CONSIDERATIONS WHEN BIDDING CROPLAND INTO CRP. DEPARTMENTAL SPECIAL REPORT #24 September James B. Johnson Walter E. Zidack

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1 Department of Agricultural Economics and Economics Montana State University DEPARTMENTAL SPECIAL REPORT #24 September 1997 CONSIDERATIONS WHEN BIDDING CROPLAND INTO CRP James B. Johnson Walter E. Zidack

2 This report is provided to assist farm operators and/or land owners prepare bids for CRP signup 16 and subsequent bidding opportunities for the reauthorized Conservation Reserve Program. Information included in this report was derived from the Federal Agriculture Improvement and Reform Act of 1996 (FAIR Act), various United States Department of Agriculture announcements relative to CRP, and the FSA handbook entitled Agricultural Resource Conservation Program, short reference 2-CRP (Revision 3) issued February 14, 1997, and subsequent amendments. More complete information on program details and CRP bid calculation strategies are available through the county offices of the Farm Service Agency and the county offices of the Montana State University Extension Service, respectively. Technical advice on the content of this report was provided by Glenn Patrick, Conservation Specialist in the Montana state office of the Farm Service Agency and Richard Fasching, State Agronomist in the Natural Resources Conservation Service, USDA. Technical reviews of this report were provided by Kent Williams, Phillips County Extension Agent and Vincent Smith, Associate Professor in the Department of Agricultural Economics and Economics, Montana State University-Bozeman. The programs of the Montana State University Extension Service are available to all people regardless of race,creed,color,sex, handicap,ornationalorigin.isuedinfurtheranceofcooperativeextensionworkinagricultureandhomeeconomics,actsofmay 8andJune30,1914,incooperationwiththeU.S.DepartmentofAgriculture,CharlesRust,InterimDeanandDirector,ExtensionService, Montana State University, Bozeman, Montana

3 Considerations When Bidding Cropland Into CRP Several changes in the rules for implementation of the CRP program, as contrasted to the March 1997 signup, have been made or are under consideration. The report contains rule changes which were made as of September 12, CRP signup 16 will conducted from October 14, 1997 through November 14,1997. Cropland must have been planted or considered planted to an agricultural commodity in two of the most recent five years. Cropland must have an erodibility index greater than or equal to eight or must be in a conservation priority area to be eligible. Owners and operators must have controlled (managed) cropland for one year prior to the close of the periodic CRP signup. Contract acres (wheat and barley), previously known as crop acreage base, may be used elsewhere on a farm as long as the total acres of active cropland on the farm equal or exceed the contract acres. Persons offering land for consideration in the reauthorized CRP may wish to develop bids relative to their next best uses for the cropland. CRP bids will be made by tract. Operators and/or owners will need to make multiple bids if they intend to bid more than one tract. Tracts may be combined under certain conditions. The per acre maximum CRP rental rate will be the weighted average of the soil rental rates for the three predominant soils in each tract plus a $5 maintenance fee. An environmental benefits index (EBI) will be calculated for each bid to reflect wildlife benefits, water quality, air quality, on-farm effects of erosion, likely long-term benefits, enrollment in a conservation priority area and costs to taxpayers. EBI values for all bids will be compared in this competitive process. Producers will be informed of the EBI equation and will be provided opportunities to increase their scores at the time their bids are being submitted. EBI factor scores that may be directly influenced by management decisions are the wildlife benefits factor and the cost factor. Periodic CRP Signup Periods The second signup period under the reauthorized CRP will begin October 14, 1997 and continue through November 14, Information in this report is pertinent to this signup.

