Like any risk management program, ACRE can make large payments. Given current revenue levels and a large decline in revenue, ACRE payments could exceed $10 billion in a year (see article by Zulauf and Orden noted below). However, unlike the marketing loan rate and counter-cyclical target price, ACRE’s benchmark values adjust downward as market revenue declines. While the decline is capped at no more than 10% per year, the decline will accumulate over time. This downward adjustment limits the period over which ACRE will make large payments, both in terms of the number of consecutive years of payments and relative to the length of large payments historically made by farm programs. Thus, ACRE results in less long term trade distortion than historically has been the case with the traditional U.S. price support programs.
This feature of ACRE also means that, when a major long-term decline in revenue occurs, U.S. farmers will need to use ACRE payments as a bridging mechanism to adjust to a world of lower revenue. Thus, farmers should see ACRE as a temporary risk management option. ACRE extends the window for adjustments beyond one year but does not provide a floor that precludes the need for adjustment as has often been the case with traditional farm programs.
This paper is also available at http://aede.osu.edu/sustainability-large-payments-acre
For further discussion of the payment path, program cost, and World Trade Organization (WTO) implications of ACRE, see:
Carl Zulauf and David Orden. “The Revenue Program Option in the 2008 U.S. Farm Bill: Evaluating Performance Characteristics of the ACRE Program.” Agricultural and Resource Economics Review. Volume 39, Issue 3, October 2010, pages 517-533.
Note: If the ACRE program started in 1996, ACRE payments would have totaled $2.1, $6.2, $5.7, $2.6, $1.8, and $1.0 billion by year from 1997 through 2002.
Sources for the Figures: ACRE revenue payments are original calculations using data from the U.S. Department of Agriculture (USDA), National Agricultural Statistics Service accessed on November 10, 2011 at http://www.nass.usda.gov/Data_and_Statistics/Quick_Stats_1.0/index.asp. Marketing loan payments are from the USDA, Farm Service Agency accessed on November 14, 2011 at http://www.fsa.usda.gov/FSA/webapp?area=about&subject=landing&topic=bap-bu-cc. Marketing loan payments include loan deficiency payments, marketing loan write offs, and certificate gains.
Source: Carl Zulauf, Professor, Department of Agricultural, Environmental and Development Economics, The Ohio State University