using the conservation reserve to reduce program crop plantings

Agricultural & Applied Economics Association

Using the Conservation Reserve to Reduce Program Crop PlantingsAuthor(s): Steven J. TaffSource: North Central Journal of Agricultural Economics, Vol. 12, No. 1 (Jan., 1990), pp. 89-97Published by: Oxford University Press on behalf of Agricultural & Applied Economics AssociationStable URL: http://www.jstor.org/stable/1349361 .

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USING THE CONSERVATION RESERVE TO REDUCE PROGRAM CROP PLANTINGS

Steven J. Taff

This paper examines the policy instrument by which a land retirement program designed primarily for conservation purposes attempts to reduce surplus commodity production as well. A simple model incorporating the cropland allocation effects of entry into the federal Con- servation Reserve Program (CRP) is developed to estimate the reduction in aggregate crop acreage brought about under two program alternatives: (1) the "base bite," which requires a reduction in a farm's commodity base as a condition of CRP entry (the current law) and (2) no base bite, which for planting reduction purposes would rely upon a "displacement" of acreage actually available for planting. Data from the first eight rounds of CRP bidding (through February 1989) show that the base bite reduces CRP entrants' aggregate annual program crop plantings by 14.9 million acres under 1987 program rules, while displacement would have reduced plantings by 13.1 million acres. Under "1990 rules" (no set-aside required for participation), the base bite provision would reduce plantings by 19.6 million acres. Displacement is unaffected by set-aside levels. If the base bite were removed, the concomitant lower opportunity costs of entry would result in either an increase in CRP acreage or a decrease in budget outlays, depending upon program administration.

The Conservation Reserve Program (CRP) was an integral part of the compromise between agricultural and environmental interests in the passage of the 1985 Food Security Act. Reflecting this compromise, the CRP was given several stated objectives, among them erosion reduction, habitat improvement and surplus commodity reduction, and one implied objec- tive, budget reduction.

In this study, a simple model of farm- level cropland allocation is developed to assess the import of program rules drawn up to

achieve the program's surplus reduction ob- jective. Attention is drawn to a minor passage in the CRP implementing legislation that, if altered, might have significant impacts both with respect to program coverage and to program cost. This paper is not an attempt to assess the efficacy of using land retirement to bring about supply control; rather, it is an analysis of how the policy instruments selected to bring this about actually work. The results suggest that although the instrument is effec- tive in reducing program crop plantings, the resulting high opportunity cost to farmers di- minishes the CRP's conservation benefits by limiting potential enrollments.

Under the CRP, landowners agree to remove from production highly erodible cropland for ten years in exchange for an annual payment. Farmers submit bids to the USDA, indicating the total of their eligible acreage that they would enter into the Reserve and the payment per acre that they would accept annually as compensation. All parcels bid at or below a USDA-determined maximum accepted level are enrolled. Through February 1989, 30.6 million acres were enrolled under 298,580 contracts nationwide, at an average annual per acre payment of $48.70.

Annual government obligations under the CRP are currently $1.5 billion. In exchange for this payment, the public gets reduced dam- ages from soil erosion, increased public wild- life benefits, and reduced obligations for commodity program loans and subsidies. Only the third category is amenable to detailed accounting, although the first has been the subject of some exploratory work (Reicheld- erfer and Boggess). In this paper, the focus is on supply reduction under the base bite provision. The net budget and soil erosion impacts of the CRP are not addressed.

The law attempts to give the CRP some

Assistant Professor and Extension Economist, Depart- ment of Agricultural and Applied Economics, University of Minnesota. This study was supported in part by the Minnesota Agricultural Experiment Station. The Author is indebted to several anonymous reviewers whose careful critiques greatly improved this paper. Special thanks to Michael Linsenbigler and Paul Harte of the Agricultural Stabilization and Conservation Service for continuing data set support.



90 NORTH CENTRAL JOURNAL OF AGRICULTURAL ECONOMICS, Vol. 12, No. 1, January 1990

program crop production reduction over and above that which may result from retiring the CRP acres themselves. Each acre entered into the Reserve reduces a farm's aggregate acreage base for the period of the contract by the ratio of the CRP acreage to the farm's total cropland. A farmer with more than one crop acreage base can allocate this "base bite" against one or more of these bases.' In thereby "retiring" a portion of each enrollee's base for the duration of the CRP contract, the government reduces its obligations for any enti- tlements (notably deficiency payments) tied to crop acreage bases.

