A Brief Economic Survey of the USDA Conservation Reserve Program

Transcription

1 A Brief Economic Survey of the USDA Conservation Reserve Program Nathaniel Kale Ed Goetz, Paper Supervisor: Date: William Easter, Advisor: Date: Robin Martinek, Client, USDA NRCS: Date: April 2009 Professional Paper To Complete Humphrey Institute MURP Degree Requirements

2 Table of Contents Executive Summary...3 Introduction...3 What Is the Conservation Reserve Program?...4 The Role of CRP...4 The Structure of CRP...5 The Spatial Extent of CRP...5 Costs...7 Direct Costs...7 Transaction and Maintenance Costs...8 Indirect Costs...9 Analysis of Costs...12 Benefits...13 Ecological Benefits...13 Land Value Benefits...14 Productivity and Miscellaneous Benefits...14 Net Benefit Calculations...15 Direct Analysis...16 Who Benefits?...20 Who Loses?...21 Strengths, Weaknesses, Opportunities, Threats...22 Conclusion...24 Works Cited...25 Nat Kale A Brief Survey of the USDA CRP Program 2

3 Executive Summary The Conservation Reserve Program, which maintains farmland out of production (including 34.6 million acres in 2007) by paying rent on land that farmers agreed to keep idle, is a net benefit to the United States economy. It provides (very approximately) $8.4 billion in net present value to the country, mostly through conserving natural resources such as topsoil and water quality. The rental payments and many of the indirect benefits accrue to rural communities, especially farmers, but there are significant ecological benefits for the country as a whole. There is little evidence that benefits measurably accrue at the county level. In the future CRP should focus on reducing transaction costs (which are higher than those for most USDA Natural Resource Conservation Service programs) and on expanding programs that permit farmers to enroll while continuing to farm their land. Introduction In this paper I examine the effect of the Conservation Reserve Program (CRP) on the United States economy. Numerous studies have examined the benefits of CRP for specific purposes, such as increasing the population of certain species of fowl through habitat expansion or prevention of soil loss. This paper builds from these studies and calculates the total benefits the program contributes to the US economy. By combining the estimated benefit with an estimate of the cost of the program, I calculated the Net Present Benefit of CRP in 2007, and use this figure as a basis to argue for continuation and possible expansion of the program. This paper also examines the relationship between economic indicators such as unemployment (taken from the 2000 US Census) and CRP enrollment at a county level. The goal of this analysis is to determine whether the positive effects of CRP can be discerned empirically for counties throughout the US, or if the effects are imperceptible at that level. Nat Kale A Brief Survey of the USDA CRP Program 3

4 What Is the Conservation Reserve Program? The Role of CRP According to the USDA Natural Resources Conservation Service (NRCS), CRP provides technical and financial assistance to eligible farmers and ranchers to address soil, water, and related natural resource concerns on their lands in an environmentally beneficial and cost effective manner. 1 This stated goal is promoted by rental payments from the Commodity Credit Corporation or CCC (a USDA run corporation that aims to stabilize agricultural commodity prices for the benefit of farmers) to farmers who take farmland out of crop production and plant it in soil and habitat conserving covers, such as native prairie grasses. These rental payments are designed to encourage retiring marginally productive land, and some sub programs target sensitive areas such as wetlands. By keeping natural cover on these lands less soil is lost (because the ground is never bare, unlike cultivated land during soil preparation), fewer pesticides and fertilizers are applied, and the land itself becomes habitat to many species, especially prairie birds. The goal of CRP at inception in 1985, as suggested by the name, was to create a reserve of crop land that could be put into production in times of need, such as drought, as well as to take surplus grain off the market. These goals diminished over time as soil and habitat conservation became the main focus of CRP, but the basic structure of the program has not altered and enrollment has remained steady. In economic terms, CRP is a subsidy to rural land owners that provides an incentive to take land out of crop production. A subsidy is established by a government to correct for some form of market externality. Viewed in this way, and taking into account the stated goals of decreasing sediment runoff into water bodies and increasing wildlife habitat, CRP is designed to correct the sub optimal pricing of 1 USDA NRCS, Accessed 11/15/07 Nat Kale A Brief Survey of the USDA CRP Program 4

