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Wheat Will Likely Benefit the Most From ACRE?[1]

Back on August 14, the final day for ACRE sign up, AgManager.info contained a ranking by crop and state where farmers were most likely to collect ACRE payments.  The winter wheat estimates were the most accurate because wheat was 3 months in to the marketing year and many winter wheat states had NASS yields already published.  For fall harvested crops including spring wheat, August 12 was the date of the first NASS yield estimates.  In addition several states had their yields split between irrigated and non-irrigated production.  NASS will report its first yield estimates split by practices in February. 

Currently, only combined yields are reported for crops that ACRE will split by practice between irrigated and non-irrigated.  Therefore, the updated estimated ACRE payments include KSU’s estimated irrigated/non-irrigated yields that was derived from the NASS reported combined yield.  It is likely that in states with below average yields the KSU method will over estimate the non-irrigated yield and under estimate the non-irrigated yield in states with above average 2009 combined yields.

Also the marketing year for feedgrains and soybeans had not started at the time of ACRE sign up on August 14.  With so many estimates, clearly one would expect the estimated ACRE payments would change based on newly published NASS yields and prices.

In the tables below are all of the states/crops analyzed by KSU and ranked by the most likely to receive ACRE payments.  The larger the projected gross percentage of guarantee paid, the deeper ACRE is in the money and the more likely to pay.  For example Oklahoma wheat is very likely to pay with a value of 42.3% (payment is capped at 25%), while Colorado wheat is way out of the money at a negative 40.1% and very unlikely to pay.

If projected gross percentage of the guarantee that is lost is over 20% then the odds favor payment, if less than 10%, then it is less likely, and a coin flip for the rest of the states.  The NASS yield will change from current NASS estimates but they too are getting close to their final value.  There are no NASS irrigated and dryland yield estimates and the remaining source for most of the errors in the KSU estimates.  Also NASS does not publish yield estimates for some of the smaller states.  KSU estimated the yields when there was no published NASS yields but future KSU estimated ACRE payments will use the NASS yields once they are published.

The KSU estimated wheat Marketing Year Average (MYA) price was $5.16 on August 14,  has declined to $5.13 (table 1).  The mid-point of the USDA wheat price estimate is $4.85.  The KSU price estimate puts Kansas wheat ACRE payments out of the money, but the lower USDA price would trigger small ACRE payments on Kansas wheat.  This also assumes the KSU forecasted FSA failed acres were estimated correctly.  A lower MYA wheat price will have no effect on Oklahoma and Texas wheat because it is expected the ACRE payment will hit the maximum limit, 25% of the guarantee, and a lower price will not increase the payment.  Even if FSA failed acres are severely under reported, the ACRE payment will still hit the maximum in Texas and Oklahoma on wheat.

The KSU estimated corn price of $3.24 on August 14, has increased to $3.70 but is still below the strike price of $4.13.  The grain sorghum price estimate has increased from $2.91 to $3.25 but is also below the strike price of $3.64.  The KSU estimated soybean MYA price has declined from $9.67 to $9.59 and is below the $10.04 strike price (tables 1, 2, 3, and 4).  The higher feedgrain prices will decrease the ACRE payment from the August 14 estimate.  While the estimated wheat and soybean MYA price is slightly lower, it will have little effect on the estimated ACRE payments compared with the forecasted payments at sign up back on August 14.

There were some major changes in NASS yields.  For example the North Dakota NASS wheat yield increased from 39.2 to 44.8 bushels.  This 14.3% increase in yields has eliminated the ACRE payment for North Dakota wheat based on current KSU price estimates (table 1).  The Wisconsin NASS corn yield increased from 135.8 to 146.0 bushels.  This 7.5% increase in yields has eliminated the ACRE payment for Wisconsin corn based on current KSU price estimates (table 2). 

Using the mid-point of the USDA price estimates released on 12/10/09, USDA has not changed their price estimates from the previous month.  The KSU estimated MYA price is close to the USDA estimated soybean price estimate but USDA estimated prices for wheat and feedgrains are much lower.  If USDA is correct, then the ACRE payments will be larger than the ones forecasted in table 1, 2, and 4.

