Crop Outlook and ACRE

Department of Economics

Crop Outlook and ACRE

CFNB Annual Crop Insurance Update MeetingStorm Lake, IowaFebruary 19, 2009

Chad HartAssistant Professor/Grain Markets Specialist

[email protected]


U.S. Corn Supply and Use

Source: USDA-WAOB, Feb. 2009

$3.90

-638

-686

+574


U.S. Soybean Supply and Use

Source: USDA-WAOB, Feb. 2009

-35

$9.00 $9.25

+50

+0.25

Department of EconomicsSource: USDA-WAOB, Feb. 2009

Drought in South America

Department of EconomicsSource: Dow Jones Newswires

Argentine Drought Impacts (Early Reports)2007 Production

Corn 20.9 million tonsSoybeans 46.2 million tons

January 2009 USDA EstimatesCorn 16.5 million tons -21%Soybeans 49.5 million tons +7%

Current USDA EstimatesCorn 13.5 million tons -35%Soybeans 43.8 million tons -5%

January Estimates from Buenos Aires Cereal Exchange (BACE)Corn 12.3 to 13.7 million tons -35 to -41%Soybeans 34.5 to 38.2 million tons -17 to -25%

Feb. Estimate from BACE Soy 40 million tons -13%


Chinese Corn Production

Source: USDA-WAOB, Jan. 2009


Soybeans in China

Source: USDA-PSD, Jan. 2009

0

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15

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25

30

35

40

2000 2001 2002 2003 2004 2005 2006 2007 2008

Mill

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Production Imports

Department of EconomicsSources: Various USDA-NASS reports

Livestock Adjustments

Sows farrowing: Sept-Nov 2008 2.99 million, down 6% from last yearDec-Feb 2009 2.97 million, down 3% from last yearMar-May 2009 3.01 million, down 2% from last year

Broiler-type eggs set: 203 million, down 7% from last yearBroiler chicks placed: 166 million, down 6% from last year

Feedlot placements: 2.02 million, down 5% from last year


Ethanol Margins

Source: ISU, CARD


Biodiesel Margins

Source: ISU, CARD


Renewable Fuels Standard (RFS)

0

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4

6

8

10

12

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16

2009 2010 2011

Bill

ion g

allo

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Additional Advanced Biofuels Biodiesel

Cellulosic Biofuels Conventional Biofuels

CropYear

Billion Bushels

2008 3.57

2009 4.11

2010 4.43


U.S. Blended Motor Gasoline Consumption

Source: Energy Information Administration

115

120

125

130

135

140

145

Bill

ion

Ga

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Actual Feb. Proj. July Proj. Dec. Proj.


Outside Influences (Jan. 2007 = 1)

0.5

0.7

0.9

1.1

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1.9

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2.3

2.51

/3/2

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Dow Oil Corn Soybeans


Outside Influences (Sept. 2008 = 1)

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/2/2

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1/6

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/20

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7/2

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Dow Oil Corn Soybeans


130

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145

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165

1990

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1994

1996

1998

2000

2002

2004

2006

2008

Mill

ion

acr

es

Corn & Soybean AreaGrowth rate of 1.55 million acres per year


CRP Expiring Contracts

Source: USDA-FSA

0

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2007 2008 2009 2010 2011 2012 2013

Mill

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acr

es


Input Costs

Source: USDA, Agricultural Prices, Jan. 2009


Ammonia Prices

Source: http://www.fertilizerworks.com/html/market/TheMarket.pdf


Iowa Corn Prices vs. Costs

Source: USDA-NASS and Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-21.pdf

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Season-average Price Cost


Iowa Soybean Prices vs. Costs

Source: USDA-NASS and Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-21.pdf

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Season-average Price Cost


Estimates for 2009 Iowa Costs

Non-land

Cost

Land Cost

Total Cost

Expected Yield

Cost per Bushel

($/acre) (bu/acre) ($/bu)

Corn

486.61 205.00 691.61 160 4.32

Soybean

285.60 205.00 490.60 50 9.81

December 2009 Corn Futures = $3.875 (2/18/09)November 2009 Soy Futures = $8.3575 (2/18/09)

Source: Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-20.pdf


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Canada Mexico Brazil EU

China South Korea Japan Australia

Exchange Rates (Jan. 2003 = 1)

