Farm commodity programs over the decades have focused on protecting farmers against declines in farm prices and not declines in revenue (price times production). Traditional programs for field crops—specifically marketing assistance loan benefits and counter-cyclical payments—provide benefits to producers when farm prices drop below specified (and fixed) levels. While such programs can help farmers when prices are low, they do not necessarily compensate farmers who suffer yield losses or face a revenue shortfall caused by some combination of both yield loss and price declines. The 2008 farm bill debate produced a new program to help farmers manage their revenue risks. Congress included the Average Crop Revenue Election (ACRE) program in the Food, Conservation, and Energy Act of 2008 ( P.L. 110-246 , the 2008 farm bill) as a revenue-based program option for farmers who enroll in traditional farm commodity programs. Under the ACRE program, farmers can forgo a portion of their direct payments and marketing loan benefits and all of their counter-cyclical program payments in exchange for potential revenue-based payments. Farmers who do not select the option remain eligible for full benefits of the traditional commodity program (Direct and Counter-cyclical Payment Program and Marketing Assistance Loan Program) as provided in 2008 farm bill. Unlike revenue protection provided by some crop insurance products, ACRE is designed to protect against losses from multi-year price declines, using price triggers based on national average prices from the previous two marketing seasons. Program authorization for ACRE ends with the 2012 crop year. A variation of the ACRE program may be included in legislation that reauthorizes farm programs in the next farm bill. Traditional farm commodity programs for field crops include three basic types of benefits for farmers: direct payments, counter-cyclical payments, and marketing loan benefits. The first two types of payments are made under the Direct and Counter-cyclical Payment Program (DCP). Eligible DCP crops are wheat, corn, grain sorghum, barley, oats, upland cotton, rice, pulse crops, soybeans, other oilseeds, and peanuts. Direct payments are fixed annual payments based on a farm's historical plantings, historical yields, and a national payment rate. Direct payment rates vary by crop as specified in the 2008 farm bill and do not depend on market prices. To receive this payment, farmers have almost complete flexibility in what they plant (except for fruit, vegetable, and wild rice planting restrictions), but they must abide by conservation provisions that basically amount to good management practices. Counter-cyclical payments are crop-specific payments that depend upon national average farm prices. When prices (not revenue) drop below a certain level, participating farmers receive a payment based on the season-average farm price and their farm's historical acreage and yield. This is the program that the ACRE option replaces with revenue protection. The Marketing Assistance Loan Program provides a government loan to participating farmers of designated crops (those listed above, plus extra long staple cotton, wool, mohair, and honey). The loan is made at a specified loan rate using the crop as collateral. Prior to loan maturity, if local market prices are at or above the loan rate, farmers may repay the loan principal and interest. In cases when the price is below the loan rate, farmers may repay the loan at the lower market price and receive a "marketing loan gain." Or, rather than taking the loan, farmers may request a "loan deficiency payment," with a payment rate equal to the difference between the loan rate and the local market price. Program benefits are available to farmers on the entire crop produced, which means farmers receive no benefits in the event of a crop loss. This is in contrast to the other two programs that make payments on historic acres and yields and therefore are not dependent on current production. Unlike traditional farm programs, the ACRE program provides farmers with protection against revenue loss for each crop regardless of its cause: price decline, yield loss, or some combination of the two. The ACRE program pays a farmer when two conditions are met: (1) actual state-level revenue for a crop (determined after harvest) falls below a guaranteed level (determined before harvest), and (2) the farmer experiences an individual crop revenue loss on a farm. The second trigger is required so that payments are made only to farmers who experience a revenue loss. If farmers select the ACRE option on a farm, they forgo 20% of their direct payments; loan rates are reduced by 30%; and participants on the farm are not eligible for counter-cyclical program payments. The program applies to all DCP crops on that farm, and payments for each crop are calculated separately. A farmer who operates more than one farm may elect to enroll one or all farms in ACRE. Importantly, once a farm is enrolled, it must remain in the program for subsequent crop years (the program covers crop years 2009-2012). The following explanation is shown in Figure 1 for