CRP enrollment might, therefore, reduce production of a given program crop on enrollees' farms in two ways. First, entry may reduce the amount of land that is agronomically suitable for that crop. Second, entry may reduce the amount of land on which the crop can be legally planted. This second action is to be accomplished through a reduction in permitted plantings, the amount of land that can be allocated to program crop production. If there were no base bite, production might still be cut through "displacement," which would occur if CRP entry reduces the amount of land available for planting program crops (available acres), after required set asides are deducted. Under conditions to be developed in this paper, displacement could result in a larger production cut-back than that accomplished by the base bite on some of the farms that enter land into the Reserve.

The relative effectiveness of the base bite and a hypothetical no-bite CRP in reducing program crop plantings depends upon the real- tive magnitudes of each enrolled farm's crop acreage bases, total cropland, and the size of the CRP entry. The model used here is a

representation of federal land retirement laws; for the most part, it does not rely upon as- sumptions about either landowner or government behavior. The analysis does not address the question of whether a reduction in permitted program crop acreage (which is directly measured here) leads to a reduction in program crop supply (which is not measured). That link is presumed-but not always evi- denced- in all land retirement programs. The analysis does make clear, however, the mech- anism by which the CRP might reduce production, namely, through the reduction in permitted plantings. Might other implemen- tation instruments achieve the similar levels of reduction without the same opportunity costs to the enrollee?

The analysis assumes that CRP-induced production cut-backs will have no secondary effects that differ between the two provisions under examination. In particular, there is assumed to be no change in price-support program participation attributable to either individual or aggregate CRP enrollment levels. Commodity program participation decisions are assumed to be independent of and prior to CRP enrollment decisions. (Possible links between the two are discussed in the final section.)

The current regime of production constraints and incentives to maintain base means that farmers have a strong incentive to plant all they legally and agronomically can of a program crop--no more, no less. While commodity programs are voluntary, current participation rates are 80 percent. The approach developed here, however, is valid for any level of participation in traditional farm programs or in the CRP, because removal of the base bite would affect the planted acreage allo- cations only of those farmers who also participate in the price support programs. (See below for a discussion of the effects of chang- ing certain commodity program rules.)

A Model of Cropland Allocation

The model draws attention to the critical nature of legal, as opposed to agronomic or financial, constraints, when govenment supply-

'A farm's official crop acreage base is a number (linked to historic planting records) used by ASCS to determine the magnitude of government loans and subsidies for that commodity. The base is an accounting entity, tied to a farm unit; hence, a particular acre should not be thought of as a "base acre" or a "non-base acre." Deficiency payments are calculated for output "grown" on the farm's established base (minus any required set-aside) at the established yield. Farmers participating in the commodity programs can plant no more of a program crop than their permitted acreage, which is the established base for that crop, minus any set aside.



USING THE CONSERVATION RESERVE TO REDUCE PROGRAM CROP PLANTINGS Taff 91

control programs are in effect. It also dem- onstrates the potential significance of a rela- tively modest change in the administrative details of the CRP.

Prior to CRP enrollment, total cropland for an individual farm is allocated among program crops, required land optional set asides, and non-program crops. Permitted plantings are limited by each program crop acreage base, reduced by required set-asides.

I I K

C = 2(1-ji)Bi + jiBi + Ok, (1)

where

C = Total cropland Bi =Crop acreage base for program crop

i=l,...,I ji = Required set aside percentage for pro-

gram crop i Ok = Planted acreage for non-program crops

k= 1,...,K

The first term in equation (1) is aggregate permitted plantings, the maximum amount of land a commodity program participant is al- lowed to plant to program crops. In the present analysis, the farmer is assumed to have the incentive to plant no more and no less than this amount. The second term is aggregate required set-asides. Available acres is defined as the land left after set-asides have been made: C-2;jiBi.