Source: USDA, ERS


0.6

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1.0

1.1

1.2

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Canada Mexico Brazil EU

China South Korea Japan Australia

Exchange Rates (Jan. 2003 = 1)

Source: USDA, ERS


2007 World Corn Exports

Source: USDA, FAS

U.S.65%

Other12%

Argentina16%

Brazil7%

Drought issuesfor 2008 crops


2007 World Soybean Exports

Source: USDA, FAS

Other5%

U.S.40%

Paraguay6%

Brazil32%

Argentina17%

Drought issuesfor 2008 crops


Pace of Corn Export Sales

Source: USDA, FAS

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Week

2006 2007 2008


2008 U.S. Corn Exports

Source: USDA, FAS

Taiwan7%

South Korea9%

Other27%

Mexico19%

Japan38%


Pace of Soybean Export Sales

Source: USDA, FAS

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Week

2006 2007 2008


2008 U.S. Soybean Exports

Source: USDA, FAS

Japan6%

Mexico7%

Other17%

EU9%

China61%


U.S. Stocks-to-Use Ratios

0%

5%

10%

15%

20%

25%

30%

Corn Soybeans Corn - Avg. 1990-2006 Soy - Avg. 1990-2006


World Stocks-to-Use Ratios

0%

5%

10%

15%

20%

25%

Corn Soybeans Corn - Avg. 1990-2006 Soy - Avg. 1990-2006


Finishing Out the 2008 Crop YearGeneral economic conditions

A lot of recent market trade has been tied to reaction to the financial crisis and the world’s responseEconomic slowdown raises concern about export and energy demand

Most important ag. statistic: Exchange rates or South American production

Current futures are indicating 2008 season-average prices of $3.75-4.25 for corn and $8.75-9.25 for soybeans

Stress on South American crops has provided some support for prices


Thoughts for 2009 and BeyondMany of the storylines from 2008 will continue

Tight stocks for corn (worldwide) and soybeans (U.S.)The competition for acreageEthanol’s buildout & livestock’s adjustmentEnergy price & general economy concerns

Market volatility will remain highLink to the energy marketsMore market players with different trading objectives

Given current factors, the 2009 outlook is for crop prices around $3.75 for corn and $8.00-8.25 for soybeans

Key factor: Economic growth returns by mid 2010


Average Crop Revenue Election (ACRE)

ACRE is a revenue-based counter-cyclical payment programBased on state and farm-level yields per planted acre

and national prices

Producers choose between the current price-based counter-cyclical payment (CCP) program and ACRE

There are still some details to be worked out about ACRE (stay tuned)


Farmer Choice Starting in 2009, producers will be given the

option of choosing ACRE or notCan choose to start ACRE in 2009, 2010, or beyondOnce you’re in ACRE, you stay in ACRE until the next

farm bill If you sign up for ACRE, you must do so for all eligible

cropsDeadline for sign-up, June 1 of each year

Producers choosing ACRE agree to 20% decline in direct payments and 30% decline in loan rates


ACRE Settings

ACRE is based on planted acres

Total acres eligible for ACRE payments limited to total number of base acres on the farm

Farmers may choose which planted acres are enrolled in ACRE when total base area is exceeded


Loan Rates under ACRE

Corn $1.365 Soybeans $3.50

Current Loan Rates

Corn $1.95 Soybeans $5.00


Average Direct Payments Per Payment Acre for Iowa

Crop Current Program

ACRE Difference

Corn 32.51 26.01 6.50

Soybeans 15.71 12.57 3.14

Please note the 83.3 or 85% rule has not been yet to these payments.


ACRE Program has state and farm trigger levels, both

must be met before payments are made

Expected state and farm yield based on 5 year Olympic average yields per planted acre

ACRE price guarantee is the 2 year average of the national season-average price


ACRE Set-up for Iowa SoybeansYear Yield per Planted Acre

(bu./acre)

2004 48.8

2005 52.2

2006 50.3

2007 51.9

2008 45.6

Olympic Average 50.3

Year Season-average Price ($/bu.)

2007 10.10

2008 9.25

Average 9.68

The 2008 yield and price are USDA’s February 2009 estimates.

So the expected state yield would be 50.3 bushels per acre and the ACRE price guarantee would be $9.68 per bushel.


