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. 

Updated MYA Prices for Setting ACRE Guarantees[1]

The KSU estimated 2008/09 Marketing Year Average (MYA) price is more than 80% complete for wheat because the wheat marketing year starts June 1 through May 31 while the marketing year for the other crops is September 1 through August 31.  Therefore, the 2008/09 MYA price for corn, grain sorghum and soybeans is about 70% complete (table 1).  The 2008/09 MYA price is used to set the 2009 ACRE guarantee and to settle 2008 SURE claims.  A higher 2008/09 MYA price will increase the ACRE guarantee but reduce payments under SURE for 2008 revenue losses.  Farmers may participate in both ACRE and SURE.

Currently the model is just using the single new crop futures price to reflect the expected price for the 2009/10 MYA price that will settle any ACRE/SURE claims.  The NASS price is an annual price weighted by sales volume.  New crop futures are a spot price.  While futures are normally higher in most markets (but not all), cash prices tend to increase after harvest to reflect storage.  The estimated monthly prices will need to reflect the deferred months too, that normally show a return to storage.  Evaluating the historical monthly corn NASS prices have been about 90% of the nearby monthly average futures prices.  However, the recent basis has been about 80% but this was with historically high prices (over $6 for corn on the Board).

The model is assuming average state yield for spring planted crops but by August 14 we will have a good estimate of the winter wheat yields in TX, OK, and KS.  Also, farmers will have some information on their ability to meet the farm benchmark that is the second trigger on ACRE payments.  If farmers have a bumper crop then it is unlikely they will qualify for the ACRE payment if the state triggers because their revenue will be greater than the benchmark.

There is some concern the KSU NASS corn price estimate is too high.  The KSU estimated MYA price continues to be higher than the USDA estimates.  If the KSU estimate is closer to the final NASS weighted national average (MYA) price then the ACRE guarantee will be higher.  A higher ACRE guarantee will increase the odds of an ACRE payment and make it more attractive to farmers.

Assuming the negative price-yield correlation does not equal a negative -1.0 then clearly there is a chance that low yields will trigger ACRE payments.  About the highest negative price-yield correlation anyone could expect is about a -0.50, and Iowa corn is likely to generate the largest negative price yield correlation.

Because the ACRE is being argued as risk management, then “premium cost” should change with the risk of a claim but the premium cost is the same under all conditions, 20% of farmers’ direct payments.  This is further complicated with the secondary trigger that requires the individual farm revenue to be below the farm’s individual farm level benchmark to collect any ACRE payment.  For example the “premium cost” should be lower if ACRE is out of the money (the strike price is lower than the expected harvest price at signup).  Premium should also be lower in large states like Iowa with negative price yield correlation and less correlation between farm revenue and state revenue that is necessary to meet the second trigger.  On the other hand premiums should be higher in Delaware where ACRE is nearly a “county” based Group Revenue Income Protection (GRIP) contract with no price yield correlation.  Also the Delaware corn production area is small enough that any drought that affects the state revenue will also likely affect the farm level yields and farmers would meet the benchmark trigger too.  This rating principle would apply to other states too, for example grain sorghum in New Mexico, where production is concentrated in a few counties.

There is no reason to signup for ACRE until mid to late July so there is still time to do more analysis.  The market could change and Kansas could lose the wheat crop to freeze by that date.  Therefore there is little reason to signup until ones winter wheat is harvested and spring crops are well in their grain filling stage.

Table 1.  Estimated Weighted National Average Price and Projected % ACRE Price loss and % SURE Price Loss (04/01/09)