4 Considerations When Bidding Cropland into CRP Land Eligibility Cropland is the primary type of farmland that is eligible for CRP enrollment. Cropland must have been planted or considered planted to an agricultural commodity in any two of the crop years 1992 through Additionally, the eligible cropland must also meet one of the following criteria to be offered for enrollment in CRP:! Have an erodibility index greater than or equal to eight to be bid in the periodic signups.! Be considered a cropped wetland.! Be devoted to a number of highly beneficial practices such as filter strips, riparian buffers, grass waterways, shelter belts, well-head protection areas, and other similar practices.! Be subject to scour erosion.! Be located in a national or state conservation priority area; or,! Be cropland associated with or surrounding non-cropped wetlands. Under limited conditions, marginal pasture land may be eligible for CRP enrollment. It should be noted that minimal acres of Montana marginal pasture land will be eligible for enrollment in the CRP. Person Eligibility A person eligible to bid land into CRP must be an owner, operator, or tenant of eligible cropland. Owners and operators must have controlled (managed) the cropland for one year prior to the close of a periodic CRP signup. Contract Acreage Limitations Owners and operators had an opportunity to manage contract acres established under the Agricultural Market Transition Act of Under this Act farm operators were provided the opportunity to sign up under production flexibility contracts that converted what had been historically called crop acreage base to contract acres. For owners and operators on existing CRP contracts that are expiring, the crop acreage bases in escrow under the expiring CRP contracts may be converted to contract acres. For those with expiring CRP contracts and for others with lands 2

5 Considerations When Bidding Cropland Into CRP eligible for the reauthorized CRP program, these contract acres may be used on the active cropland other than that being offered for the reauthorized CRP. However, a restriction does exist. CRP acres and production flexibility contract acres cannot exceed the total cropland acres on a farm. If the cropland acres on a farm are exceeded, the owner and/or operator may decide to reduce existing CRP acres, contract acres, or the acres of cropland being offered for consideration under the reauthorized CRP. Most producers have chosen to reduce their contract acres because the market transition payments per acre are often less than the existing or expected CRP payments and market transition payments, as now legislated, extend only through the 2002 crop year whereas the CRP contract payments under new contracts are for a minimum of 10 years. Why is the disposition of the contact acres important? The use of the contact acres influences the breakeven bid between CRP participation and the next best use of the cropland. A Bidding Strategy for Bid Formulation Potential participants in the reauthorized CRP should determine breakeven bids with the next best uses of their resources that would be idled through CRP participation. For many bidders who are owner/operators with an intent of bidding only a part of their cropland into CRP, the next best use would be continued production of annuallyplanted crops in rotation. For such a bidder, several economic considerations need to be reflected in the calculation of a breakeven bid. These economic considerations include: 1) the returns from crop production over short-term operating costs; 2) market transition payments forfeited because contract acres exceed active cropland acres; 3) recapture of the unreimbursed portion of the costs of establishing cover on the CRP acres; and 4) recapture of the costs of maintaining a conserving use on the land in CRP. For retiring owner/operators who wish to cease farming if their cropland were bid into the CRP, their opportunity costs for participating in the CRP would be quite different from those who intend to enroll only a portion of their cropland. The retiring owner/operators will likely desire to sell their farm machinery, retire their family labor and management and place all their cropland in CRP. Opportunity costs for such individuals become those associated with their cropland. A breakeven bid would likely reflect 1) the rent from leasing the cropland to a tenant and 2) the actual maintenance costs incurred for the conserving use on the CRP lands. For more information on how to formulate a breakeven bid, contact your county office of the Montana State University Extension Service or the authors of this report at (406) Disposition of Contract Acres The proportion of a farm s cropland bid into CRP will influence the disposition of the contract acres. Likewise, the disposition of these acres will influence the breakeven CRP bid. As a general rule, the greater the proportion of the farm s cropland bid into CRP, the greater the loss of the market transition payments associated with the contract acres that cannot be used due to the lack of available active cropland. As a conse- 3

