Disclaimer: This web page is designed to aid farmers with their marketing and risk management decisions. The risk of loss in trading futures, options, forward contracts, and hedge-to-arrive can be substantial and no warranty is given or implied by the author or any other party. Each farmer must consider whether such marketing strategies are appropriate for his or her situation. This web page does not represent the views of Kansas State University. 

Estimated 2009 ACRE payments for Selected Winter Wheat States[1]

The 2009 wheat ACRE guarantee is now official based on a $6.63 strike price.  The state yields are also official for wheat.  The county “plug” yields to replace yields that farmers cannot prove are now located on the Farm Service Agency (FSA) WEB site.  However, for farmers with yields higher than the plug yields it will be to their benefit to prove yields.  It is more complicated than just showing up at the FSA office with aph crop insurance yields.  The aph units are different than the farm serial numbers.  Also under crop insurance when land is purchased under some conditions the new owner(s) can use their history from other land they farm to set the aph.  Landlords can often use some of the tenant’s history to establish an aph. 

The Risk Management Agency (RMA) underwriting rules for proving yield are complicated and the top insurance agents will always work to get their clients the best aph.  Many agents earn their commissions because neither I nor most farmers are an expert on interpreting the underwriting rules on aph’s and units.  However, it is unclear how FSA will prove yields if it is new land ownership or many other variations in land ownership.

For example in Garfield, Oklahoma the county plug yields for years: 2004, 36.9 bu.; 2005, 28.7 bu.; 2006, 31.1 bu.; 2007, 17.6 bu.; and 2008, 36.8 bushel.  Farmers with no records would have an Olympic average yield of 32.2 based on the county numbers.  A 50 bushel yield is not uncommon in this county, so it is clear that some farmers will be able to prove yields greater than 32.2 bushels.  This is important because if they prove a higher yield they will receive a greater share of the expected Oklahoma wheat ACRE payment.  Because of the freeze damage, most of the Garfield county wheat farmers will be able to meet the farm level benchmark, especially after they add their crop insurance premiums to the calculation.  However, if a farmer could prove a 42 bushel yield then it would make it easier to meet the farm level benchmark in the following years.  If this farmer doesn’t prove yield then he starts at a disadvantage because he is more likely to have a yield above the county average yield when his real expected yield is 42 bushels and that would prevent an ACRE payment. The farm level benchmark test will not trigger an ACRE payment, it can only prevent a payment.

The Bottom Line Forecast.  Any expected payment is based on the 2009 yield forecast and the 2009/10 weighted national average price, because all of the other numbers are final for wheat.  For winter wheat, National Agricultural Statistics (NASS) has published a preliminary estimate of state yields.  It is reasonable to assume this number will change before the final number is published that will settle ACRE claims, but the adjustment is likely to only change by a bushel or two.  Therefore, the 2009 wheat is technically a forecast but one that would have only a small error, as compared to the forecasted 2009 yields for fall harvested crops.  For example, I expect the final 2009 yield for Kansas wheat will likely exceed the preliminary NASS estimate of 39.7 bushels.  My speculation is based on press reports of some exceptional Kansas wheat yields and while it doesn’t affect the ACRE calculation, test weights over 60 pounds!

The other half of the forecast that will settle ACRE claims is the 2009/10 price forecast.  KSU estimates have continued to be posted but there is no reason to sign up before August 14 (or at least a few days before August 14) because the market outlook could change.  More importantly, historically by August over 40% of the NASS wheat price is determined because it is a weighted monthly average price.  The weights are based on the percent of the total crop sold in the month.  The largest wheat weights normally are in June, July, and August so those 3 monthly prices have a greater impact on the NASS national average price.  There have been years when over 50% of the NASS price was locked in by August.