5 natural resources in the form of soil quality, water quality, and natural habitat by the competitive market. CRP rent payments are subsidy payments that counteract the tendency of agricultural land owners to value the soil, water, and habitat resources of their land less than their societally optimal level. The private market offers no compensation to farmers for preserving these natural resources, so CRP attempts to estimate their value on behalf of society, allowing farmers to determine lands where agricultural production benefits outweigh natural resource benefits (and vice versa). The Structure of CRP A farmer signs a ten year contract when land is placed in CRP, and is required to perform basic maintenance such as mowing. One half of the cost of establishing cover is provided by USDA. At the end of the ten year contract USDA has generally offered renewals to farmers with currently enrolled land of up to five years, but landowners may resume crop production if they wish. As of October 2007 CRP has active contracts on 34.6 million acres of former farmland, encompassing 3.5% of the total US farmland. About 10% of the land enrolled is covered under the Continuous Signup and Conservation Reserve Enhancement Program (CREP), which are 10 year contracts on small parts of fields designed to promote conservation practices such as filter strips (USDA Farm Service Agency, ). To qualify for the main CRP program a field is evaluated using the Environmental Benefit Index (EBI). Only fields with the highest EBI scores are enrolled in the program. Factors such as soil erodibility, wildlife habitat potential, and the competitiveness of the bid submitted by the landowner (farmers may choose to request to up to $15 per acre less than the rent calculated by EBI) are considered. Continuous signup and CREP acres are not subjected to the competitive bid process. The Spatial Extent of CRP Nat Kale A Brief Survey of the USDA CRP Program 5

6 USDA NRCS releases CRP enrollment data on the county level. The most recent datasets are for 1997 and 2004; lacking US Census data post 2000, this analysis will focus on 1997 CRP data and 2000 (gathered in 1999) US Census data. Figure I shows the degree to which the percent of the population in a county engaged in farming is correlated with the extent to which that county is covered in CRP acres. A reasonable conjecture might be that a strong correlation would exist between counties with extensive farming populations (and the strong farming organizations and extensive agricultural land that go with them) and the percent of land in those counties that receives CRP rental payments. The linear trendline shows an R 2 of about.16, indicating moderate correlation; lower than perhaps might have been expected. Interestingly, the R 2 for the curved polynomial line is greater than that of the linear trendline, at about.2. This indicates that in general counties tend to increase in CRP coverage as the percent of population farming increases, until a certain threshold of farming population is reached, at which point the trend reverses and a greater percent of farmers indicates a lower percent of CRP coverage. Notwithstanding these general trends, the clearest indication from Figure I is that a significant majority of counties in the US have less than 5% of their land in CRP and less than 10% of their populations engaged in farming. In no county is CRP the dominant land use, and in no county is the majority of the population farming. It also suggests that CRP is utilized in a variety of counties, from Nat Kale A Brief Survey of the USDA CRP Program 6

7 fairly urban to mostly rural, from absenteelandlord (high agricultural land but low percentage of the population engaged in farming) to family farmed. Figure II shows the spatial extent of both farming activity and CRP coverage 2. The Midwest, unsurprisingly, shows both the greatest percent of the population in farming and the greatest percent of land devoted to CRP, with notable concentrations of both in the Pacific Northwest and the Southeast as well. CRP land seems more concentrated than farming populations, with distinct concentrations of 5% or greater surrounded by large swaths of less than 1% in CRP. While most of these CRP concentrations correspond to significant farming populations, there are two notable exceptions. The greatest concentration of counties with significant farming populations, centered around Iowa, corresponds with a distinct lack of CRP acreage. There is also a belt of CRP enrollment in the Southeast that does not seem to correspond with any significant farming population. Costs Direct Costs The USDA will pay out $1.8 billion in CRP rental contracts and other incentives in 2008, for obligations fulfilled by farmers in This number is slightly higher than the average of approximately 2 Categories were chose by first implementing a Jenks natural breaks method, then manually creating more readable categories. Thus, % became 2 5%, etc. Nat Kale A Brief Survey of the USDA CRP Program 7