6 Considerations When Bidding Cropland into CRP quence, the CRP bid (with other conditions equal) would have to be greater to break even with continued crop production when a higher proportion of farm s total cropland acres are being bid into the reauthorized CRP. An interpretation is provided by example. Consider a farm with 4,000 acres of cropland that has 2,000 wheat and 400 barley contract acres. What would likely happen if 1,800 of 4,000 acres of cropland were bid into the reauthorized CRP program? The farm manager would likely use the entire 2,000 wheat contract acres and 200 of the 400 barley contract acres on the remaining 2,200 acres of active cropland. Therefore, there would be 200 acres of barley contract acres that could not be used on the active cropland (Figure 1). The market transition payments on these 200 barley contract acres would be sacrificed. The producer would likely choose to recapture the value of these barley market transition payments in the breakeven CRP bid. Consider a second bidding scenario on the same 4,000 acre farm with 2,000 wheat and 400 barley contact acres. The owner operator has reconsidered and decides to bid only 1,000 acres into the reauthorized CRP. No market transition payments are sacrificed as the 3,000 acres of remaining active cropland exceed the 2,400 contract acres (Figure 2). Therefore, the CRP bid needed to break even with continued crop production will be less 4

7 Considerations When Bidding Cropland Into CRP Figure 1. Disposition of Contract Acres When 1,800 Acres of Cropland Are Bid Into CRP 2,200 Acres of Active Cropland 1,800 Acres Offered for CRP 2,000 wheat contract acres 200 barley contract acres than when a greater acreage was enrolled because no market transition payments were sacrificed due to unused contact acreage. Maximum CRP Rental Rates For a particular tract, the maximum CRP rental rate will be the weighted average of the soil rental rates for the three predominant soils in the tract plus the $5 per acre allowance for the annual maintenance costs for the conserving use. For CRP signup 15 in March 1997, each soil map unit in every county in Montana was assigned a soil rental rate by multiplying its relative inherent productivity times the county cropland cash rental rate or cash equivalent of a share lease. For CRP signup 15 the least productive soil map units in a county had soil rental rates that were 50 percent of the county average cropland rental rate. The most productive soils in the county had soil rental rates that were 150 percent of the county average cropland rental rate. For instance, in a county where the county average cropland rental rate was $30, soil map units with the lowest inherent productivity ratings had $15 soil rental rates and the most productive soils in the county had soil rental rates of $45. Montana county-level average cropland rental rates plus the $5 per acreage maintenance fee allowance are shown (Figure 3). For CRP signup 16, the Farm Service Agency State Committee has the authority to review the 200 barley contract acres foregone soil rental rates to determine whether the range of soil rental rates used in the March 1997 signup reflects the range of dryland cash rental rates that actually exists in each county. In counties where there were more than six groupings of soil rental rates for CRP signup 15, the committee authorized reducing the group-ings to six. This action will increase the lower soil rental rates and decrease the higher rental rates from those originally specified for CRP signup 15. Applicants should check soil rental rates in their local USDA offices. For a more complete understanding of the calculation of a maximum CRP rental rate, consider an owner/operator who want to bid a 500 acre tract of land into the reauthorized program. On this tract there are six soil map units with widely ranging inherent soil productivity ratings (Table 1). In this example, soil map units 2, 5 and 6 are the predominant soils (column 3, Table 1). The acres of predominant soils (column 3, Table 1) are multiplied times their respective soil rental rates (column 4, Table 1) to obtain the weighted soil rental rates (column 5, Table 1) that are summed to total $9,360 which was divided by 380 acres to obtain the per acre rate. When the $5 per acre maintenance fee is added, the maximum acceptable CRP rental rate is $ Once the CRP maximum rental rate is known, a producer may choose to pursue one of several 5