Is this Risk Management?  In Oklahoma, it is the equivalent of “the house is on fire” so do farmers want to buy insurance?  By August, Oklahoma farmers will have a good idea of how much of the “house has already burned”.  While I doubt many farmers care about this academic argument, buying insurance after the “house is on fire” does not meet my test for risk management.  Therefore, on wheat the question is will ACRE likely pay, otherwise one would think most farmers will take the direct payment.  If it is clear that ACRE will not pay, then a small direct payment is better than no payment and the “fire” has or has not already happened.

Analysis was completed on winter wheat for Kansas, Oklahoma, Texas, Colorado, and Nebraska (tables below).  Based on the preliminary NASS yields, Colorado would require a NASS wheat price below $4.73 to trigger a one cent payment, and below $3.55 to generate the maximum ACRE payment (table 4).  The trigger on the Counter Cyclical (CC) is $3.40, so if the market were to fall apart to the point of causing a maximum Colorado wheat ACRE payment, then CC payments might also trigger.  Remember, those farmers in ACRE eliminate the CC payment and their loan rate is reduced by 30%.  Therefore the market will need to decline by about a dollar to trigger wheat ACRE payments in Colorado.  As a result, one would expect few Colorado wheat farmers to elect ACRE and they can sign up next year.  If they sign up next year, then they only forego 3 years of reduced direct payments.

At the other extreme is Oklahoma wheat.  Based on the preliminary NASS yields, Oklahoma would require a NASS wheat price below $9.42 to trigger a one cent payment, and below $7.07 to generate the maximum ACRE payment (table 2).  That would require more than a dollar increase in the market to prevent the maximum payment in Oklahoma and price increase of nearly $3 to eliminate the payment.  A price above $7 is very unlikely but the estimate will be more solid by August 14.  A forecast of a maximum ACRE payment on Oklahoma wheat is about as close to a “guarantee” as anyone could expect from an economist.  About the only thing that might impact the payment is under reporting of failed acres, but I think this is a very small risk.  I will be very surprised if a large number of North Central Oklahoma wheat farmers don’t elect ACRE.  The expected ACRE payment is so much larger than a 20% reduction in the direct payment over the 4 year life of the current Farm Bill.

The KSU current estimate of $5.88 for the NASS 2009/10 wheat price will be updated after NASS publishes the price for June and the first half of July on July 30.  The price will then be updated with current prices and posted by KSU.  While it will not be reported by NASS because of the time delay, historically over 40% of the NASS wheat price is determined in the first 3 months of the marketing year, June, July and August.

The marketing year doesn’t start for corn, soybeans and grain sorghum until September 1, so the estimation error will be much larger on both price and yield.  This is more of risk management question because farmers do not know if the “house is on fire” yet.  In any case by August 14, there will be corn progress reports and obviously more market information, than would be the case if signup were prior to June 1 as will be the case for next year.   

Webinar Being Planned for August 4.  KSU is planning an ACRE webinar for Tuesday, August 4, 2009.  The KSU webinar will focus on the simple question; will ACRE likely pay this year in my state and on my crop?  KSU will provide its latest “market guess” based on current futures and NASS price reports.  Analysis, similar to the tables below will be provided on a number of crops and selected number of states.  Also under consideration will be irrigated versus non-irrigated corn.  Kansas and Oklahoma will be covered but other states will be included, depending on the states represented by those farmers who enroll in the webinar.  We expect to post registration and details on AgManager.info after the July 4 holiday.  Troy Dumler and I will make the presentation but questions on enrollment and computer requirements should be directed to Rich Llewelyn; email rvl@ksu.edu or phone 785.532.1504.  The webinar will require a registration fee and participants will be able to enroll on line after the July 4 holiday.

Table 1.  Kansas Wheat Estimated 2009/10 ACRE Payment

Table 2.  Oklahoma Wheat Estimated 2009/10 ACRE Payment

Table 3.  Texas Wheat Estimated 2009/10 ACRE Payment

Table 5.  Nebraska Wheat Estimated 2009/10 ACRE Payment