When R acres of eligible cropland are entered into the CRP, present law specifies that the farm's acreage base be reduced. This reduction can be allocated to any or all individual crop acreage bases, to the extent that each can cover the reduction. Let the required reduction in base (the "base bite") be #B, where B--Bi. The portion of the reduction allocated to each program crop is oci, where 2;oci=1.0. Under current law f=R/C, different for each CRP enrollee. The CRP-reduced base becomes Ni-=Bi-aifB, permitted plantings becomes ((1-ji)Ni, and available acres becomes C-R-ZjiNi.

Displacement would occur on those farms on which CRP-reduced available acres is less than permitted plantings. This cannot occur

under present law because the bite reduces farm acreage base faster than it might oth- erwise be displaced. Under a no-bite CRP (#=O), however, displacement occurs on those farms for which R>C-B. This assumes that the no-bite CRP alternative treats CRP acres as "considered planted," so that the base is kept constant over time, even though payments would be made only on the land actually planted. Other program alternatives are possible as well. See the concluding section for further discussion on this point.

Farmers would plant 2;(1 -ji)Bi to program crops, if there were no base bite or displacement or C-R-2jiBi if there is some displacement. The base bite would reduce plantings more than the alternative on all farms on which displacement does not occur. However, the alternative would result in less program crop production than the current law on those farms for which

C-R-2jiBi <

Z(1-ji)(Bi-ailB). (2)

The relative effectiveness (for surplus commodity reduction by CRP participants) of displacement over the base bite depends upon the aggregate impact of those farms on which equation (2) would hold if there were no bite. These farms are a subset of those on which displacement itself would occur.

Table 1 shows allocation patterns for commodity program participants in the absence of the CRP, in the presence of CRP enrollment with a base bite provision (#=R/C, the current law), and in the presence of a hypothetical CRP with no base bite (0=0).

Total actual plantings of program crops by CRP entrants under a base bite is the sum of permitted plantings by commodity program participants (X) and total plantings by non- participants (Z). (The latter, unconstrained by legal planting restrictions, are presumed to plant the same amount of program crops, whether or not a CRP base bite provision is in effect.)

xI z

(1-ji)(Bix- aixBx) + ICz. (3)




Table 1. Available and Permitted Planted Acres

No CRP CRP with Bite CRP without Bite

CRP 0 R R

ARP/PLD 2jiBi 2jiNi ZjiBj Permitted ( 1 -ji)Bi 2( 1 -ji)N, 2( 1 -ji)B, Available C-2jiBi

C-R-2jiNi C-R-ZjiBi Other Crops C-ZBi C-R-2Ni C-R-2Bi

(no displacement) 0

(some displacement) Note: Ni-Bi-ociRB/C. Key: Ji Set-aside percentage for crop i = 1, ..., INi Post-CRP acreage base for crop i Bi Acreage base for crop i R CRP entry level C Total cropland ai Proportion of total base bite allocated to crop i

Without a base bite, total actual plantings of program crops by CRP participants would be

QI s I Z

22(1-ji)Biq + s[Cs-Rs-2jiBis] + 2Cz, (4) where Q and S are the sets of CRP entrants that participate in commodity programs on whose farms displacement would not or would occur, respectively. (The set S is simply those farms that meet the condition R>C-B when

Entrants' total plantings with the bite is less than total plantings without the bite if

equation (3) < equation (4). The extent to which this holds must be determined empirically.

The Evidence The data set used here is the official

ASCS listing of 298,516 CRP contracts2 signed through February 1989. Each record itemizes

among other characteristics the farm's total cropland (C), the number of CRP acres (R), the annual CRP rental rates, and the allocation of the required base reduction (aiPB). Indi- vidual farm acreage base (B) can be calculated from these figures. Farmers can allocate the required bite RB/C among any or all of their bases, but the data set does not permit determination of individual crop acreage bases. Additionally, the data report only those bases actually selected for reduction, not all bases on the farm. If no reduction happens to be allocated to a particular crop, it might be the case that the farm has no base in that crop. The data do not permit this distinction.

Table 2 shows the aggregate allocation of 19.6 million acres in base reduction among program crops for the 276,354 farms that were subject to the base bite. Seven percent of the CRP contracts were on farms that showed zero farm-base acreage; presumably, these farms do not participate in government programs and so are not subject to either the base bite or displacement. See the concluding section for futher discussion.