8 Considerations When Bidding Cropland into CRP Figure 2. Disposition of Contract Acres When 1,000 Acres of Cropland Are Bid Into CRP 3,000 Acres of Active Cropland 1,000 Acres in CRP 2,000 wheat contract acres 400 barley contract acres Table 1. Calculation of the Maximum CRP Rental Rate for a 500 Acre Tract of Cropland Soil Map Unit (1) Acres (2) Three Predominant Soils (3) Soil Rental Rate (4) Weighted Soil Rental Rate (5) 1 20 $ $34 $2, $ $ $30 $3, $18 $3,600 Total xxx $9,360 Per Acre Rate $24.64 Maintenance Fee $ 5.00 Maximum CRP Rental Rate $29.64 options: 1) do not submit a CRP bid; 2) submit a CRP bid equal to the maximum CRP rental rate; or 3) submit a bid less than the CRP rental rate maximum. A producer might choose not to submit a bid for program participation if it is determined that the maximum rental rate is considerably less than the opportunity costs associated with the resources to be removed from production. In other words, an owner/operator might determine that greater returns to these resources could be obtained by using the cropland and machinery resources and family labor and management in production. Alternatively, an owner intending to retire from farming might judge that greater returns to the land resources could be obtained by leasing the cropland to a neighbor. 6

9 Considerations When Bidding Cropland Into CRP Producers with bids equal to or less than the maximum CRP rental rate will know they are in the ball game. But they will not know whether their CRP bids have been accepted until their bid submissions undergo an environmental benefits rating. Producers will know in advance of completing their paperwork for a CRP bid what the maximum rental rate will be for the cropland being bid. They can offer whatever they choose. The United States Department of Agriculture, in its News Release No suggested that producers can offer less than the maximum rental rate to increase the likelihood of acceptance through the competitive environmental benefits index. The merits of this suggestion might be questionable. Again, as in CRP signup 15, the USDA does not intend to advise applicants of the calculation of EBI points for the major component of the cost factor and the total points for the cost factor until after CRP signup 16 closes. But it is known that in the March 1997 CRP signup 15 the overall EBI index did not increase much per dollar decrease in the CRP bid level. Environmental Benefits Index The environmental benefits index (EBI) is used to prioritize and rank CRP bids offered. Each bid is assigned a point score based on the relative environmental benefits associated with the land resources offered. Bids are ranked in comparison to all other bids submitted nationally, and selections are made from that ranking. At the time producers are developing their bids, they will be provided with opportunities to increase their EBI scores. Applicants for CRP signup 16 should be aware that there are changes from CRP signup 15 in the way EBI scores for several environmental factors are calculated. There are seven EBI components. These components, or factors, and their respective minimum and maximum points are: 1) wildlife habitat benefits (0-100 points) ; 2) water quality benefits from reduced erosion, runoff and leaching (0-100 points); 3) on-farm benefits of reduced erosion (0-100 points); 4) likely long-term benefits beyond the CRP contract (0-50 points); 5) air quality benefits from reduced wind erosion (0-35 points); 6) benefits of enrollment in a Conservation Priority Area (0-25 points); and, 7) cost of the bid, where points for this factor all unknown to applicants until after the close of the CRP signup 16 bidding period. Owners and operators need to be aware of these EBI components when they submit CRP bids. They need to know that they may be able to make management changes that will influence the scores received in two categories wildlife benefits and cost of the bid. But they also need to be aware of the other EBI components, the subfactors, and work with the Natural Resources Conservation Service personnel in obtaining full recognition for these subfactors in their ratings. In other words, being 5' 10" tall in not something an operator can change through management, but it would be useful that the technician doing the rating knew your height if you get 50 points if you are 5' 10" or greater in height and no points if you are less than that height. EBI Factors Not Influenced by Management Decisions Water quality benefits from reduced erosion is an EBI factor that may receive points, based on four subfactors. The first subfactor will award 0-30 points based on the location where crop production contributes to groundwater or surface water quality impairments. For instance, cropland bid for CRP consideration that is in a stateidentified wellhead or groundwater recharge area or in a federal 319 priority water list area will receive 30 points. A minimum of 50 percent of the cropland area offered for the CRP must be in such a designated area to receive points; 7