8 $1.5 billion paid out annually over the last four years, a change most likely due to 2007 being a major contract renewal year (USDA Farm Service Agency, ). This, along with the fact that total enrollment in CRP has fluctuated between 30 and 36 million acres since 1990, indicates that the direct cost of CRP has remained approximately the same since just four years after inception. The cost for 2007 is the closest to today s dollars and reflects current market factors, so it is the price we will use. Transaction and Maintenance Costs The transaction costs for implementing CRP are born by the organization that provides technical support (USDA NRCS) and the organization that manages contracts (USDA Farm Service Agency). For a typical ten year contract the two agencies spend approximately $60 per acre in the signup year and approximately $20 in the following nine years, for an average of $24 per acre over the lifetime of a contract (Organization for Economic Co Operation and Development, 2007). Given the 34.6 million acres currently enrolled in CRP, transaction costs paid by USDA in 2007 should be around $830 million, or approximately 46% of the total spent on CRP rental payments. This is higher than the 38% incurred in transaction costs for NRCS programs in general, and much higher than 33%, the average transaction cost that NRCS pays directly (Easter & McCann, 2000). The transaction costs of CRP are mostly born by the agencies that administer the program. Farmers spend much less time and resources in first planting acres with a cover crop and then mowing them every few years to maintain their eligibility for enrollment than they do actively farming. Establishing a cover crop that is acceptable for CRP, such as prairie grasses, can be expensive. The USDA Economic Research Service estimated in 1999 that the net present cost (4% discount rate, 10 year timeframe) of establishing a cover crop for all acres enrolled in CRP was $1.6 billion. CRP offers to cover half of the cost of cover crop establishment, so it may be assumed that this cost is split evenly between USDA and the individual farmer. Nat Kale A Brief Survey of the USDA CRP Program 8

9 Indirect Costs A profit maximizing farmer will sign a CRP contract for all acres where CRP rental offered is higher than the net benefit (profit) the farmer would assume from the land prior to subtracting taxes (CRP rental payments are not exempt from federal income taxes 3 ). This behavior is adjusted slightly by some of the characteristics of CRP. For example, many of those enrolled in CRP are retired farmers 4 who may not be lured back into physically demanding full time farming even by increased crop prices. To further complicate matters, the USDA sets CRP rental rates at a county by county level, basing the rate on the average land rent (for dry land crops) over the past three years (USDA Farm Service Agency, 2000). Acceptance into the program is partially determined by the competitiveness of the bid a farmer makes; as few as one third of all applications in any given year are accepted. Yet despite these complicating factors, marginal analysis still does apply. A farmer who can get more income from their land by planting it is likely to do so, instead of enrolling in CRP. This supposition is corroborated by Figure II, which shows that little CRP land exists in the central Midwest, despite a significant farming population a phenomenon that may be explained by the extremely fertile soil (and hence high land rents) to be found there, convincing more farmers to continue farming their land. The bidding process should ensure that CRP rental rates remain approximately equivalent to land rental rates. In 2007 the USDA spent $1.8 billion on rental payments, which translates into $1.8 billion of missed income from cropping. This calculation assumes that: 1. All of the land that is currently in CRP would otherwise be in production; 2. All of the crops produced could have sold for the prices USDA assumed when it set CRP rental rates; and 3 US Tax Code, Rev. Rule % in 2003 (USDA Farm Service Agency, ) Nat Kale A Brief Survey of the USDA CRP Program 9

10 3. None of the $1.8 billion in crop production would have been the result of other subsidies. Assumption 1: Full Production The extremely high instance of retired farmers among CRP beneficiaries belies the assumption that all CRP land would be productive farmland if the program did not exist. While many aging agrarians might well sell their land to another farmer or rent it out when they have finished their careers, a significant percentage might choose to let their land lie fallow even without the added incentive of CRP. Even some farmers that continue to practice with some of their fields enrolled might have simply been taking advantage of the program to receive payment for marginal fields they wished to retire from active production, a scenario made even more likely by the CRP policy of targeting highly erosive fields. In 2000 the USDA estimated that only about half of CRP land would go back into agricultural production if all standing contracts were immediately voided (Sullivan, Hellerstein, McGranahan, & Vogel, 2004). This would cut the estimate of indirect losses from pulling crops out of production from $1.8 billion to $900 million. Assumption 2: Full Crop Prices One of the initial reasons to create the Conservation Reserve Program was to prevent excess grain from flooding the market, driving down prices. In 1985 when the program was established this was a very real concern, as cheap corn was squeezing farmers out of the market (National Agricultural Statistics Service, 2007). Currently corn is buoyed by ethanol production, putting it several dollars per bushel above the price it commanded in 1985(ibid); since CRP began, corn prices have never been as low as they were then. It is very unlikely that every acre of current CRP land would be planted in the same crop if they were thrust back into production; a much more likely scenario is that most of the land would be divided between the three most common upland crops of corn, soybeans, and wheat, with some Nat Kale A Brief Survey of the USDA CRP Program 10

