### COST

- BENEFIT ASSESSMENT

Transition Incentives Program Provisions of the Conservation Reserve Program

Date: February 2, 2010 Agency: USDA/Farm Service Agency

Contact: Alexander Barbarika Natural Resources Analysis Group Economic and Policy Analysis Staff Farm Service Agency U. S. Department of Agriculture Washington, DC 20250

202

- 720

- 7093 Alexander.barbarika@wdc.usda.gov

I. Title

The CRP Transition Incentives Program is authorize d by Section 2111 of the Food, Conservation, and Energy Act of 2008 (Pub. L. 110

- 246, the 2008 Farm Bill).

II. Summary

Section 2111 of the 2008 Farm Bill authorizes $25 million for incentive payments to retired or retiring owners and operators with expi ring Conservation Reserve Program (CRP) contracts who sell or long

- term lease their expiring CRP land to beginning or socially disadvantaged farmers or ranchers that are not family members. The retired or retiring owner or operator will receive CRP

rental payments for 2 additional years beyond contract expiration to encourage participation. To be eligible for this program, farmers or ranchers who purchase or lease the former CRP land are required to obtain a conservation plan and follow sustainable livest ock and crop production practices.

Beginning or socially disadvantaged farmers or ranchers who participate in this program are allowed to begin to make conservation and land improvements in the final CRP contract year. They also will be eligible for enro llment in three USDA conservation programs and may begin the organic certification process during the CRP contract’s final year. Members of the retired or retiring owner or operator’s family who are beginning or socially disadvantaged farmers or

ranchers may participate in the program in order to obtain eligibility for enrollment in certain conservation programs, but the 2 additional years of rental payments would not be paid to the retired or retiring owner.

If fully subscribed, an estimated 400 to 1,800 beginning or socially disadvantaged farmers and ranchers would benefit. With an average CRP rental payment of $39/acre to $49/acre for two years, obligations are estimated at between $5.1 million and $17.1 million. These cost estimates

1reflect the total obligation for fiscal years 2010

- 20 12; payments would be made over a number of years, depending on when CRP contracts expire. Due to the limited amount of eligible farmable quality CRP acreage likely to be offered for sale or lease, and the location of be ginning and socially disadvantaged farmers relative to the location of eligible CRP lands, participation and costs are expected to be closer to the lower end of this range than the higher end.

III. Need for Action

The cost of acquiring land is a major b arrier faced by beginning and socially disadvantaged farmers and ranchers who desire to start new operations or expand existing ones. The Transition Incentives Program lowers this barrier because the two extra years of annual CRP rental payments will enco urage retiring or retired farmers with expiring CRP contracts to accept a slightly lower price for their land if selling or leasing to members of the targeted population. The $25 million provided in the 2008 Farm Bill for these payments will reduce the lan d acquisition costs of beginning and socially disadvantaged farmers and ranchers, while ensuring that land being removed from CRP through this program is farmed or ranched using sustainable production practices.

IV. Alternatives Considered

We considered three alternatives implementing this program, which are analyzed in this CBA.

Alternative A is the one selected.

Alternative A.

— Implement the program using the maximum flexibility provided by the 2008

farm bill : The 2008 Farm Bill requires expenditures “to the maximum extent practicable” of $25 million, and allows for up to 2 years of additional rental payments as an incentive. This option

w ill provide the full 2 years of rental payments, plus also defines a retired or retiring owner or

operator as any one with an expiring CRP contract who had retired from farming or will do so within 5 years. In addition, this option defines expiring CRP lands to include land that was under CRP contracts that expired on September 30, 2009. This alternative provides th e maximum possible benefits within the requirements specified in the 2008 Farm Bill.

Alternative B.

— Do not include a retroactive definition of expiring CRP lands : Land under CRP contracts that expired on September 30, 2009 would not be eligible under thi s alternative. Only land under CRP contracts that expired on or after the effective date of this rule would be eligible. This alternative would not provide benefits for CRP land transitions that took place between September 30, 2009 and the effective dat e of this rule. This alternative would reduce the number of eligible expiring acres by about 16 percent relative to the selected alternative (Alternative A).

Alternative C.