10 Considerations When Bidding Cropland into CRP otherwise, no points are awarded. The groundwater quality benefits subfactor may receive 0-20 points and is scored on an index based on soil properties including particle size and organic matter. The surface water quality subfactor may receive from 0-40 points and is scored relative to the potential amount of sediment that may be delivered to water courses and the human population within the watershed that would benefit most directly from improved surface water quality. There are several changes in procedure from CRP signup 15 relative to how this subfactor will be scored in CRP signup 16. Producers may wish to advise NRCS personnel of the distance from their tracts to the nearest water bodies. The fourth subfactor in this EBI component is related to water quality improvements associated with wetlands. For this subfactor 0-10 points may be awarded with the nonzero points awarded when 10 percent or more of the land being bid is enrolled under the cropped wetlands eligibility criterion. On-farm benefits of reduced erosion is an EBI factor that receives points based on the Erodibility Index (EI) values for the tracts being offered. The score for EI, the weighted average of all soil map units in the tract, is determined by crediting points for the greater of the two EI estimates: 1) sheet and rill erosion using the Universal Soil Loss Equation (for water erosion); or, 2) wind erosion using the Wind Erosion Equation. The more erodible the soil(s) is in a map unit, the higher the EI value, and the more points for this factor. (Refer to Appendix A for points awarded for different EI values.) The EBI factor reflecting the likely long term benefits of CRP participation beyond the contract period may provide up to 50 EBI points. Although it appears that scoring for this factor could be influenced by management decisions, most of the practice options with the higher points assigned are impractical for Montana conditions. The planting of shrubs is one possible exception. Shrub planting on at least five percent of the cropland being bid for CRP, when an approved seeding mix is used, could yield an EBI score of 20. CRP applicants should confer with their local NRCS office on other possibilities for this factor. The EBI factor reflecting the air quality benefits of reduced wind erosion can provide up to 35 points. This factor is to give credit to CRP enrollments which achieve reductions in airborne dust and particulate that reduce damages to nearby affected population concentrations. Cropland located in state or national conservation priority areas bid for CRP participation may be awarded 0 or 25 points. Thirteen of Montana s counties are located in the national Prairie Pothole Conservation Priority Region (Figure 4). State-level conservation priority areas are located in portions of Fergus, Cascade, Teton and Prairie counties. Applicants should confer with county-level FSA and NRCS personnel to determine if croplands being bid for CRP participation are in a conservation priority area. Points that will be awarded for this EBI factor will be contingent on how the bid was scored for the wildlife cover subfactor. For example, if the major purpose of the conservation priority area is to maximize wildlife benefits, a CRP bid must receive 40 percent or more of the maximum score for the wildlife cover subfactor in order to receive 25 points under this factor. Failing this contingency requirement, the bid would receive zero points for the conservation priority area EBI factor. EBI Factors Influenced by Management Decisions The wildlife benefits EBI factor may be influenced, in part, by management decisions. This factor is intended to encourage landowners to manage CRP acreage to be most beneficial to wildlife. There are six subfactors which include: 1) cover and practices beneficial to wildlife (0-50 points); 2) areas involving threatened, endangered and candidate species (0-15 points); 3) proximity to streams, rivers, and wetlands (0-8

11 Considerations When Bidding Cropland Into CRP 10 points); 4) proximity to protected areas such as a federal or state wildlife areas or areas with permanent con-servation easements (0-10 points); 5) the CRP contract size relative to the average contract size in the state (0-5) points; and, 6) the upland to restored wetlands ratio for the cropland area offered (0-10 points). The calculation for the wildlife benefits factor is the sum of the points accumulated for the six subfactors multiplied by the points for the first subfactor (cover and practices) divided by 50. Major management influences to the wildlife benefits factor may be made through the first subfactor. For instance, an operator bidding land under an expiring CRP contract for consideration in the reauthorized CRP may want to renovate a monoculture of an introduced species of grass to a mixture of mainly introduced grasses and legumes best suited for wildlife in the area. There are four national-level CRP cover practices listed in the FSA Agricultural Resource Conservation Program Handbook that are particularly pertinent to Montana conditions. Applicants need to be aware that there are substantial changes for CRP signup 16, as compared to CRP signup 15, in how these practices are described and in the EBI scores for the option within these practices. Each practice is listed in its entirety so that producers can envision how to manage their resource to enhance both wildlife benefits and their scores for this EBI subfactor. These specifications were revised as of Applicants should confer with local NRCS personnel on the species required to fulfill each of the options specified under these practices. Points will be awarded based on the type of cover applied. For acreage currently or recently in CRP, the threshold is 51 percent of the cover applied. For new cropland, the threshold is 90 percent. For combined existing and new cropland offers, the threshold is 70 percent. 9