ACRE StructureACRE revenue guarantee = 90% * ACRE

price guarantee * Expected state yieldFor our example, the ACRE revenue guarantee is

90% * $9.68/bu. * 50.3 bu./acre

$438.21/acre

ACRE actual revenue = Max(Season-average price, Loan rate) * Actual state yield per planted acre


ACRE StructureACRE Farm revenue trigger = Expected

farm yield * ACRE price guarantee + Producer-paid crop insurance premiumLet’s assume farm yields equal to state yields

and use the average producer-paid crop insurance premium for 2008

50.3 bu./acre * $9.68/bu. + $17.58/acre

$504.48/acre


ACRE Payment TriggersACRE actual farm revenue = Max(Season-

average price, Loan rate) * Actual farm yield per planted acre

Given our example, ACRE payments are triggered when ACRE actual revenue is below $438.21/acre and ACRE actual farm revenue is below $504.48/acre


ACRE PaymentsPayment rate = Min(ACRE revenue

guarantee – ACRE actual revenue, 25% * ACRE revenue guarantee)

Payments made on 83.3% of planted/base acres in 2009-11, 85% in 2012

ACRE payment adjustment: Payment multiplied by ratio of Expected farm yield to Expected state yield


ACRE Payment TimingPayments can begin as soon as practicable

possible after the end of the marketing yearSo 2009 ACRE payments could start to be paid

out in October 2010There are no provisions for advance payments


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$ per bushel

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ACRE vs. CCP

ACRE pays out

No ACRE payments

CCP pays out

No CCP payments


An Example for 2009 To start, we need the expected state and farm

yields and the ACRE price guarantee

Expected state yield 50.3 bu/acre Expected farm yield 55.0 bu/acre

2004-08 Olympic average of yields per planted acre

ACRE price guarantee $9.68/buAverage of 2007 and 2008 season-average prices

ACRE Revenue Guarantee $438.2190% * $9.68/bu * 50.3 bu/acre

ACRE Farm Revenue Guarantee $552.40$9.68 * 55 bu/acre + $20/acre


Example (continued) For 2009, we need the actual state yield, the

actual farm yield , and the season-average price

Actual state yield 45 bu/acre Actual farm yield 55 bu/acre Season-Average Price $9.00/bu

ACRE Actual Revenue $405.00$9.00/bu * 45 bu/acre

ACRE Farm Actual Revenue $495.00$9.00/bu * 55 bu/acre


Example (continued)State Trigger

ACRE Revenue Guarantee $438.21ACRE Actual Revenue $405.00

So we’ve met the state trigger

Farm TriggerACRE Farm Revenue Guarantee $552.40ACRE Farm Actual Revenue $495.00

So we’ve met the farm trigger


Example (continued)

ACRE Payment $30.25Min(25%*$438.21, $438.21 – $405.00)

* (55 bu/acre / 50.3 bu/acre)

* 83.3%


Looking Beyond 2009The ACRE revenue guarantee is updated each

year using the same rules5 year Olympic average for yields2 year average for prices

But the ACRE revenue guarantee can not change by more than 10 percent (up or down) from year to yearSo if the 2009 ACRE revenue guarantee is $438.21, then

the 2010 ACRE revenue guarantee must be between $394.39 and $482.03


Farmer’s ChoiceIn deciding about ACRE, farmers must

weigh:

The loss of 20% of their direct payments, a 30% drop in the marketing loan rate, and no access to CCP payments versus

The potential for payments under ACRE


Comparing Program ParametersFor Iowa Soybeans

Under the current CCP programCCP Yield Average = 38.5 bushels per acreCCP Effective Target Price = $5.36/bushel

In our example, for ACREACRE Yield Guarantee = 50.3 bushels per acreACRE Price Guarantee = $9.68/bushel

20% of average Iowa soybean direct payment = $3.14 per acre


You Don’t Have to Decide TodayACRE signup will not be for a while,

probably starting in AprilOnce the ACRE rules are finalized, there

will be a number of decision tools available to help producers

Preliminary ACRE information and tools are available at:

http://www.extension.iastate.edu/agdm/crops/html/a1-45.html

http://www.card.iastate.edu/ag_risk_tools/acre/


Thank you for your time!

Any questions?

My web site:http://www.econ.iastate.edu/faculty/hart/

Iowa Farm Outlook:http://www.econ.iastate.edu/outreach/agriculture/periodicals/ifo/

Ag Decision Maker:http://www.extension.iastate.edu/agdm/

Crop Outlook and ACRE

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