11 lesser amount of land producing hay and some given to pasture. Assuming half of current CRP land is converted to active crop use, approximately 17.3 million acres of land would resume production, an increase of approximately 5.7% in crop production from the current 305 million acres in use (Wiebe & Gollehon, 2006). Such a significant influx of grain would be likely to decrease crop prices. In 1994 the annual effect of returning 19.2 million acres (of a total of 36.4 million acres) to production from CRP was estimated at an approximately $3 billion decrease in crop income, offset by a $1 billion increase in livestock income (Taylor, Smith, Johnson, & Clark, 1994). While these numbers don t allow us to extrapolate anything concrete about precisely how much completely discontinuing CRP would cost in crop prices, it is important to note that crop price fluctuations are not gains or losses by the economy, but rather wealth redistribution. Discontinuing CRP would shift a significant amount of wealth from American farmers to crop (food) consumers in the form of lower commodity prices. At least one investigation suggests that the cost savings to CCC provided by CRP are very similar to the increase in food costs borne by consumers, with CRP creating slightly more costs for consumers than savings for CCC (Feather, Hellerstein, & Hansen, 1999). Assumption 3: No Price Supports An in depth discussion of US crop price supports is outside the scope of this paper, but it is an important final element in determining the cost of CRP to the economy of the United States. The scope of the impact of federal subsidies on crop prices is difficult to overstate. In 2005 the federal government spent $21.8 billion in direct price supports through the USDA CCC, and $8.4 billion in 2004 (some of the disparity is due to disaster relief spending) (USDA, 2006). In both of these years feedgrains (including corn), wheat, and soybeans received over half of the money spent. Assuming a 2007 outlay of approximately $16 billion, over half of which going to crops likely to be planted on CRP land ($11.5 billion) (USDA, 2007), then by pulling approximately 5.7% of US cropland out of production, CRP will Nat Kale A Brief Survey of the USDA CRP Program 11

12 save the federal government approximately $656 million in subsidies by the end of This further reduces the indirect costs of CRP from $900 million to $244 million. Analysis of Costs The sum of indirect costs ($244 million), transaction costs ($830 million), and direct costs ($1.8 billion) is $2.9 billion. The direct costs do not represent a net loss to the economy, since the $1.8 billion is realized as income by farmers enrolled in CRP, and represents a transfer of wealth from the US federal government (taxpayers as a whole) to rural landowners. The net loss to the US economy from CRP in 2007 was approximately $1,070 million. Nat Kale A Brief Survey of the USDA CRP Program 12

13 Benefits Ecological Benefits Wildlife Many studies have demonstrated the success of CRP at sustaining and improving populations of wildlife, especially ducks and other fowl. One study demonstrated that in the Midwest 12.4 million more ducks in 5 species entered the population between 1992 and 1997 due to CRP (Reynolds, 2001). Another found that there was a greater diversity of nesting species, higher nesting success rates, and greater abundance for bird populations in CRP land in Corn Belt states as opposed to traditional row crop fields (Best, 1997). Pollution Control Pulling land out of production reduces agricultural impact upon water bodies. CRP fields require no application of fertilizers or pesticides, virtually eliminating these lands as sources of runoff pollutants. Additionally the USDA policy of accepting acres that are among the most erodible or along riparian areas means that the benefit is greater than it would be if a random sampling of fields were removed from active cropping, because highly erosive land is protected, and buffer areas that filter out phosphorus, pesticides, and other chemicals are established. Dust (particulate matter) is also reduced by eliminating plowing in the spring and preventing any bare soil during the year. The economic impact of these environmental benefits is apparent in increased tourism and closely related activities, such as hunting, in rural areas. The USDA ERS approximated the net present value in 1999 (discount rate 4%, 10 year time frame) of these benefits at $9.2 billion (Feather, Hellerstein, & Hansen, 1999). Nat Kale A Brief Survey of the USDA CRP Program 13

