By August 14: ACRE Guidelines for CORN

August-03-09

Summary:Price expectations are critical to the ACRE decision. I am currently estimating that the breakeven to make ACRE a superior decision for 2009 corn is when December 2009 corn futures price is at $3.64 or lower. If prices drop sharply below this implied level ACRE has potential for enormous payments.
The election to go into ACRE for 2009 crops has to be made by August 14. With that deadline fast approaching, you will want to use all the information available to make a decision.

More Detail:The critical information includes the Indiana yield (or state yield that the farm is in), and the U.S. average farm price for the 2009 crop. The Indiana state revenue guarantee for the 2009 corn crop will be about $579 per acre (this is a 157 bushel state five year Olympic yield times an estimated $4.10 average price from the last two years times .90). To trigger, the actual state revenue for the 2009 crop has to less than this amount. As of August 3, I estimate the 2009 state yield at 161 bushels per acre. With this yield, the state would trigger if U.S. farm prices are below $3.60 per bushel. But your farm must also trigger.

For your farm to trigger calculate the five year Olympic yield average on that farm multiply by $4.10 per bushel and add the costs of crop insurance per acre. For example on a farm with the following yields in the last five years 120, 158, 175, 190, and 153, the five year Olympic average (drop high and low years) is 162 bushels. So, the farm’s revenue target is 162 times $4.10 = $664 + $10 per acre for crop insurance = $674 per acre. Let’s say you have estimated the 2009 yields at 180 bushels per acre for this farm, then, if the U.S. farm price for the 2009 crop is below $3.74 your farm would also trigger. If the state and your farm trigger, then you will receive a 2009 corn ACRE payment.

How Much Payment? Under these assumed yields it could be a lot, but prices have to be low. If the U.S. average corn price averages $3.25, then your corn ACRE payments assuming the above yields will be $59 per acre. If the U.S. average farm price is $3.50 payments drop to $26 per acre and at $3.75 per bushel there would be no 2009 corn ACRE payment.

You can see that the U.S. average price for the 2009 crop is maybe the most important key. As a guideline, I have estimated the 2009 December corn futures price, and the ACRE payment. These are just estimates, but all of us have to use what information we can up until August 14, and the futures market gives at least some clues of what the 2009 U.S. farm price might be. These are for a farm that has a 157 five year Olympic yield, which is the same as the state of Indiana. The last column shows the estimated corn ACRE payments in excess of the 20% reduction in direct payments. Thus, if the number in the last column is negative, then staying in the regular DCP program would be better for 2009. If the number in the last column is positive, then ACRE would be better for 2009.

You can see how large the advantage of ACRE would be if the U.S. average price falls near $3.00. My best guideline is that if December 2009 corn futures are at $3.64 or lower, then ACRE is better than DCP for 2009. But keep in mind that, the final price for the 2009 crop will actually be determined by many factors extending through August 2010.

On Monday August 3, December 09 corn futures closed at $3.69 per bushel. If this is reflective of the final U.S. average farm price, then no 2009 corn ACRE payment would be expected, and would favor STAYING OUT OF ACRE. Of course on July 22nd December 09 corn futures were as low as $3.15, a level that would strongly favor shifting farms INTO ACRE.

December Corn Futures Estimated U.S. Avg Price Estimated ACRE Payments Above DCP
$3.80 $3.73 $-5.56
$3.70 $3.63 $-5.56
$3.60 $3.53 $3.60
$3.50 $3.43 $17.01
$3.40 $3.33 $30.43
$3.30 $3.23 $43.84
$3.20 $3.13 $57.25
$3.10 $3.03 $70.66
$3.00 $2.93 $84.11

Chris Hurt
August-03-09
Purdue University