the 2009 crop year. Figure 2 shows a hypothetical example for the 2009 corn crop. Actual state revenue must be less than the state ACRE revenue guarantee. The actual state revenue is the national average market price times the current-year planted yield (production divided by planted area ) for that state. The national price is defined as the greater of (1) the national average market price received by producers during the 12-month marketing year following harvest for the eligible commodity, or (2) the national marketing assistance loan rate for the eligible commodity reduced by 30%. The state ACRE revenue guarantee is 0.9 times the five-year average state planted yield (excluding high and low years) times the two-year average national price (i.e., the most recent two years). For the 2009 guarantee, the two-year average uses average prices from the 2007/2008 and 2008/2009 market years. The two-year national average market price used here is not subject to the loan rate substitution. The 90% factor in the formula reduces the guarantee level so that at least a 10% loss below the average is needed before payments begin, similar to an insurance deductible. A ctual farm revenue must be less than the farm ACRE benchmark revenue . The actual farm revenue is the actual yield for the farm times the average national price. The farm ACRE benchmark revenue is the farm's five-year average planted yield (excluding high and low years) times the two-year average national price plus any producer-paid crop insurance premiums. The addition of crop insurance premiums is meant to encourage farmers to use crop insurance, thus making it easier to meet the farm trigger. Also, unlike the state ACRE revenue guarantee, the farm ACRE benchmark revenue is not multiplied by 90%. If both triggers are met, the per-acre payment rate is the lesser of: (a) the state ACRE guarantee minus the actual state revenue (from the first trigger); or (b) the state ACRE program guarantee times 25% (setting the maximum ACRE payment). The farmer's payment for each crop is determined with the following calculation: 0.833 (0.85 in 2012) times the farm's planted area times (the farm's five-year yield divided by the state five-year yield) times the per-acre payment rate. The 0.833 factor is the same as for direct payments, and reduces expenditures. The yield ratio adjusts for differences in a farmer's yield relative to the state average. The total number of planted acres for which a producer may receive ACRE payments may not exceed the total base acres (historical plantings) for the farm. If planted area is greater than the base, the farmer elects which planted acres to enroll in ACRE. In this respect, the ACRE program is a closer match with current plantings than the Direct and Counter-cyclical Payment Program, which uses historical base acres for calculating payments. The potential downside is that ACRE payments would likely be considered "amber box" for U.S. commitments to the World Trade Organization (see final section) and thus count against U.S. spending caps. Another key feature of ACRE is that by using a recent average of farm prices and yields for calculating the program guarantees, the program provides a moving income support level, rather than one that is fixed over time as in traditional programs. As a result, the guarantee level for a given year depends on prices and yields in the years immediately preceding it. Also, to prevent a rapid increase or decrease, the program guarantee cannot change more than 10% from year to year. Finally, if irrigated and nonirrigated land each account for at least 25% of that crop's land in a state, two separate crop revenue guarantees are established. ACRE does not have a separate payment limit. Instead, ACRE payments count toward the counter-cyclical program payment limit of $65,000 per person. The limits for both direct payments and counter-cyclical/ACRE payments are adjusted to account for the 20% reduction in direct payments under ACRE. Specifically, for ACRE participants, the direct payment limit of $40,000 per person is reduced by the amount deducted from an individual's direct payments (i.e., 20% of the direct payment required for ACRE participation). This same amount is added to the $65,000 limit for counter-cyclical/ACRE payments. The total limit ($40,000 + $65,000 = $105,000) can be effectively doubled to a combined $210,000 for a sole proprietor's farm by having a spouse. When deciding to participate in ACRE, producers generally consider the trade-off between reduced benefits under traditional programs and the expected increase in revenue risk protection provided by ACRE. Analysis of the trade-off requires assumptions about next year's prices, historical state crop yield variability, and individual farm yield variability. Farmers also need to consider expected price trends for the life of the program (2009-2012 crops), because a farm stays in the ACRE program once it is enrolled. The reduction in direct payments will be greatest for crops with relatively high per-acre payments such as rice and cotton (total per-payment-acre rates are approximately $96 and $34). This compares with