The data do not permit calculation of available acres or of permitted plantings by crop, because the individual crop acreage bases Bi cannot be determined. Consequently, a di-

2It might be the case that a given farm has enrolled land during two or more sign-up periods or through two or more separate contracts in a given period. This poses no problem for the aggregation exercise conducted here. Total planting reduction on any farm is simply (1-j)B2Rn/ C, where n= 1,...,N, are the CRP contract sizes for each enrolled parcel. The data do not allow a straightforward computation of the extent to which the total number of contracts exceeds the total number of participating farms.




Table 2. Distribution of Base Bites by Crop: U.S., through February 1989

Number of CRP Contracts Affecting

At Least This Reduction in Crop Crop Base Base (Acres)

Corn 126,262 3,548,357 Wheat 159,794 9,486,759 Oats 66,233 1,024,904 Barley 42,663 2,304,011 Grain Sorghum 53,759 2,054,270 ELS Cotton 20 558 Rice 1,048 22,495 Upland Cotton 12,692 1,136,838 Tobacco 1,008 5,559 Peanuts 304 57,718 TOTAL 19,641,465

Source: Compiled from USDA ASCS data.

rect comparison of the relative magnitudes of plantings required in equation (3) and equation (4) is not possible. However, the required reduction in plantings under the alternate provisions can be determined.

With the present base bite ratio of f#=R/C, the reduction in program crop acreage by CRP entrants is the difference between permitted plantings with no CRP, xI

ZZ(1-ji)Bix z + MCz, and permitted plantings with the CRP, equation (3):

22[(1--ji)oc ixBxRx/Cx]. (5)

(Plantings by non-commodity program participants cancel out).

Increasing the set aside rate ji, the government's traditional approach to surplus commodity control in the mid-1980s, reduces permitted plantings. But because permitted plantings are subject to set-aside requirements, a one acre reduction (by the base bite) in a crop's base leads to a less than one acre reduction in that crop's planted acres, as equation (5) clearly shows. Decreasing ji has the opposite effect. Permitted plantings increase, but so does the reduction in plantings attrib- uted to the base bite.

The 1988 and 1989 droughts dramatically changed program administrators' interpreta- tions of program crop stock levels: set asides have been reduced for most crops by 50 percent or more. To examine the range of possible outcomes, therefore, two specifications of the set-aside rate are employed in what follows. High set-asides, represented by those in effect for the 1987 crop season, are shown by crop in Table 3. Under these rules, the total base bite of 19.6 million acres resulted in a production cut-back of 14.9 million acres, equivalent to a uniform set-aside rate of 3 =0.24. To represent a lower bound for the set aside rate, ji=0 in (5), the full base bite of 19.6 million acres suffices. Call these the "1990 rules."

The reduction in plantings under a no- bite provision is the difference between permitted plantings with no CRP and plantings after any displacement occurs, equation (4): S I

2[$Bis-Cs+Rs]. (6) This number can be directly calculated from the data. Under a no-bite system, 142,145 (48 percent) of the enrollees would be subject to displacement, because their CRP entry exceeds non-base cropland, R>C-B. The aggregate reduction in program crop planting




Table 3: Annual Program Crop Planting Reductions Due to CRP Base Bite by Crop (1987 Rules): U.S., through February 1989

Required Reduction in Set Aside (Percent) Permitted Plantings

Crop (1987 Rules) (Acres)

Corn 20 2,838,686 Wheat 27.5 6,877,900 Oats 20 819,923 Barley 20 1,843,209 Grain Sorghum 20 1,643,416 ELS Cotton 15 474 Rice 35 14,622 Upland Cotton 25 852,629 TOTAL 14,890,858

Note: Tobacco and peanut bases are also eligible for the CRP bite, but these crops operate under allotment programs rather than required set-asides. These two crops account for 0.1% of the reduced base acres achieved in the first eight rounds on CRP enrollment. Source: Compiled from USDA ASCS data.

would be 13.1 million acres. Only half of the CRP entrants are potentially subject to displacement, while 93 percent are subject to the base bite. Even so, displacement would reduce program planting levels nearly as much as would the base bite under 1987 program rules. Clearly, many of the CRP entrants must satisfy equation (2), whereby displacement exceeds base bite reductions.

