- A closer inspection of ACRE's details reaffirmed why the program has always been an unattractive choice for cotton since its inception in 2008.
- The 2012 ACRE program's ultimate downfall, especially for irrigated cotton, was the program's 10 percent cap on increases to the state level ACRE program guarantee from year to year.
- On dryland cotton farms it may have slightly more potential but would still be considered a somewhat risky option.
Last week we reported that the Average Crop Revenue program (ACRE) might be an option worth considering for cotton producers finalizing their 2012 farm program participation decision. Unfortunately, that early assessment has been proven wrong and it doesn't appear that ACRE will offer a better choice for cotton producers than the Direct and Counter-cyclical (DCP) program in 2012.
In fact, a closer inspection of ACRE's details reaffirmed why the program has always been an unattractive choice for cotton since its inception in 2008.
The 2012 ACRE program's ultimate downfall, especially for irrigated cotton, was the program's 10 percent cap on increases to the state level ACRE program guarantee from year to year.
Based on this single program parameter, a reasonable projection for the 2012 state ACRE guarantee for irrigated cotton would be $535 per acre. A projected 2012 dryland cotton ACRE guarantee would be $221 per acre.
Dividing the $535 projected ACRE guarantee for irrigated cotton by an estimated 2012 irrigated cotton benchmark yield of 885 pounds per planted acre (calculated from NASS data) provides an effective price guarantee of only 60 cents per pound.
Assuming that actual state irrigated cotton yields equal the 885 benchmark yield, the 2012 market year average price would have to fall below 60 cents to trip the state ACRE trigger and open the possibility that payments could be made. Again, assuming an 885 pound statewide irrigated yield, the amount of any ACRE payment would be determined by how far below 60cents the national average market price falls.
With a market year average price of 60 cents, the 2012 DCP program would likely have already delivered a significant payment, compared to none under ACRE. Any additional decline in the national average market price would increase the counter-cyclical payment rate and likely keep it ahead of the ACRE payment rate on the basis of total dollars per acre.
The same analysis for dryland cotton yields only slightly different results, in that meaningful payments begin to be generated at nearly the same price levels. However, the lingering effects of the 2011 drought increase the probability of a statewide average dryland yield low enough to trigger an ACRE payment at a higher price level. State average yields for ACRE are calculated as yield per planted acre; therefore, an abandonment rate of much greater than the long term average of 25 percent would likely trip the state ACRE trigger.
To figure out why the 2012 ACRE guarantee would only be $535 per acre for irrigated cotton, instead of the $764 you get by multiplying the $0.863 guarantee price by the 885 pound state benchmark yield, you have to go back to ACRE's first-year guarantee for irrigated cotton in Texas. In 2009 Texas upland cotton had ACRE State guarantees of only $424.03 for irrigated and $203.57 for dryland as the starting points. Each year since the state guarantee has only been allowed to rise by no more than 10 percent each year, while market year average prices have increased by over 60 percent.
Unfortunately, after several days of wading through the details of the ACRE program it is clear that ACRE is a poor candidate for irrigated cotton farms. On dryland cotton farms it may have slightly more potential but would still be considered a somewhat risky option given where cotton prices or yields would have to fall to overcome the reduced level of direct payments, the possibility of counter-cyclical payments and reduced loan values.