14 Land Value Benefits CRP can be viewed as a modern implementation of a traditional system of field rotation. In medieval agriculture it was standard practice to allow a field to lie fallow after heavy crop production, allowing the soil to rejuvenate. Enrolling land in CRP mimics the benefits of this ancient practice, giving a mixture of plants (instead of a monoculture of wheat or corn) a chance to restore the natural chemistry and biology of the land. Idled land gains in productive ability over time, increasing the long term income potential of a farm. Certain CRP programs offer the farmer a chance to grow trees instead of grasses on fields that have been removed from production. Trees have significant economic value. Once enough time has passed and the land has been removed from the CRP contract, they may be harvested to the benefit of the farmer. The USDA ERS estimated the 1999 net present value of these benefits at $7 billion (discount rate 4%, 10 year timeframe). Productivity and Miscellaneous Benefits Perhaps the most obvious benefit to a farmer of idling land in CRP is a substantial boost to free time. After initial seeding land enrolled in CRP needs very little tending. A landowner who enrolls all of their land is free to pursue any number of activities, including a full time job. The statistics already cited indicate that most farmers do not choose that path; nonetheless, a significant minority of CRP participants is composed of non retired farmers with more free time on their hands. Even retired farmers may engage some form of economic activity part time. No studies appear to exist that place a dollar amount on this effect of CRP. Benefits not enumerated here may be associated with CRP, but their impact should be much less than those already listed. Many of these are difficult to quantify; for example, aesthetic improvements benefit residents of rural areas apart from the additional tourism they generate. CRP Nat Kale A Brief Survey of the USDA CRP Program 14

15 lands may be carbon sinks, proportionally keeping more carbon out of the atmosphere than croplands and thereby slowing global warming 5. These benefits are real and important, and so they should be included in any evaluation of CRP as a program. Without any dollar amount to associate with them, they must be left out of any attempt to establish a net present value of CRP as a whole. Net Benefit Calculations Net Present Value One way to attempt to evaluate CRP as a program is to apply a rough Net Present Value calculation, using the costs already calculated and the benefits as determined by the USDA ERS. The first step is to sum all of the benefits $9.2 billion for ecological benefits, plus $7 billion for land value benefits, yields $16.2 billion in net present benefits (1999). The costs are in two different forms: $1,074 million per year in 2007 dollars, plus $1.6 billion in net present costs (1999) for planting cover. An important caveat to the USDA ERS data is that it was conducted assuming 45 million acres enrolled in CRP, whereas the $924 million per year figure was calculated given 34.6 acres of enrolled farmland. To correct for this the net present values will be reduced to 76.9% of their original values: $12.5 billion in net present benefits (1999), and $1.2 billion in net present costs (1999). This transformation assumes a linear relationship between benefits/costs and acres enrolled in CRP, an assumption that may well not be true. The final calculation will be very rough, and only very generally informative. The next step is to convert the 1999 net present benefits and costs into 2007 benefits and costs. We will extend the assumption of a 4% discount rate. Starting with $12.5 billion in benefits, we ascertain the value in 2007 dollars by multiplying by ( ) 7, obtaining $16.5 billion. Similarly, $1.2 billion in costs becomes $1.6 billion. This step assumes that 4% accurately measures the average annual 5 Up to 50 million metric tons in 2006 (USDA Farm Service Agency, ) Nat Kale A Brief Survey of the USDA CRP Program 15

16 change in monetary value from 1996 to The Federal Reserve Bank of Minneapolis indicates that the Consumer Price Index did average almost exactly that level of inflation (Federal Reserve Bank of Minneapolis). Finally we need to calculate the net present cost of the $1,074 million in indirect and transaction costs we calculated earlier. Using a ten year time span and 4% discount rate, the net present cost comes to $6.5 billion. Thus the present value of all costs (indirect, transaction, cover crop planting) is $8.1 billion, and the present value of the benefits is $16.5 billion. The net present value of CRP, assuming the same number of acres remains enrolled and benefits and costs per acre remain approximately constant, is $8.4 billion. It is important to recall that several of the steps required to ascertain this number, as well as the benefits that could not be quantified for economic analysis, indicate a very large margin of error for this number. Nevertheless such a broad disparity between the costs and benefits indicates that CRP is justified on purely economic grounds. Willingness to Pay A different perspective might give a more accurate picture of the economic viability of CRP. We can take the estimated cost of CRP in 2007 of $1,074 million (setting aside the cost of sewing a cover crop on idle fields) and determine what taxpayers are receiving for their investment. In 2007 the US population is approximately 300 million people. Through the federal government we are paying approximately $3.50 per person per year to continue CRP. Are the benefits received from CRP enough to justify the continued existence of the program? Direct Analysis Nat Kale A Brief Survey of the USDA CRP Program 16

