The Conservation Reserve Program, born in the 1985 Farm Bill, has become rooted deep in the heart of American Agriculture. Most farmers salute it as they do when the parade flags pass by on Memorial Day. However, the CRP’s silver anniversary year is also bringing some significant challenges to its future. And it will have to keep step with changing economic dynamics.

USDA’s new electronic magazine Amber Waves offers an interesting statistic about the CRP and says the Economics Research Service conservatively estimates annual CRP benefits at $1.3 billion, not including carbon sequestration, ecosystem protection, and other less easily quantified benefits. Currently, the CRP is capped at 32 million acres, down 4.6 million from the 2007 peak, and 20% under the 39 million authorized in the 2002 Farm Bill. But in administering the CRP, the USDA has had to increase its rental payments to compete with higher priced commodities. After all, land owners are less interested in CRP leases that return less revenue than what could be received from farming. Another major challenge is suggested by the growing concerns about climate change, and how CRP must change in makeup and location.

The rental rate issue began in 2006 when commodity prices began to rise to nearly the point of doubling in 2008, and there was pressure to release some CRP for crop production as well as pay higher rental rates to entice acreage into the program. But the USDA economists also suggest that some landowners may be willing to remain in the program, sacrifice income, and prefer to appreciate the environmental benefits. In 2006, more than 80% of contract holders with land set to expire agreed to re-enroll, but for a 2 to 5 year term instead of the typical 10 years. Eventually higher commodity prices will cause enrollment costs to increase or result in an offsetting reduction in environmental reduction of benefits.

To get a computer’s help in forecasting the future, the USDA economists found that holding rental rates steady, landowners would offer only 29 million acres for enrollment. If all offers were accepted, the yearly cost would be $1.8 billion, compared to the $1.1 billion for the best 29 million acres offered in 2008. By adjusting rental rates upward 60% to remain competitive with higher commodity prices, the annual rental payments would cost nearly $2.5 billion.

The other scenario looked at commodity prices holding steady at 2008 rates with a 120% increase in CRP rental rates. To maintain the quantity and quality of CRP land, the USDA would have an annual rental expense of $3.0 billion. The economists believe that even with the trend in prices, higher program payments will be needed to maintain the environmental benefits of the CRP program as old contracts expire and new enrollments are accepted. They realize that to continue the program with increased environmental benefits and reduced costs, certain changes will be required. Among those are relaxed eligibility rules which might include land with soils that are not highly erodible, but which provide wildlife or water quality benefits. Another is the use of auctions to control program costs, with a per acre bid cap based on particular soils in a given county, and producers may offer land into the program either at or under the bid cap. Such a calculation would be correlated with the cash rental rate in a county along with NRCS soil productivity values. Another requirement of land owners might be enhancement of the land for wildlife habitat by planting certain vegetation.

For the past 6 years, USDA has ranked bids higher on the environmental index if they have a greater capability to sequester carbon, and currently CRP land can earn carbon sequestration payments. If those payments become significant, then more land might be enrolled for that reason. USDA economists calculate that if carbon is priced at $25 per ton, then CRP rental rates would drop by 10% as owners factor in the carbon payment for calculating their bid. USDA says allowing the sale of carbon credits on current contracts does not really reduce atmospheric carbon, since the change has to occur to sequester more carbon such as conversion of grass CRP to a tree planting.

Possibly the biggest future challenge to CRP is the federal budget. The economists say their efforts to calculate and project will be costly, and funds may not be available to properly manage the CRP enrollment. While higher rental rates do not have to be offset in the budget, any cost of an administrative change does have to be paid from a program reduction elsewhere.

The Conservation Reserve Program has seen a 20% drop in acreage due to federal funding cuts, and futures changes in enrollments must account for higher cash rents and higher commodity prices. CRP rental payments must be high enough to compete with those upward trends, and economists indicate that may require some relaxation in the environmental benefits of the program. While the federal budget may be a continuing challenge in management of the program, landowners may be willing to take a lower rental payment from the USDA, if they can receive a payment for carbon sequestration.

Source: Stu Ellis, University of Illinois