October 20, 1997 Issue 15
CRP - A Few Observations
The 16th sign up for CRP started October 14. I've been on the road circuit making presentations at CRP information meetings. I've formed some observations (opinions) which I don't ask you to take at face value, but I think they are important to consider if you are planning on bidding in Signup 16. First consider that CRP is not the same program today as it was in 1986. The economics and the politics of CRP have changed dramatically.
The Politics: The initial draft of the 95 Farm Bill contained only the Freedom to Farm - production flexibility - market orientation - provisions. It was about 150 pages long. The Bill grew to 600 pages in order to get Freedom to Farm past the Senate and the Administration. CRP was one of those additions. Wildlife and environmental groups were strong supporters of CRP. The locus of power around CRP came from the Senate Ag Committee where the influence of the Midwest and east predominate!
The Economics: Early CRP rental payments and criteria were probably set at levels to create incentives to retire highly erodible lands as well as machinery and people from farming. The year 1986 saw record low prices and high surplus levels. That set of conditions does not exist today. Preservation of family farms and farmer incomes are not targeted in the 96 Farm Bill as they have been in former farm bills - international competitiveness, protecting sensitive environmental areas, and "cost effectiveness" are.
The incentives in 1986 were aimed at growers and grower incomes, the incentives in 1997 are aimed at the environment - to get maximum environmental benefit from each CRP dollar spent, and to reduce federal expenditures on a popular program. Spoken in market jargon, the priority in 1986 was to create a supply of land for the CRP program, therefore higher rental rates and lower criteria thresholds. The priority in 1997 is to maximize environmental benefit and "cost effectiveness" therefore rental rates are being bid down and criteria thresholds are being raised.
CRP Signup 16 is still a national competition. Getting into CRP will likely depend more on what a producer is willing to do by selecting land most suited for the program and with enhancing cover than any change in the program from Signup 15. Producers in other states who didn't get in last time or who chose not to bid when prices were $1 a bushel higher than they are now, will also be sharpening their pencils and working to maximize their CRP offer. In Signup 15, North Dakota had 2,006,527 acres accepted with an average EBI with cost of 357, an average Erodibility Index of their soils of 8, and an average accepted rental payment of $32/acre!
So where is the answer? I see only one answer if you want in the program. Do what one needs to do to maximize the EBI score in factors N1 through N6. It doesn't matter whether we think the EBI may measure the wrong things or work to benefit other areas of the country. The national program leaders have set the criteria with either the concurrence or as a result of the strong pressure from the "Farm Bill managers" in Congress. Unfortunately, members of the Washington delegation represent a minority viewpoint on CRP, and while they have made their position known clearly to the Secretary, Midwestern influences still seem to reign.
BUT I don't think it is hopeless. We can get land into CRP. The changes in criteria for Signup 16 such as air quality factors help but do not provide a "fix" for Washington bidders. CRP factors are still weighted towards water quality issues and the erodibility index of soils and much of our Washington CRP ground doesn't fare well on either score. So if we want to successfully bid into this program, we need to maximize in areas where we can - mostly but not exclusively, an increase in the wild life cover score. I understand that ripping out perfectly good cover to try and establish cover in our dry areas that may not do as well doesn't make much sense. However, the one-size-fits-all criteria for CRP which is driven by the desire to have consistency across the country, means that is our reality.
Once one has done what can be done to maximize the N1 through N6 CRP factors, what should your rental rate bid be? There is no one answer! We do not know how the cost factor will be scored in Signup 16 and will not know until after the sign up is finished. We know that the "cost incentives" built into the program mean the lower your bid the higher your overall cost adjusted EBI score will be.
So given the uncertainties in the cost area, I suggest you FIRST calculate a "break-even" bid. A break-even bid is the rental rate level at which you would be indifferent financially whether the land were in CRP or you cropped it. You find the break-even bid by estimating your returns over variable costs as if the land were cropped and then either adding or subtracting CRP rehabilitation and maintenance costs as well as lost flexibility contract payments. Once you know this value, you at least know how your bid relates to your alternatives. I don't say this should be your bid, it just gives you a place to start from. It is actually easier to calculate than it seems here.
WSU has developed a little worksheet to help figure out the break-even bid. Using the worksheet will also allow you to amortize rehabilitation and establishment costs over the ten years of the CRP contract so that you can see how those costs relate to your CRP bid level (This will be important with seed mix costs etc.). You can call my office and I will send you a copy of the worksheet or drop by and pick one up. There is also a computer program that will do the same thing, which is available for $25, and I have the worksheet computerized in my office. I also have the EBI scores of accepted bids from several other states for Signup 15 if you'd like those as well.
I strongly recommend you use a bid level that equates to a reasonable and relatively risk free return over the next ten years for the lease of your land for environmental and conservation uses. Conceptualize this as a lessor/lessee arrangement. You will notice that I have said nothing about USDA set maximum bid levels!! I personally think that trying to guess the highest CRP bid that might get you in is a lot like trying to out guess the wheat market which was $4.75/bu. and you held for $5.25 but instead the market went to $3.75 and your full cost of production was $3.50. As an economist, I'd say if you sold at any of the levels above your full cost of production, you made a wise economic decision. The same holds true for your CRP bid.
Good Luck and don't hesitate to call if I can be of assistance!
Desktop publishing and distribution by marge Schoessler,
§ Ph: 509 659-3211 § Fax: 509 659-3206 § e-mail: email@example.com
Member, WSU Cooperative Extension Ag Horizons Team
Styer - CRU