17 A final approach is to directly measure correlation between CRP and economic benefits. Two of the most often used statistics of economic well being are median income and unemployment. Using the county level CRP enrollment level released by the USDA NRCS and US Census 2000 data, we can look for correlation between these two variables and CRP enrollment, while controlling for other variables. Median Income Figure 3: Median Income versus Percent CRP actual fitted Median Income in Percent CRP in 1997 Creating a regression with median income as the dependent variable and percent of land in CRP as the only independent variable (apart from the constant) presents a dichotomous result. 67 While the R 2 value of the regression is only 0.012, indicating that the model has essentially no explanatory power, 6 Regressions and charts performed with gretl, the Gnu Regression, Econometrics and Time series Library. 7 While the two data sets were not collected at precisely the same time, a two year discrepancy should not cause significant issues. Median income values are unlikely to have changed dramatically since CRP data was collected. Nat Kale A Brief Survey of the USDA CRP Program 17

18 percent CRP has a T Statistic of < with a negative coefficient, a very strong indication that as the percent of any given county s land in CRP increases, the median income is likely to drop. Figure 3 explains this result the greater the percent of land in CRP, the less the range of median incomes, imparting a strong (almost horizontal) direction to the trend. All told, this result indicates that CRP coverage explains little or none of the fluctuation in county incomes. Despite the initial result, confounding variables could have obscured a relationship between CRP enrollment and median income; for example, a relationship Table 1: Regression of Median Income Against Percent CRP, Percent Rural, Total Population Variable Coefficient Sign T Statistic Constant Positive Percent CRP Negative Percent Rural Negative Total Population Positive 9.82 R-Squared: F-Statistic: 159 between the percent of the population that is rural and the median income in measured counties could cloud the correlation for which we are searching. Table 1 shows the results of a regression attempting to explain variation in county median incomes by percent of land in CRP, percent of the population that is rural, and the total population (with the assumption that less rural, larger counties will have higher median incomes). This table explains much more of the variation in median income (about 13%), and Table 2: Regression of Median Income Against Percent CRP, Percent Rural, Total Population Variable Coefficient Sign T Statistic Constant Positive Percent Rural Negative Total Population Positive R-Squared: F-Statistic: 234 the T Statistics show that every variable is meaningful. Again, we see the unexpected result that greater CRP coverage increases the likelihood of a lower median income. Table 2 shows very similar T Statistics and an R 2 that is almost identical to Table 1, but with no percent CRP variable and a much higher F Statistic. Nat Kale A Brief Survey of the USDA CRP Program 18

19 Taken together, the two tables and Figure 3 seem to indicate that including percent CRP in our model to predict median income of a county lowers the confidence we can take in the explanatory power of the model, without increasing the amount of variation explained. If percent CRP predicts any change in median income by county, Figure 3 and Table 1 show that the correlation is negative, not positive. Unemployment Figure 4: Percent Unemployed versus Percent CRP 0.35 actual fitted Percent Unemployment Percent CRP Figure 4 presents a familiar sight a slightly downward sloping fitted line, indicating a negative relationship between percent CRP coverage and percent unemployment in US counties. Also familiar are the statistics with an R 2 of just and a T Statistic of <0.0001, percent CRP has high correlation with percent unemployment but low explanatory value, just like median income. Nat Kale A Brief Survey of the USDA CRP Program 19

20 Table 3: Regression of Percent Unemployed Against Percent CRP, Percent Rural, Total Population Variable Coefficient Sign T Statistic Constant Positive Percent CRP Negative Percent Rural Negative Total Population Negative R-Squared: 0.05 F-Statistic: 57 Table 3 demonstrates that percent CRP coverage has essentially no explanatory value for percent unemployment by county. The R 2 statistic of 0.05 is simply too low to assume that the model shows any correlation between the dependant variable and the independent variables. Interpretation The results of the models above all point in a similar direction it is difficult to find any correlation between percent CRP coverage and economic indicators on a county level. The most obvious explanation for this is that there is no correlation more land being covered under CRP contract does nothing for the economy. Another explanation is that while CRP does aid economies, it is focused most heavily in the areas that need it most. The negative coefficient observed in every model for percent CRP coverage would fit nicely into this explanation. However for this hypothesis to explain the results, the positive economic effects of CRP would have to precisely counterbalance the economic decline in the regions it aids, making this scenario unlikely at best. The most likely explanation of the results is simply that the economic benefits of CRP do not accumulate at a county level. The economic benefits of CRP, such as increased tourism due to greater natural beauty and more abundant wildlife, may accrue at a more local scale, such as towns and villages, or a broader scale, such as the state and national level. Who Benefits? The major beneficiaries of CRP are rural communities and rural landowners in particular. The payments for enrolled land can be more than the farmer could have made by growing crops, Nat Kale A Brief Survey of the USDA CRP Program 20