12 Considerations When Bidding Cropland into CRP Practice CP1: Permanent introduced grasses and legumes Assigned Planting of 1 or 2 species of an introduced species 10 Mixed (minimum of 3 species) of at least 1 introduced grass and 1 forb or legume species beneficial to wildlife in the area Mixture (minimum of 4 species) of at least 2 introduced grasses and at least 1 forbs or legume species best suited for wildlife in the area Practice CP2: Establishment of permanent native grasses Assigned Solid stand of a 1, 2, or 3 native grass species 20 Mixed stand (minimum of 4 species) of at least 2 native grasses and at least 1 shrub, forb, or legume species beneficial to wildlife in the area Mixed stand (minimum of 5 species) of at least 3 native grasses and at least 1 shrub, forb, or legume species best suited for wildlife in the area or any native prairie restoration mix of 5 or more species Practice CP4D: Permanent wildlife habitat, noneasement Mixture of herbaceous, shrub, and tree species best suited for various wildlife species in the area Practice CP10: Vegetative cover - grass - already established Assigned 50 Assigned Solid stand of 1 or 2 species of introduced species of grass 10 Solid stand of 1 or 2 species of native grass 20 Mixed stand (minimum of 3 species) of at least 1 introduced or native grass and at least 1 shrub, forb, or legume species beneficial to wildlife in the area Mixed stand (minimum of 4 species) of at least 2 native or introduced grasses and a least 1 shrub, forb, or legume species beneficial to wildlife in the area Mixed stand (minimum or 5 species) of at least 3 native grasses and at least 1 shrub, forb, or legume species or a native prairie mix of at least 5 species determined as best suited for wildlife

13 Considerations When Bidding Cropland Into CRP Practices CP1 and CP2 are pertinent to lands being enrolled in CRP for the first time. Mixed stands will greatly enhance the wildlife benefits and the score for this EBI subfactor. Practice CP10 pertains to situations where grass is already established on lands being bid for consideration in the reauthorized CRP; this would pertain to most expiring Montana contracts that are being bid for consideration in the reauthorized program that are currently in native or introduced grasses or possibly grass and legume mixes. These existing stands may be renovated to improve wildlife cover and the EBI subfactor score. Of course these renovations come at a cost and the owner and/or operator may want to decide whether or not it is advisable to accept cost share renovation for cover renovation. Practice CP4D may be pertinent to both new and existing CRP lands under certain conditions; this practice will require prior planning and collaboration with the appropriate agencies to achieve the desired wildlife habitat. To re-emphasize, it is important to maximize the EBI score for the subfactor related to cover and practices beneficial to wildlife. The point score for this wildlife cover subfactor enters the equation for the total EBI score for wildlife benefits in two ways. Under the assumption that the other subfactors each receive their maximum point scores, the equations are specified as: EBI Points for Wildlife Benefits = (wildlife cover score/50) x (wildlife cover score ) Consider this equation evaluated with wildlife cover subfactor scores of 10, 20, 40, and 50. The EBI scores would be the following: EBI for 10 = (10/50) x ( ) = 12 EBI for 20 = (20/50) x ( ) = 28 EBI for 40 = (40/50) x ( ) = 72 EBI for 50 = (50/50) x ( ) = 100 Options that will improve both the wildlife cover and the EBI subfactor score may be identified in consultation with the local NRCS personnel. Although the maximum points were assumed for each of the other wildlife subfactors, the actual point scores for most will be a function of location and natural endowments of the cropland being bid. Owners and/or operators may choose to increase contract size. Owners and operators have the ability to increase CRP contract sizes in certain instances. This may lead to an increase in the score for the EBI wildlife subfactor based on contract size. If the contract size is twice or greater than the 205 acre average for Montana CRP contracts specified by the USDA for CRP signup 16, then five EBI points are awarded. It may be advisable to combine adjoining tracts when several are being offered. However, producers 11

