Watch out for the ACRE program

With high commodity prices and booming farm profits, agricultural subsidies of the traditional kind have been trending down in recent years.  Of course, this doesn't count the huge subsidy implicit in the ethanol mandate and subsidy paid to blenders.

But I'm wondering whether the ACRE program could be a big issue going forward.  Its intent was to provide insurance against a broad decline in revenue per acre (price multiplied by yield).  It achieves this by giving farmers a payment based on state-level revenues falling below 90% of a five-year average.  This old Q&A by Bruce Babcock and Chad Hart explains some of the finer details.

The ACRE program, established in 2008, has had relatively modest participation so far.  The low participation rates likely follow from the fact that the five-year historical average price is really low relative to what farmers now expect going forward.  As time goes on, and recent higher prices get folded into the 5-year baseline guarantee, we should expect to see participation rates increase.

And then, if prices then start to decline, we could have a huge problem on our hands, with huge excess production and subsidy payments.  In an environment with declining prices, the ACRE program could be hugely distortionary, which could provoke action by the WTO.

I don't presently have a strong expectation that prices will decline much going forward.  But it's definitely possible.  Prices are very sensitive to quantities.  So a little good weather and more-than-expected production expansion in the rest of the world could bring prices down fast in another year or two, just after a lot more farmers roll into the ACRE program, motivated by this year's and (in all likelihood) next year's prices.

Here's a paper by Barry Goodwin and Vince Smith that warns about these impending dangers.