The data set does not permit equation (2) to be determined precisely, because individual crop bases are not included. However. some of the characteristics of the entrants that satisfy equation (2) can be approximated by applying to Minnesota data the "uniform set-aside rate" j developed above.

Through the first eight enrollment periods, nearly 26,000 Minnesota farmers entered 1.86 million acres into the CRP. These entries reduced farm acreage bases by 806,000 acres on total participant cropland of 7.2 million acres. The task is to identify those contracts for which equation (2) holds, substituting j=0.24 for the ji: C-R < B(1-(l-j)R/C. (7)

In Minnesota, 8,186 contracts satisfy equation (7), accounting for 695,000 acres, 86 percent of the state's total potential displace-

ment. The farms in this subset of CRP enrollees average 160 acres in size and enter an average of 112 acres into the CRP. This compares to 341 acres and 54 acres, respectively, for the 17,000 farms that do not satisfy equation (2).

If similar proportions hold for the nation as a whole, then some 96,000 (32 percent of the 298,580 total) contracts account for 11.3 of the 13.1 million acres displaced. Displace- ment, it would seem, is largely accomplished by smaller farms.

The full range of planting reductions for the first eight rounds of CRP bidding is shown in Table 4. The table compares the actual reduction in permitted plantings under 1987 program rules (equation (5)), the reduction that would have been accomplished by displacement (equation (6)), and the reduction that would be affected under 1990 rules (equation (5) with ji=0). In each round, displacement would have reduced program crop plantings slightly less than did the base bite under 1987 rules and significantly less than would the bite under 1990 rules.

Limitations and Expansions

The analysis conducted in the previous




section assumed the same "slippage"-a less than one-to-one link between a retired acre and the associated reduction in production-- regardless of the presence or absence of the base bite. It also assumes that the distribution of idled acres across crops will be the same for equivalent acreage reductions, and it ig- nores the indirect market effects of CRP re- tirements. See Boggess; Hertel and Preckel; Dicks, et al.; and Webb, et al. for other approaches.

The analysis also assumed the independ- ence of commodity program participation and CRP entry decisions. There are in actuality at least two links between them. First, the CRP entry might be so large that little or no land on the farm remains to be cropped. On such farms, remaining cropland might be so low as to provide little incentive to farmers to bear the transaction costs of commodity program participation.

A second link runs from commodity program rules to CRP enrollment incentives. Lower set-aside percentages will increase the reduction in permitted plantings brought about by the base bite, as is seen in Table 4. A lower set-aside requirement, j1, means that participation in commodity programs is less costly, since permitted plantings are thereby larger than before. The rate of participation, already very high, could increase, if anything,

causing even more CRP entrants to be subject to the base bite. (The opposite may occur if higher market prices, due to lower perceived supplies and reflected in the reduced set-aside rate, induced current participants to exit the commodity program.)

The analysis also assumed that CRP entries were fixed under the two provisions. This need not be the case. In holding enrolled acres per farm, R, fixed, the supply reduction attributable to displacement is probably under- stated. More land might enter the Reserve in the absence of a base bite if opportunity costs were thereby lower. To illustrate, let net returns for a single program crop farm be

NR = (1-j)irmN + pR + aa(C-N-R) = (1-j)rm(1-R/C)B + pR + 7ra(C-R-(1-R/C)B),

where p is the CRP rental payment and lrm, Ira are per-acre net returns from the program crop and non-program crop, respectively. All other symbols are as before. The incremental opportumnity cost of CRP entry (from ONR/ OR=O) is

p* = (1-j)(B/C)rm + r-a(1-B/C). (8)

If there were no base bite, the opportunity cost of each acre of CRP entry would be simply the return from the non-program crop, Ira, up to the level A=(C-B). Beyond that, each displaced acre would reduce program

Table 4. Total Reduction in Acreage Base and Annual Program Crop by Provision: U.S., through February 1989

Reduced Plantings (Acres) Reduced Base Base Bite

Round Date (1990 Rules) (1987 Rules) Displacement

1 March 1986 444,417 338,863 227,058 2 May 1986 1,774,272 1,345,235 1,220,334 3 August 1986 3,215,475 2,432,887 2,376,148 4 February 1987 6,024,965 4,617,781 4,115,591 5 July 1987 2,788,880 2,110,474 1,770,263 6 February 1988 2,144,787 1,595,764 1,343,165 7 July 1988 1,658,375 1,239,401 1,033,900 8 February 1989 1,590,295 1,210,435 973,016

