is a disincentive to buy coverage above 75%
(115% of 80% exceeds the 90% cap on SURE’s guarantee).
2. SURE most benefits areas with higher yield variability
(ceteris paribus). Yield variability increases the chance of
a county disaster designation (50% or more decline in a
farm’s production).
3.
SURE most benefits single-crop farms because crop
diversification reduces revenue variability (ceteris
paribus). Thus, SURE could affect crop rotation decisions.
► Will farmers adopt an all-crop alternative year rotation,
(100% corn one year; 100% soybeans the next year)?
► Will farmers eliminate small acreage crops, such as
wheat in the Midwest?
July 28, 2017
Carl Zulauf, Ohio State University
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ACRE: Thumbnail Sketch
► ACRE is a state revenue protection program. A payment is made if a state’s
realized revenue (state yield time U.S. average cash price for the crop year) is less
than its revenue guarantee.
▲ ACRE’s per acre revenue guarantee for a crop equals: [(90%) times (2-year
moving average of U.S. crop year cash price) times (5-year Olympic moving
average of prior state yields)].
 Revenue guarantee cannot change more than 10% from prior year guarantee.
 ACRE’s payment is capped at 25% of the state revenue guarantee.
 State revenue payment is adjusted to individual farm by yield ratio.
► If ACRE is elected, a farm’s direct payments are reduced by 20%. In addition, the
marketing loan rates for the farm’s crops are reduced by 30%.
► Payment is based on acres planted to a crop, but an ACRE payment cannot be
received on more acres than the farm’s total base acres.
► ACRE payments are crop specific (for example, corn but not wheat can receive a
payment), but a farmer must elect ACRE for all eligible crops grown on the farm.
For a more detailed discussion of ACRE see Carl Zulauf, ACRE (Average Crop Revenue Election)
Provisions in Food, Conservation, & Energy Act of 2008, ” AEDE-RP—0104-08, May 2008, available at
http://aede.osu.edu/resources/docs/display.php?cat=21
July 28, 2017
Carl Zulauf, Ohio State University
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Breakeven Price Between ACRE and Traditional
Suites of Farm Programs, Average for 26 States
Includes direct, marketing loan, price counter-cyclical, and ACRE revenue payments
$/bushel
$6.35
$4.39
$2.87
Corn
Soybeans
Wheat
If U.S. cash market price is expected to average above the breakeven price through the
2012 crop, expected payments from ACRE are higher despite the reduction in direct
payments under ACRE. Note, that actual payments from ACRE may be zero if cash market
price is above the breakeven price. Thus, even if market price is above the breakeven
price, the traditional programs may pay more.
For details on this analysis see Carl Zulauf, “Understanding ACRE: Breakeven Price With Traditional
Programs,
Corn,
Soybeans,
Wheat,”
(AEDE-RP—0109-08),
June
2008,
available
at
http://aede.osu.edu/resources/docs/display.php?cat=21
July 28, 2017
Carl Zulauf, Ohio State University
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20% of Average U.S. Direct Payment Per Acre
Oats
Barley
Soybeans
Wheat
Sorghum
Corn
Cotton
Rice
$0.20
$1.95
$2.30
$3.05
$3.36
$4.87
$6.85
$19.24
At breakeven price, (expected ACRE revenue payments minus expected marketing
loan and counter-cyclical payments) equals ACRE’s 20% reduction in direct payments.
Reduction in direct payments can be considered an ACRE risk management fee.
Calculation is made using data from the U.S. Department of Agriculture.
July 28, 2017
Carl Zulauf, Ohio State University
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Share of Years with an ACRE Revenue Payment,
Average for 26 States
36%
37%
Corn
Soybeans
33%
Wheat
Source is the breakeven price analysis. For details on this analysis see Carl Zulauf, “Understanding
ACRE: Breakeven Price With Traditional Programs, Corn, Soybeans, Wheat,” (AEDE-RP—0109-08), June
2008, available at http://aede.osu.edu/resources/docs/display.php?cat=21
July 28, 2017
Carl Zulauf, Ohio State University
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ACRE Payments Tend to Occur
in Consecutive Years
Share of Years with an ACRE Revenue Payment that was Consecutive
with Another Year with ACRE Revenue Payment, 26 State Average
79%
77%
74%
Corn
Soybeans
Wheat
ACRE provided payments during multiple-year, large declines
in state revenue
Source is the breakeven price analysis. For details on this analysis see Carl Zulauf, “Understanding
ACRE: Breakeven Price With Traditional Programs, Corn, Soybeans, Wheat,” (AEDE-RP—0109-08), June
2008, available at http://aede.osu.edu/resources/docs/display.php?cat=21
July 28, 2017
Carl Zulauf, Ohio State University
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A Reason for Consecutive Year ACRE Payments is 10%
Limit on Year-to-Year Change in Revenue Guarantee
Share of Years ACRE Cup/Cap Effective, 26 State Average
58%
49%
48%
Corn
Soybeans
Wheat
Cup is the name for a 10% limit on declines in ACRE revenue guarantee from
the prior year’s guarantee. Cap is the name for a 10% limit on increases in
ACRE revenue guarantee from the prior year’s guarantee.