21 representing a direct increase in income. This boost is supplemented by the additional free time afforded the participant, resulting in higher income potential (or simply more available free time) for those involved in the program. Most of the land benefits of CRP accrue to the landowner as well. Timber production and the increasing productivity of soil are economic benefits that a farmer man utilize once the CRP contract runs out, if they so choose. Finally crop prices are maintained by idling land, a universal benefit to all US farmers. Farmers who enroll see the majority of the short and long term benefits of the program. Rural communities receive a boost when their members gain economically. Richer farmers lead to richer townships and more robust economies. CRP lands increase rural tourism. Game birds, such as pheasant, flourish in the grasslands that CRP creates, bringing more people out of cities and into the countryside to hunt. Hunters are a valuable source of external spending in rural economies. Small towns are also direct economic beneficiaries of CRP, although not as directly or as much as the landowners themselves. Ecological benefits accrue to everyone within the region. Local watersheds have cleaner water, because USDA targets riparian corridors and highly erodible land for inclusion in CRP. Standing grass in idle fields protects soil from erosion directly, and filters sediment and pollutants as stormwater passes through it to waterways. The wildlife habitat provided by enrolled fields may help to establish or maintain populations of endangered animals over several states. Who Loses? US taxpayers who live in urban areas and do not visit rural land for recreation pay for CRP without receiving most, if any, of the benefits. Urban watersheds are much less affected by CRP than rural watersheds. The wildlife that utilizes the habitat enrolled fields provide is unlikely to spend much time within the confines of a city. Urban dwellers pay more than just the three dollars and fifty cents Nat Kale A Brief Survey of the USDA CRP Program 21

22 per year per citizen (likely more per taxpayer) pays. The price support for crops that CRP provides in turn boosts the price of food. Urbanites pay more for their bread because of field idling. Strengths, Weaknesses, Opportunities, Threats Strengths The Conservation Reserve Program, unlike many other conservation programs, provides a broad range of benefits to a wide community of people. It does not specifically target just wildlife habitat restoration, crop price supports, support for rural economies, or erosion control, and may therefore be less effective and efficient at any one of these areas than a more focused program would be. The best aspect of CRP is that it can integrate well with any of these focused programs, helping them to achieve more than they could by themselves. Any erosion control technique is helped when highly erosive fields are retired from production, and any rural community enhancement program is benefitted by retired farmers having more time and income to spend in their local towns. Weaknesses The high transaction cost of CRP is the most immediate and glaring flaw. 46% over the cost of rental payments is a high price to pay. Some of this expense could probably be mitigated by modern technology. Satellite photography and computerized Geographic Information Systems analysis can streamline compliance monitoring. Given the much higher transaction cost for signup years, offering longer term contracts on land could be a method of cost reduction. This cost reduction could be offset by hidden costs related to long term inflexibility of land use, making it a somewhat risky path. It may be that higher than average transaction costs are simply the price of implementing a land retirement mechanism. Nat Kale A Brief Survey of the USDA CRP Program 22

23 With the exception of benefits to rural land owners from higher crop prices, it may be argued that all of the benefits of CRP could be obtained to almost the same degree while continuing to use the land. Erosion control practices such as strip cropping on sloped fields and grassed waterways greatly reduce sediment runoff. Implementing a node and corridor land cover practice, where existing nodes of non cropped land (such as the woodlots that existed on many farms before CRP) are connected by thin corridors of wildlife friendly vegetation can encourage higher populations of certain species by improving habitat quality. Income in rural areas may be supported by the creation of economic development zones, loans for equipment to farmers to boost productivity, or retirement programs for older farmers. All of these practices would preserve many of the benefits of CRP, while retaining the boost to the economy provided by crop production. Opportunities CREP addresses many of the concerns discussed above. In the Continuous Enrollment and CREP programs farmers may enroll portions of fields as conservation practices, such as filter strips or buffer zones. This permits continued farming while encouraging habitat creation, erosion control, and boosting farm income. USDA should expand these programs to bring more farmers in, while working to lower the transaction costs of CRP as a whole. Threats The greatest current threat to continued CRP enrollment is the increase in grain prices, driven in part by increased demand for biofuels, especially ethanol. As the price that farmers can command for their crops increases, CRP rental payments must increase as well, or see enrollment sharply drop off. One perspective on this situation is that if the price of food and the grains from which they are derived has increased, then the better use for that land is in producing food, not conserving soil and habitat. This perspective ignores the subsidy driven nature of corn derived ethanol and other biofuels. While Nat Kale A Brief Survey of the USDA CRP Program 23

