Future changes in the Conservation Reserve Program
At the end of this month, contracts covering 3.3 million acres currently enrolled in the Conservation Reserve Program expire and contracts covering nearly 1.7 million acres go into effect. This is a net reduction in the size of the program of 1.62 million acres. Stronger crop prices and high rents for crop land are reasons for the decline in the amount of land enrolled. This week we look at how the size of the CRP might change in the next couple of years if the ratios of land offered and accepted in future sign-ups are similar to what happened in 2013.
The future of the Conservation Reserve Program (CRP) can be impacted by changes in the law, budget pressures and the level of environmental benefits that can be achieved through the program. Since Congress has been unable to pass a new farm bill, the cap on the CRP remains at 32 million acres. However, the cap is expected to be lowered to 25 million when or if a new farm bill is signed into law. With the changes set to take effect at the end of the month, a total of 25.3 million acres will be enrolled in the program. One of the reasons Congress is lowering the cap on the CRP is to save money. With 32 million acres enrolled at the current average rental rate the program costs nearly $2 billion per year. The cost of a 25 million acre program is near $1.5 billion per year. USDA decides how much of the land offered for the program to accept based on an Environmental Benefits Index in an effort to get the most “bang for the buck.”
USDA held a general sign-up this spring and farmers offered a total of 1.9 million acres for enrollment in the program. This was about 58 percent compared to the land with expiring contracts. There are no data showing how much of the land offered was in fact the same land covered by expiring contracts, but it is probably a very high proportion. Land with a high environmental benefits index tends to be re-enrolled and many landowners that enrolled their land in the program years ago have retired from farming. A CRP contract takes all of the risk out of farming with a guaranteed payment every year. A lot of the land in the CRP is in the Plains states. Annual rainfall in this part of the country can be erratic leading to big swings in yield and cash flow, which make the CRP an attractive option.
Crop prices were high when USDA held their spring sign-up. Corn prices were near $7 per bushel, soybean prices topped $15 per bushel and the wheat price was $7.55 per bushel. The high prices probably tended to reduce the amount of land offered for the CRP. In the signup in the spring of 2012 the amount of land offered for the CRP was equal to 70 percent of the land with expiring contracts. If crop prices are lower in 2014 and 2015, the amount of land offered for the CRP would probably increase.
click image to zoom Recent weather has tightened the outlook for crops in the 2013/14 crop year, and price declines will probably be smaller than expected a few months ago. Contracts covering 2 million acres expire next September, with more than half of those acres in six states, Montana, Minnesota, Texas, North Dakota, Washington and Kansas. Farmers in Texas offered land equal to 92 percent of the land with contracts expiring in 2013. With the prolonged drought in Texas, the CRP is an attractive option for farmers trying to produce dryland crops. Even farmers with irrigation are facing significant challenges. Another year with a lot of land offered for the CRP seems likely for 2014. The ratio of land offered to land with contracts expiring was also relatively high in Kansas at 73 percent. In contrast the ratio for Minnesota and North Dakota were 25 percent and 28 percent respectively.
In the heart of the Corn Belt the ratio of land offered to land expiring was almost universally below 50 percent (Iowa 30%, Indiana 25%, Illinois 47%, Ohio 23%, and Missouri 45%). The amount of land offered in these states in 2014 will probably remain low with crop prices and land rents remaining high. The share of land offered in South Dakota was very near the bottom of the ranking at only 18 percent. In total there are nearly 1 million acres of land enrolled in the CRP in South Dakota.
So, what happens to the size of the CRP if the ratios recorded in the 2013 signup continue in 2014? Using the same ratios on a state-by-state basis, farmers would offer 1.15 million acres and 1.01 million would be accepted. This would result in a decline in the size of the CRP of a little less than 1 million acres, lowering the total to 24.3 million. If crop prices are significantly lower by the spring of 2014, the amount of land offered by farmers could be higher. If the drought persists that could also boost the amount of land offered. If these or other factor increase the amount of land offered by 20 percent, we would still see a decline in the size of the CRP by 770,000 acres.
click image to zoom By 2015, lower crop prices appear likely at this point, unless yields fall well short of trend levels again in 2014. Contracts covering 1.7 million acres expire in 2015, significantly less than in 2013 and 2014. The top six states account for 43 percent of the total land with contracts expiring in 2015 but Illinois and Iowa are both in that top six. Other states with a lot of land scheduled to come out of the CRP include Texas, Washington, Montana and Kansas. Again, assuming that farmers boost the share of land offered relative to the land with contracts expiring by 20 percent compared to the 2013 level, the amount offered is 1.15 million acres and 1.02 million acres accepted. The total size of the CRP declines by 650,000 acres to around 23.5 million.
The size of the CRP has been declining steadily in recent years. In 2006 enrollment totaled 36 million acres, more than 10 million acres higher than the level that will be in effect in fiscal 2014. Further declines are likely unless crop prices decline significantly. At least based on the assumptions in this analysis, the size of the CRP will decline to around 23.5 million acres in fiscal 2016. Crop prices, weather conditions, and changes in policy could all impact the size of the program over the next few years.