crops with lower per-acre payments such as corn, wheat, and soybeans (approximately $24, $15, and $12 per payment acre). For a farmer to select ACRE, the expected per-acre benefits under the ACRE program must be at least as high as the amount of direct payments the producer will forgo. In Illinois, for example, fixed payments average $18-$25 per acre on most farms. A 20% reduction equals $3.60-$5.00 per acre. Key to the ACRE decision is a farmer's expectation of prices over the subsequent years. This expectation helps formulate expected benefits under each program. If market prices are expected to remain above levels that trigger counter-cyclical payments, a farmer would expect to give up no counter-cyclical payments. Similar logic holds for marketing loan program benefits. In this case, a farmer may be inclined to select ACRE for its revenue protection benefits if the forgone direct payment is not too large. In contrast, if prices are expected to remain high enough so that ACRE payments are not triggered, farmers may stay with traditional programs because they would not give up any direct payments. A number of economic tools are available to help producers make their decisions on participating in ACRE. Analysts indicate that the ACRE program appeals to a farmer whose current plantings and historical base differ substantially from each other, because counter-cyclical payments (derived from historical base) may not match well with the revenue risk from current plantings. The program is also attractive for crops with prices well above their loan rates and in areas with relatively high yield variation, such as wheat in the western Great Plains, where dry conditions lead to yield variability. In the South, farmers who plant cotton, peanuts, and rice are less inclined to select ACRE because analysis has shown that traditional program payments, particularly for cotton and peanuts, are likely to be greater than ACRE payments. Producer signup for the 2009 crop year began April 27, 2009, and continued until August 14, 2009. For the 2009 crop year, approximately 8% of the total number of farms elected to participate in ACRE, representing nearly 13% of base acres (total program acreage). Both measures increased less than one percentage point in 2010. The states with the largest number of base acres enrolled were Illinois, Nebraska, Iowa, South Dakota, and North Dakota. Corn, wheat, and soybeans were the leading crops. In its March 2009 baseline budget, the Congressional Budget Office estimates that ACRE program payments will total $4.9 billion during FY2010-FY2014, with corn, soybeans, wheat, and sorghum accounting for nearly all of the total. (Note that 2009 crop-year payments are made in FY2011.) These figures compare with $22.1 billion for direct payments, $3.6 billion for counter-cyclical payments, and $0.8 billion for marketing loan program benefits. The estimates account for reduced traditional program payments for farmers who participate in ACRE. A major factor in estimating outlays is the expected pattern in season-average prices. In general, declining prices assumed in the forecast period result in ACRE outlays for the major crops. Price levels are also high enough to result in relatively low levels of marketing loan benefits. In November 2010, USDA began issuing approximately $420 million in 2009 ACRE payments for wheat, corn, barley, dry peas, grain sorghum, lentils, oats, peanuts, soybeans, and upland cotton, with about 70% of the total expected to be issued to wheat producers and 23% to corn producers. By state, about 80% of the payments were distributed to producers in Oklahoma, Washington, Illinois, South Dakota, Idaho, and North Dakota. In December 2010, USDA announced it would begin issuing an estimated $10 million in ACRE payments for the 2009 crop year for large and small chickpeas, sunflowers, canola, flaxseed, mustard seed, rapeseed, safflower, crambe, and sesame seed. About 95% of $10 million was issued to sunflower producers in Minnesota, Nebraska, North Dakota, and South Dakota. The situation with the wheat crop in 2009 illustrates how ACRE payments by state depend on how yields perform relative to the recent past as well as the overall level of yields. Wheat prices across the country were down in 2009, but yield departures from normal levels varied by state, resulting in varying ACRE payment rates. For example, the ACRE payment rate for participating farmers was nearly $47 per acre in Oklahoma and $91 in Washington. Yields in both states were down from the historical averages, but Washington's relatively high historical yields contributed to a higher payment rate per acre. In other states, such as Kansas, where yields increased in 2009, the payment rate was less than $8 per acre. Other government programs that interact with ACRE (besides the traditional program discussed in this report) include the new Supplemental Revenue Assistance Payments Program (SURE) and crop insurance. The 2008 farm bill authorized the SURE program to compensate eligible producers for a portion of crop losses that are not eligible for an indemnity payment under the crop insurance program. Because