24 the demand for alternative fuels is real, it is artificially inflated by government incentives for production. There is a simple, albeit not an easy, solution to prevent federal programs from working at cross purposes to one another: the U.S. government must adopt a comprehensive plan that definitively states whether federal policy is to promote alternative fuels at the cost of retiring land from production, or vice versa. This paper establishes the benefits of the current CRP program, but cost/benefit analysis of grain based biofuels is outside the scope. This question is one of policy that must be made, and soon, by federal officials. Conclusion The estimated Net Present Value of CRP at $8.4 billion is a strong argument that the United States should continue or expand the Conservation Reserve Program. While increased crop value as a result of expanding demand for biofuels is likely to decrease the Net Present Value over coming years, expanding the more flexible aspects of the program, such as enrolling parts of fields to encourage soilretention practices on actively cropped land, can meet this challenge and provide a place for CRP in the future. Empirical analysis at a county level revealed no direct link between increased median income or employment and acreage enrolled in CRP. The land in a county enrolled in CRP in 1997 (as a percentage of the total land in the county) did not predict increased or decreased employment in 2000, nor did it predict increased or decreased median income. Assuming that the first portion of the analysis is correct in the conclusion that CRP brings significant benefits to the country, this indicates that these benefits likely accrue at a state or federal level, instead of locally. While enrollment in CRP seems to be a good boon to the federal economy, there is no evidence that boosting enrollment in a particular county will bring greater economic gain to the county itself. Nat Kale A Brief Survey of the USDA CRP Program 24

25 Works Cited Best, e. a. (1997, Winter). Bird Abundance and Nesting in CRP Fields and Cropland in the Midwest: A Regional Approach. Wildlife Society Bulletin, pp Easter, W. K., & McCann, L. (2000, December). Estimates of Public Sector Transaction Costs in NRCS Programs. Journal of Agricultural and Applied Economics, pp Feather, P., Hellerstein, D., & Hansen, L. (1999). Economic Valuation of Environmental Benefits and the Targeting of Conservation Programs: The Case of the CRP. USDA Economic Research Service. Federal Reserve Bank of Minneapolis. (n.d.). What is a Dollar Worth? Retrieved November 28, 2007, from Federal Reserve Bank of Minneapolis: National Agricultural Statistics Service. (2007, October 31). Agricultural Prices. Retrieved November 27, 2007, from USDA Economics, Statistics and Market Information System: Organization for Economic Co Operation and Development. (2007). The Implementation Costs of Agricultural Policies. OECD Online Bookshop. Reynolds, e. a. (2001, October). Impact of the Conservation Reserve Program on Duck Recruitment in the U.S. Prairie Pothole Region. The Journal of Wildlife Management, pp Sullivan, P., Hellerstein, D., McGranahan, D., & Vogel, S. (November, 2004). Farmland Retirement's Impact on Rural Growth. AmberWaves. Taylor, C., Smith, H., Johnson, J., & Clark, R. (1994, Vol. 49, no. 5). Aggregate economic effects of CRP land returning to production. Journal of Soil and Water Conservation, pp USDA. (2006). Budget Summary. USDA. USDA. (2007). Budget Summary. USDA. USDA Farm Service Agency. (2000). CRP Continuous Signup Factsheet. USDA Farm Service Agency. USDA Farm Service Agency. ( ). CRP Fiscal Year Summaries. USDA FSA. USDA. (2007). USDA NRCS. Retrieved November 15, 2007, from USDA NRCS: Wiebe, K., & Gollehon, N. (2006). Agricultural Resources and Environmental Indicators. USDA Economic Research Service. Nat Kale A Brief Survey of the USDA CRP Program 25