14 Considerations When Bidding Cropland into CRP must concurrently evaluate the impact of tract combination on the weighted soil rental rates that compose their maximum CRP rental rates. The second EBI factor that may be influenced by management action is the cost factor. The cost factor received a maximum of 200 points under the March 1997 CRP signup 15, although this point maximum of 200 points and the point assignments were not known to applicants until after the close of the signup. Again, in CRP signup 16 applicants will not know the maximum possible point total and their total scores for the cost factor until after the close of signup. The EBI cost factor score for CRP signup 15 had two components. Component A was based on the cost-share funds awarded by the USDA to owners and/or operators to establish a conserving use on the CRP acres. This component received 10 points if cost-share funds were declined. If the cost-share funds were accepted, this component received zero points. Component B was based on the per acre CRP bid. The score for Component B was determined by the following equation: Component B points = [($CRP bid per acre/$165) x 190], where $165 was the maximum CRP rental rate nationally based on soil rental rate calculations for the March 1997 CRP signup 15. The equation for Component B was quite insensitive to changes in the per acre bid levels. For illustration, consider the $29.64 maximum CRP rental rate for the March 1997 bidding period for the 500 acre tract previously discussed (Table 1). This CRP rental rate of $29.64 included the $5 per acre maintenance fee for the conserving use. The Component B score for this bid level was [($29.64/$165) x 190] = (Table 2). The scores, for reducing the CRP bid in $5 increments are also shown (Table 2). It is readily noted that for each $5 reduction in the CRP bid for CRP signup 15 only increased the Component B score by just over 5 points, or a one point increase in the EBI score for each $1 per acre decrease in the CRP bid. If the CRP bid was a breakeven bid with continued crop production calculated as the annual annuity equivalent of the present value of the future net returns from crop production over a 10-year CRP contract period, this would have been a costly way to gain points for acceptance into CRP. That is, if the CRP bid would have had to be substantially lowered below the maximum acceptable rental rate to achieve an adequate EBI score, wouldn t the owner and/or operator have evaluated other alternatives such as continued farming or leasing the land to others at a rental rate higher than the reduced CRP bid level? The impact of accepting the cost-share funds under CRP signup 15 is illustrated (Table 2). However, producers may choose to accept costshare funds knowing that the scores received for the wildlife benefits factor might be drastically increased by planting a cover that is highly beneficial to wildlife. The EBI cost factor score for CRP signup 16 has three components. Subfactor A will reflect the offered rental rate. Subfactor B will reflect if costshare payments are received or are not received. Subfactor C will reward offers less than the maximum CRP rental rate for a tract. Subfactor A is specified as: Points for Bid = Y - Y ($ Bid amount/$160). This, rewritten is the same equation structure as in CRP signup 15. The rewritten equation is: Points for Bid = Y - [($ Bid amount/$160) x Y]. Y will be determined after the CRP signup 16 ends. The $160 is evidently the maximum CRP rental rate that will be accepted nationally. Subfactor B for CRP signup 16 is the cost-share payment factor. If cost-share payments are 12