losses under the program are measured in terms of a shortfall in whole-farm revenue, payments made under ACRE (and other commodity programs) are included in the payment calculation for SURE. Crop yield and revenue insurance products are available for most program crops in most producing regions. Farmers purchase policies to cover yield or revenue risk on specific fields or groups of fields. As discussed previously, ACRE requires a revenue loss at the state level, so an individual farmer with a local loss will not be compensated if the state trigger is not met. And even if both triggers are met, the payment is based on the state loss, not the level of the individual farm's loss. In this circumstance, the farmer may choose to purchase crop insurance to protect against losses specific to the farm. In contrast, for a producer with crop revenues that track the ups and downs of state crop revenues, the ACRE program may be sufficient to manage the operation's revenue risks. In either case, the same loss may be reimbursed in part by both ACRE and crop insurance. Some policy observers have questioned why taxpayers should fund programs that potentially reimburse a farmer twice (note that unlike SURE, there is no offsetting payment feature between ACRE and crop insurance). A research report by USDA's Economic Research Service indicates that crop insurance premiums for farmers could decline up to 45% if ACRE and crop insurance were formally integrated to account for overlap between the two programs. The federal government pays about 60% of the total premium. Other researchers have pointed out that in some cases, particularly with low coverage levels for crop insurance, payments under ACRE and indemnities under crop insurance may not be for the same part of the revenue risk distribution (i.e., ACRE could be paying for part of the "deductible portion" of the loss that a crop insurance policy does not cover). Thus, the overlap between ACRE and crop insurance might be fairly small, perhaps less than 5%. As for the efficiency of risk reduction, researchers have found that ACRE reduces revenue risk for farmers by lowering the variability of farm revenue. Expected ACRE payments and risk reduction, however, are especially strong in areas where yield variability, and therefore revenue variability, is relatively low. For example, high-yielding areas such as the Corn Belt, which tend to have low yield and revenue variability, can receive high payments because payment rates are driven in part by yield levels. In the next farm bill debate, Congress will likely be interested in the effectiveness and cost of the ACRE program, particularly how it reduces revenue risk for producers of program crops and how variations of the program might be incorporated as part of the farm safety net. Program effectiveness will likely be measured in part by whether payments in fact reach farmers who experience revenue losses, the level of participation, and to what extent ACRE complements crop insurance and other farm commodity programs. If, for a large number of farmers, the state trigger is met but the farm trigger is not, or vice versa, program effectiveness may be called into question. Critics of ACRE also have said that the program might duplicate payments and coverage provided by crop insurance. Some farmers and university researchers have expressed a preference for pursuing a county-wide (or district-wide) trigger rather than a state trigger to more effectively cover local revenue losses. Changing the level of aggregation from the state level to one closer to the farm (such as a county or crop reporting district) would generally boost potential program costs. However, the additional costs might be partially offset by savings in crop insurance subsidies if producers purchase less coverage. The crop insurance industry is concerned that a county-based ACRE program could reduce the need for crop insurance, particularly in the Corn Belt. Another question is the timing of payments and whether they arrive when needed. The national average market farm price is required in order to calculate payment levels. As a result, farmers have to wait until the data are available to receive payment, which could be more than a year after selling their crop. For example, the national average market price for 2009-crop corn (required for determining 2009-crop ACRE payment rates) was published on September 29, 2010. Payments started flowing in November 2010. There is no specific statutory authority for making an early (advance) payment, but some could argue that it would not be necessary. Program complexity remains an issue. Some farmers have found it difficult to explain the program to landlords, which reportedly has limited participation. When the program was first rolled out, USDA developed program information to assist producers in evaluating whether ACRE suits their operations and launched an educational campaign with a series of informational meetings for producers. Farm groups had complained that local USDA offices were ill-equipped to explain the ACRE program to producers because they lack program information and training. As