19,641,465 14,890,858 13,059,475

Source: Compiled from USDA ASCS data.




crop income by (1-j)irm. The total opportunity cost of R acres with no bite is, therefore,

pR = (C-B)ira + (1-j)(R-(C-B))irm. (9)

This is smaller than the opportunity costs of R acres with a bite, p*R, if

(1-j)irm > ra. (10)

Whenever (10) holds, removal of the base bite would reduce the opportunity cost of CRP entry for the farmer and so provide an incentive to increase the number of acres entered. It would also stimulate entry by some farms not now participating, because the CRP maximum accepted rental rate is below these farms' opportunity costs under the base bite.

But why wouldn't a farmer put all eligible land into the CRP in the first place? In a single-crop framework, all eligible land will be entered if p>p*, and none will be entered if the opposite holds. In a multi-crop framework, however, p might be large enough, p>p*, to entice entry to a level sufficient to remove (through the base bite) one crop's base and yet not large enough to entice total entry, because p<p* for some other program crop. Removal of the base bite might reduce the opportunity cost of entry to some p?, such that pi >p>p), thereby affording the opportunity to increase CRP entry and, hence, potentially displace even more program crop acreage as well.

In the present analysis, displaced acres are implicityly treated as "considered planted." Set-asides are calculated on the original base, and displacement holds harmless a farm's acreage base for determination of historic planting levels.

Other schemes are possible, of course. For example, the rules might instead require that putting land into the CRP would reduce a farm's base just as would planting them to a non-program crop like alfalfa. In this case, set-asides would be calculated against a base reduced by P3=(B-C+R)/B, in the notation employed above. This reduction would be lower than the base bite (P3=R/C), but higher than the no-bite alternative (3=0) explored in this article. Over time, the official historic plant-

ings record would decline, and annual payments would be concomitantly reduced.

A third version would be to treat CRP- displaced acres as a "conserving use" (similar to the way in which terraces and set-asides are treated under current law) up to the level jiBi, which means they could substitute for required annual set asides for non-CRP land. Remaining displaced acres might be treated as "considered planted," so as to preserve base.

Each of these options would result in different production and government payment levels. There is no reason to expect agreement between farmers and the government as to which is the better policy.

Conclusion

A proportional base reduction has been shown to limit program crop production more than would an acreage displacement. The difference between the two will increase if set- aside rates decrease, thereby buffering attempts to increase planted acreage.

This performance comes at a cost; however, the opportunity cost of CRP entry is greater with the base bite than without it. The government either has to pay more for the same number of CRP acres (if there is an acreage goal) or has to enroll fewer acres (if there is a budget constraint). The trade- off is between the benefits of supply control and the benefits of environment enhancement. If supply control becomes a less-pressing social goal, then the conservation features of the CRP might be better served by removing the base bite.

References

Boggess, William G. "Implementing the Con- servation Reserve Provisions: Potential Risks Facing Farmers." Paper presented at the 1986 Meeting of S-180 "An Economic Anal- ysis of Risk Management Strategies for Ag- ricultural Production Firms," Tampa, Florida, March 1986.




Dicks, Michael R., Katherine Reichelderfer, and William Boggess. "Implementing the Conservation Reserve Program." ERS Re- port No. AGES 861213. USDA: Washing- ton, D.C., January 1987.

Hertel, Thomas W. and Paul V. Preckel. "Ex- tending the Conservation Reserve: What Ef- fect on Commodity Prices and Budget Costs?" J. Soil and Water Cons. 43(1) (Jan- uary-February 1988): 106-108.

Reichelderfer, Katherine and William G. Bog- gess. "Government Decision Making and Program Performance: The Case of the Con- servation Reserve Program." Amer. J. Agr. Econ. 70(1988): 1-11.

Webb, Shwu-Eng H., Clayton W. Ogg, and Wen-Yuan Huang. "Idling Erodible Crop- land: Impacts on Production, Prices, and Government Costs." ERS Agricultural Eco- nomic Report No. 550. USDA: Washington, D.C., April 1986.



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