Should you participate in the new optional counter-cyclical program ACRE? Answering the question is difficult, because of the knowns of the traditional program and unknowns of the ACRE program, like future commodity prices.

ACRE unknowns are a key reason the Farm Service Agency has extended the signup deadline from June 1 to Aug. 14.

The Average Crop Revenue Election (ACRE) program begins in crop year 2009 and the program is designed to be an alternative revenue-based safety net to the price-based safety net provided by the counter-cyclical payments.

The ACRE program involves state and farm guarantee revenue levels that can change from year to year depending on national prices, state yields and farm yields.

One key question that a producer should ask himself about participating or not participating in the ACRE program over the traditional Direct and Counter-cyclical Payments program (DCP): How important are the known benefits of the traditional farm policy mechanisms provided by the direct payments, loan rates, marketing loan gain and loan deficiency payments, and counter-cyclical payments to the farm business, especially in times of economic uncertainty?

Especially for cotton and rice producers in these deflationary economic times, the knowns of traditional farm policy make a lot of sense. The knowns are: (1) a full direct payment, (2) a full counter-cyclical payment triggered when prices fall below a certain level, (3) direct and counter-cyclical payments will be received whether you plant or not; and (4) direct and counter-cyclical payments are seen as less market disruptive in global trade talks than the ACRE payment.

What ACRE is:

• It is an alternative to the Direct and Counter-cyclical Payments program for crop years 2009 through 2012.

• It is a program designed to protect against short-term revenue loss from either a decrease in market price, yields or a combination of the two. DCP provides protection against a decline in market prices below the effective target prices and loan rates.

• Producers participating in ACRE elect to forgo counter-cyclical payments, receive a 20-percent reduction in direct payments, and a 30-percent reduction in marketing assistance loan rates for all commodities produced on the participating FSA farm.

• ACRE payments are tied to current planting on the farm. Counter-cyclical payments are not tied to current farm planting, but are tied to established base acres and yields.

• Producers may elect to enroll one FSA farm in the program and not enroll one or more FSA farms, so producers may elect the ACRE alternative on a farm-by-farm basis.

• A producer must enroll all of the farm’s base acres on the farm and there is no authority to establish base acres to participate in the ACRE program.

• All producers (owner, tenant, etc.) on a FSA farm number must agree in writing to the ACRE program election. They must also sign a contract to enroll in ACRE program by the sign-up deadline of Aug. 14, 2009.

• A decision to elect to participate on a FSA farm may be made in 2009, 2010, 2011, or 2012. Once the farm is in ACRE the farm is bound to ACRE through 2012 crop year, the last crop year covered by the 2008 farm bill.

• It provides eligible producers a state-level revenue guarantee as defined by this program. The guarantee is based on the five-year state Olympic average yield and the two-year national average price (2007 and 2008).

• ACRE payments are made when two conditions are met for a commodity. The first condition is met when the Actual State Revenue falls below the State ACRE Guarantee. The second condition is met when the Actual Farm Revenue falls below the Farm ACRE Guarantee.

• If both state and farm “triggers” are met, the ACRE payment calculation will provide benefits for both planted and prevented planted acres of covered commodity crops or peanuts. Prevented planted acres are “considered planted.”

• ACRE payment to the farm will be calculated by using the State ACRE Payment times the (farm average yield divided by the state benchmark yield) time 83.3 percent (85 percent in 2012).

• ACRE payments can be calculated for eligible commodity crops that do not have base acres on the farm. ACRE payments are based on planted and considered planted acres of eligible commodity crops, without regard to whether the farm has base acres for that crop. However, the maximum acreage eligible for ACRE payments cannot exceed the total base acres on the farm.

• There are no risk management purchase requirements for the DCP or the ACRE Programs. However, higher levels of insurance due to higher premiums will enhance the ability to meet the “farm trigger” for ACRE.

• Producers must sign up by Aug. 14, 2009 at their local FSA office.

For a complete analysis of eligible Arkansas crops and comparison of them under the ACRE and DCP programs, go to ACRE Program.

Bottom Line:

For cotton producers, knowns of the traditional farm government program as discussed earlier outweigh the unknowns of the ACRE program. This is primarily because cotton prices did not reach the record highs grain prices reached and the current deflationary economic setting.

The credit crisis has collapsed cotton prices to a level that not only triggered counter-cyclical payments, but the policy mechanisms of marketing loan benefits have re-emerged as critically important.

Cotton’s current economic circumstance should not be lost on rice producers. Rice is one of the world’s most protected food grains and a commodity that has the potential to show price weakness in today’s deflationary and protectionist economic setting.

Even with the trillions in global stimulus of varying types, we still remain more concerned about managing deflation over inflation. There’s no question that inflation will have its day, which could be possibly sooner rather than later.

For the immediate period, grain prices still appear to have price weakness, so the near-term grain price bottom still has to be determined. Then we can focus on the potential rebounds upside.

Don’t lose sight of possible continued WTO trade-distorting challenges from U.S. grain trading competitors like Brazil. Direct and counter-cyclical payments are seen as less market disruptive in global trade talks than revenue ACRE payments. Thus, the ACRE revenue package is more likely to be challenged as globally trade distorting than the traditional Direct and Counter-cyclical Payment program.

The ACRE program is designed to be an alternative revenue-based safety net to the price-based safety net provided by the counter-cyclical payments. This says it was not designed to pay out more than the traditional counter-cyclical program over time.

The rice and grain prices spike in the March to July 2008 period certainly has set the stage for potentially triggering significant 2009 ACRE payments, which is why it is important for producers to evaluate their situations using their historic and 2008-12 expected price and yields with the Texas A&M ACRE decision aid program or one of the other available programs like Missouri’s FAPRI ACRE program.

If we were rice or grain producers, we would wait closer to the Aug. 14 sign-up deadline to make an ACRE participation decision. By early July we will be in a far better position to make an ACRE participation decision than we are today.

Why? The economic setting is extremely treacherous due to the credit crisis and extremely high levels of government intervention. A continued study of the economic setting and the commodity markets over the next couple of months will yield information that will allow producers to make a more informed decision than they could today.

Robert Coats, Professor - Economics, and Jeffrey Hignight, Research Associate – Economics, are with the Division of Agriculture at the University of Arkansas.