Source is the breakeven price analysis. For details on this analysis see Carl Zulauf, “Understanding
ACRE: Breakeven Price With Traditional Programs, Corn, Soybeans, Wheat,” (AEDE-RP—0109-08), June
2008, available at http://aede.osu.edu/resources/docs/display.php?cat=21
July 28, 2017
Carl Zulauf, Ohio State University
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State Yield Declines Were an Important Trigger
for ACRE Payments
Share of Years with ACRE Revenue Payment That Also had a
State Yield Decline of 10% or More, Average for 26 States
61%
50%
49%
Corn
Soybeans
Wheat
An ACRE payment was made in approximately two-thirds of the years in which
state yield declined by 10%.
Source is the breakeven price analysis. For details on this analysis see Carl Zulauf, “Understanding
ACRE: Breakeven Price With Traditional Programs, Corn, Soybeans, Wheat,” (AEDE-RP—0109-08), June
2008, available at http://aede.osu.edu/resources/docs/display.php?cat=21
July 28, 2017
Carl Zulauf, Ohio State University
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Change in State Yield Explained a Small Share of
Change in Yield on Individual Illinois Farms
Average Share of Year-to-Year Change in Farm Yield Explained
by Year-to-Year Change in State Yield, Illinois, 1996-2006
44%
35%
Corn
Soybeans
Source for farm data is Illinois Farm Business Farm Management project. Data set is 552 farms with corn
and soybean acres each year from 1996 through 2006. Year-to-year change is measured as (ln change).
July 28, 2017
Carl Zulauf, Ohio State University
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ACRE: Some Initial Thoughts on Implications
1. ACRE provides risk protection against revenue declines that extend
beyond crop insurance’s planting-harvest period.
▲ Should encourage short-term, multiple year investments, such as
potassium and phosphorus application.
2. ACRE is a poor substitute for crop insurance. A farmer who elects
ACRE should purchase crop insurance to help manage the production
risks associated with his/her farm.
3. ACRE most benefits areas with higher yield variability (ceteris paribus).
4. ACRE’s expected payment (not maximum or actual payments) should
be capitalized into the value of land.
5. Because ACRE does not provide a floor, farmers will have to adjust to
lower market revenues although their adjustment time is lengthened.
6. While ACRE likely will be classified as amber box under World Trade
Organization guidelines, its distortion of trade is limited by the fact that
its payments will become zero within a few years.
July 28, 2017
Carl Zulauf, Ohio State University
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Concluding Thoughts
1. ACRE and SURE are significant new programs to help farmers
manage revenue risk, especially now when prices are high
(not chronically low) and volatile.
2. Being risk management programs, payments from ACRE and
SURE, if any, will be not known with certainty until after 2012.
► ACRE should be elected because it improves management
of systemic risk, not for a higher expected payment.
3. Hypothesis that will be tested by farmer decisions:
Optimal individual crop insurance coverage is 75%
4. The yet-to-be-written regulations will impact how the program
functions, and unexpected impacts are to be expected.
July 28, 2017
Carl Zulauf, Ohio State University
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Carl Zulauf
(614) 292-6285
[email protected]
July 28, 2017
Carl Zulauf, Ohio State University
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Appendix: Brief Outline of Analytical Parameters
of the Breakeven Price Analysis
(1) Breakeven price is an average of the weighted average breakeven price derived from two analyses,
both involving 26 states and using data for 1974-2006 crop years. One analysis used (a) percent
deviation for a state’s yield for a year from its trend-line yield estimated using linear regression and (b)
percent deviation of U.S. price for a year from the average price for 1974-2006. The second analysis
used (a) percent ratio of a state’s yield for a year relative to the state’s average yield for 1974-2006
and (b) percent deviation of U.S. price for a year from the average price for 1974-2006. A weighted
average breakeven price was calculated for both analyses. The weight was the state’s share of acres
planted to the crop in the 26 states in 2006-08. The 26 states accounted for 94%, 96%, and 83% of
U.S. acres planted to corn, soybeans, and wheat, respectively, in 2006-08. The yield distribution was
centered on the average yield used by the Congressional Budget Office for 2009–12.
(2) The data for historical prices, yields, and acres are from the U.S. Department of Agriculture.
(3) Program parameters are from 2008 Farm Bill. Marketing loan and price counter-cyclical prices are for
2010-12. The 83.3% payment factor is used. Planted acres are assumed to sum to base acres.
(4) The calculation for ACRE does not include separate programs for irrigated and dryland acres when at
least 25% of a state’s acres are irrigated and at least 25% are in dryland production.
(5) No adjustment was made for the change in calculating loan deficiency payments: a 30-day moving
average of cash prices replaces a single day’s cash price.
SOURCE: Carl Zulauf., “Understanding ACRE: Breakeven Price With Traditional Programs, Corn, Soybeans, Wheat,”
AEDE-RP—0109-08, June 2008, available at http://aede.osu.edu/resources/docs/display.php?cat=21
July 28, 2017
Carl Zulauf, Ohio State University
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