15 Considerations When Bidding Cropland Into CRP accepted, 0 points are awarded. If cost-share payments are declined, 10 points are awarded. Subfactor C pertains to CRP bids less than the maximum CRP rental rate for a tract. Bids below the maximum payment rate will be awarded 1 point, not to exceed 15 points, for every whole dollar the bid level is below the maximum CRP payment rate for the tract being offered. An application of the scoring for these subfactors is offered by evaluating the $29.64 CRP bid for the previously-cited 500 acre tract and then reducing the bid in $5 increments (Table 3). Table 2. Comparisons of EBI s for Alternative CRP Bids Using the CRP Signup 15 Cost Factor Equation Alternative Bid Component A Component B Total No Cost Share Cost Share 190 & $ Bid $165 ( 190 $ $ $ $ $ $ $ $ Table 3. Comparisons of EBI s for the Cost Factor for Alternative Bids Using the CRP Signup 16 Cost Factor Equation Alternative Bid Component Y & A $ Bid $160 ( Y Component B Component C Total 13

16 Considerations When Bidding Cropland into CRP No Cost Share Cost Share (0 to 15 points) $ $ $ $ $ $ $ $ Although the USDA has stated that the total points to be awarded for the cost factor and the specification of the points for Y will be assigned after all bids for CRP signup 16 are received, a value of Y was assigned for illustrative purposes. In Table 3, Y was assigned a value of 175. This 175 points plus a maximum of 10 and 15, respectively, for the other two cost subfactors would provide a maximum of 200 points for the cost factor, or 33 percent of the total 610 EBI points (410 points for the environmental factors plus 200 points for the cost factor). The loss is not $10 per acre, but the sum of the present values for this $10 for 10 years. At a 7 percent discount rate, there is about $70. That is, in current dollars, the 20 point increase would cost the applicant $70 per acre. What EBI Will Be Needed for Acceptance? What is noted when comparing the cost factor calculations for CRP signup 15 with CRP signup 16 is that the equation for CRP signup 16 is more responsive to lower bids than the previous equation. For CRP signup 16, a $1 reduction in a CRP bid from the CRP rental rate results in just over a two point increase in the EBI score. But applicants are warned that reducing a CRP bid to a level below the CRP maximum rental rate is not a one-year proposition. In the example, if the CRP bid were reduced from $29.64 per acre to $19.64, or $10, the EBI score increased by just over 20 points (Table 3). But the applicant forfeits the $10 for each of the ten years of the contract. The short answer to this question is there is no way to know before a bidding period closes. In USDA Notice CRP-286, Preparations for CRP Signup 16, it is stated: The national EBI cutoff score will be determined after signup concludes. The signup16 EBI cutoff score may be equal to, higher than, or lower than the 259 point cutoff for signup 15. Nationally bids with an EBI score of 259 or greater were accepted in CRP signup 15. In some counties where the acres under CRP contracts continuing beyond September 30, 1997 and the acres bid for consideration in CRP signup 15 14

17 Considerations When Bidding Cropland Into CRP exceeded 25 percent of the active cropland, the EBI cutoff scores were higher. In Montana the average EBI score was 310 during CRP signup 15. The average accepted CRP bid was $32 per acre. With cost-share funds accepted the EBI score related to cost was , or 49 percent of the average total EBI score. Without acceptance of cost-share funds the EBI score for cost was or nearly 53 percent of the average total EBI score. Some Montana producers were unsuccessful in CRP signup 15. They have evidence of their EBI scoring on all factors. It would be helpful for them to review their scoring to assure all points were properly awarded for those factors that cannot be explicitly changed through management decisions. They might also wish to assess the impacts of management decisions on wildlife habitat, assess their economic returns at various bid levels from the CRP, and evaluate resultant EBI scores for various alternatives. For the EBI factors that may be influenced with management decisions, considerable gain in EBI points may be achieved by improving wildlife benefits. Cost-share payments may be obtained for establishing these practices and/or renovating existing cover. Of course, EBI points may also be obtained by submitting bids below their respective CRP rental rate maximums and declining costshare payments. But the economic ramifications of such actions may be quite severe, especially when payment reductions are sacrificed in each year of the 10-year life of a CRP contract. Appendix A: EBI Points for On-Farm Benefits of CRP Participation EI - Sheet Rill or Wind EBI Points 15

18 Considerations When Bidding Cropland into CRP Less than and greater 100 crp97.sr/file/ /ks 16