for international trade policy considerations, the United States reports farm support to the World Trade Organization (WTO) as part of its agricultural policy commitments under the WTO's Agreement on Agriculture. The United States has notified ACRE payments to the WTO as "amber box" which means they count against the U.S. subsidy limit because payments are linked to current production and market prices. An offset to higher ACRE payments is lower direct payments (which are considered by the United States as green box and do not count against the subsidy limit), counter-cyclical payments (amber box), and marketing loan benefits (amber box). Depending upon the mix and level of total program payments, policymakers may need to look for ways to avoid violating U.S. commitments. Beyond the program itself and potential effectiveness, the introduction of ACRE to U.S. farm policy provides a unique opportunity for farmers to trade benefits in one program for those in another. Under the ACRE program, farmers may exchange a portion of their traditional income and price support benefits for an opportunity to reduce risk associated with declining crop revenues. While some farmers who signed up for the program will receive payments, others have not participated because they do not wish to exchange the certainty of the direct payment for a less certain (or negligible) chance of an ACRE payment. In the next farm bill debate, policymakers may find different trade-offs with other agricultural programs or policy objectives, which may be particularly relevant as concerns about the federal deficit mount. Examples include further integration between traditional farm commodity programs, crop insurance, and disaster programs. The Secretary of Agriculture and others have commented that farm payments need to be tied to specific policy objectives that the public can relate to, if only to maintain long-term public support. Similarly, some members of Congress foresee a future with less emphasis on traditional commodity program payments and more emphasis on farm risk management. Until now, payments made to farmers under the Direct and Counter-Cyclical Payment Program have required little from the farmer besides maintaining soil conservation practices. This trade-off—a farmer giving up traditional payments for potential ACRE payments—is new to farm programs under the 2008 farm bill and may provide another step in the evolution of farm programs as additional policy or budget objectives surface.

Summary: Farm commodity programs over the decades have focused on protecting farmers against declines in farm prices and not declines in revenue (price times production). Traditional programs for field crops provide benefits to producers when farm prices drop below specified levels. To help farmers manage their revenue risks, Congress included the Average Crop Revenue Election (ACRE) program in the Food, Conservation, and Energy Act of 2008 (P.L. 110-246 or 2008 farm bill) as a revenue-based program option for farmers who enroll in traditional farm commodity programs for crop years 2009-2012. Unlike revenue protection provided by some crop insurance products, ACRE is designed to protect against losses from multi-year price declines. Program authorization ends with the 2012 crops. As part of the farm bill debate expected in 2012, Congress will likely be interested in how ACRE reduces revenue risk for producers of program crops and how variations of the program might be incorporated as part of the farm safety net, which includes commodity programs, crop insurance, and disaster assistance. The ACRE program pays a farmer when two conditions are met: (1) state-level revenue for a crop falls below a guaranteed level, and (2) the farmer experiences an individual crop revenue loss. (Payments for each crop are calculated separately.) If farmers select ACRE, they forgo 20% of their direct payments under the Direct and Counter-cyclical Payment Program (DCP), and commodity loan rates under the Marketing Assistance Loan Program are reduced by 30%. Also, ACRE participants are not eligible for counter-cyclical program payments under DCP. When deciding to participate in ACRE, producers must consider the trade-off between reduced benefits under traditional programs and the expected increase in revenue risk protection and potential payments provided by ACRE. Once a farm is enrolled in ACRE, the program applies to all eligible crops on that farm. A farmer who operates more than one farm may elect to enroll one or all of the farms in ACRE. Importantly, once a farm is enrolled in ACRE, it must remain in the program for subsequent crop years. For the 2009 crop year, approximately 8% of the total number of farms elected to participate in ACRE, representing nearly 13% of base acres (total program acreage). Both measures increased less than one percentage point in 2010. In November 2010, USDA began issuing approximately $420 million in 2009 ACRE payments for wheat, corn, barley, dry peas, grain sorghum, lentils, oats, peanuts, soybeans, and upland cotton, with about 70% of the total expected to be issued to wheat producers and 23% to corn producers.