The current KSU estimates suggest wheat will benefit the most from ACRE and only Texas shows an ACRE payment on soybeans.  With wheat payments nearing final yields and more than half of the MYA wheat price has been determined; it is unlikely there will be large changes from the current estimated wheat ACRE payments, except in the states that have yields split by practice by irrigated and non-irrigated.  The first NASS yields separated by practice will be published in February and that yield could cause a large change in the estimates for Idaho and New Mexico wheat.

The most recent NASS corn yield for Iowa was 183.0 bushels that was adjusted down to 182.7 based on the KSU estimated FSA failed acres.  The 5 year Olympic Average yield was 171.0 bushels and the ACRE strike price was $4.13.  With the current KSU price forecast of $3.70 and 182.7 bushel yield the ACRE payment is zero.  A price of $3.52 is close to the $3.55 USDA price forecast but would also generate a zero payment for ACRE in Iowa. 

The most recent NASS corn yield for Illinois was 175.0 bushels that was adjusted down to 174.1 to account for FSA failed acres.  The 5 year Olympic Average yield was 172.0 bushels and the ACRE strike price was $4.13.  With the current KSU price forecast of $3.70 and 174.1 bushel yield the ACRE payment is zero in Illinois. 

Because the Illinois yield is near the 5 year Olympic average yield, any payment will depend on the final MYA price being lower than the KSU estimated $3.70.  For example a lower MYA price of $3.52 will generate a payment of $37.30 but it is unlikely the final payment will be anywhere near the maximum payment of $159.83.  

Because the Iowa yield is well above the 171 Olympic Average yield, or 6.8% higher ACRE will likely generate no payment even with a price below the $4.13 strike price.  By contrast Illinois’ yield was only 1.2% higher than the Olympic average.

The analysis in the tables below shows the ACRE payments estimated on August 14 at sign up.  Those estimates were updated with the current NASS yield and the current KSU price estimates.  The ranking of most likely collected is also posted for August 14 and the current ranking.  For example Washington wheat moved up from 10^th to 7^th.  Texas wheat moved ahead of Oklahoma but it is unlikely to make any difference because both states are expected to receive the maximum ACRE payment.  However, only about 1% of Texas farmers elected ACRE while both Oklahoma and Washington had “large” participation.  With such large forecasted wheat ACRE payments, it is unclear why more Texas farmers did not elect ACRE.  Cotton base cannot be the total answer because there are regions of Texas that nearly all of the crop acres are in wheat or feedgrains.

Kansas wheat moved up from 26^th to 23^rd and is near the money.  If price declines or if USDA price forecast is correct then ACRE would pay $8.50 in Kansas but nowhere near the maximum payment of $52.66.  Also, if the FSA failed acres are larger than the KSU estimated failed acres that could also trigger or increase a Kansas wheat ACRE payment. 

The KSU and USDA MYA price estimates have been updated on AgManager.info. 

The links are: HTML:

http://www.agmanager.info/crops/insurance/risk_mgt/rm_html09/AB_MYAprice_ACRE_12102009.asp

PDF:  

http://www.agmanager.info/crops/insurance/risk_mgt/rm_pdf09/AB_MYAprice_ACRE_12102009.pdf

Table 1.  ACRE Wheat Estimated 2009/10 Payments ranked in order of States most likely to make ACRE payments.  Payments are capped at 25%.  States with irrigated and non-irrigated practice are estimated yields all other yields are NASS estimates.

Table 2.  ACRE Corn Estimated 2009/10 Payments ranked in order of States most likely to make ACRE payments.  Payments are capped at 25%.  States with irrigated and non-irrigated practice are estimated yields all other yields are NASS estimates.

Table 3.  ACRE Soybean Estimated 2009/10 Payments ranked in order of States most likely to make ACRE payments.  Payments are capped at 25%.  States with irrigated and non-irrigated practice are estimated yields all other yields are NASS estimates.

Table 4.  ACRE Grain Sorghum Estimated 2009/10 Payments ranked in order of States most likely to make ACRE payments.  Payments are capped at 25%.  States with irrigated and non-irrigated practice are estimated yields all other yields are NASS estimates.