— One Year of annual rental payments: The 2008 Farm bill specifies that this

prog ram can make annual payments to retiring CRP owners or operators for not more tha n an additional two years. Under this option, only 1 year’s rental payments would be provided. Although more land could in theory be transferred within the $25 million fundi ng limit, participation would likely be reduced due to the lower incentive structure.

2V. Background

— Eligible CRP Farms and CRP Lands

CRP land characteristics reflect the primary purposes of the program, which are to reduce erosion, improve water quality , and restore wildlife habitat on land. As a result, much CRP land is highly erodible, not suitable for annual cultivation, or at best, has severe limitations when utilized for producing crops. This situation is best described using USDA’s Natural Resour ces Conservation Service (NRCS) land classification designation (Table 1). Only 23 percent of CRP acreage is designated as land capability class (LCC) 1 or 2, and most suitable for cultivation. A large proportion of CRP land (41%) is in LCC

- 3, which has severe limitations for cropping. The remaining land is LLC

- 4 or higher, which is not suitable for use as cropland. Some land in the higher

- numbered classes could be used for livestock production or forage.

Table 1. Land Capability Class of CRP and A ll Cropland.

LCC CRP All Cropland

Suitability for Cultivation Acres % Acres %

1 229,000 1 26,567,000 7 Few limitations

2 7,274,000 22 174,950,000 46 Moderate limitations

3 13,485,000 41 114,963,000 30 Severe limitations reduce choice of crops or require special conservation practices, or both

4 7,719,00 24 40,577,000 11 Very severe limitations restrict choice of plants or require very careful management, or both

5 178,000 1 2,932,000 1 Mainly limited to pasture, forestry

6 3,216,000 10 12,923,0 00 3 Suitable for pasture, forestry, not cultivation

7,8 596,000 2 4,085,000 1 Unsuitable for cultivation

Total 32,696,000 100 376,998,000 100
Source: 1997 National Resources Inventory. LCC descriptions can be found at http://www.nrcs.usda.gov/technical/NRI/maps/meta/m6175.html

These LCC estimates of CRP lands are based on the 1997 National Resources Inventory and, as such, represent CRP in 1997. More recent estimates are no t available, but there is little reason to expect that the distribution among LCCs has changed to a significant extent since that inventory

was taken.

Another measure of CRP land’s ability to be cropped sustainably is the land’s erodibility index (EI). T his is a measure of the land’s inherent erosion potential relative to its soil loss tolerance

3value. Soil loss tolerances are the amount of soil that can be lost through erosion per year without significantly reducing the long

- term productivity of the lan d. Land with an EI of 8 or greater is eligible for CRP enrollment, and the higher the EI, the greater the probability of

enrollment. For current whole

- field CRP enrollment devoted to grass plantings, the distribution among EI levels is shown in Table 2.

Table 2. Erodibility Index Levels of Eligible CRP Land.*

Erodibility Index All Contracts

Less than 8 3,240,000 (20%)

8 to 14.9 8,058,000 (50%)

15 or Greater 4,723,000 (30%)

Total 16,021,000 (100%)

Source: Farm Service Agency CRP contract data files.

*Whole

- field CRP grass plantings expired or expiring 2009

- 2012.

This table shows that 80 percent of CRP land is in the highly erodible category (EI > 8). Thirty percent has very high EI levels (EI > 15) and will be difficult, if not impossible, to crop whil e maintaining erosion below soil loss tolerance levels. In summary, much of expiring CRP land is not suitable for sustainable grazing or crop production, based on the Land Capability Class or Erodibility Index.

Table 3 provides information about curren t CRP participants and their farms. Sixteen million CRP acres of grass plantings which are in contracts that expired, or are expiring, during 2009

- 20 12 are eligible for the T ransition I ncentive s P rogram (representing contracts on 128,000 farms). 1 This an alysis excludes CRP tree plantings because interest from members of the targeted groups in buying or leasing these lands for sustainable crop or livestock production would likely be very low. Also not included are farms with only small parcels enrolled,

i ncluding land enrolled under CRP’s continuous signup provisions, because the smaller parcels would typically not represent an economically viable farming or ranching opportunity.

1 This estimate includes land that was under CRP contracts that expired in 2009 (also see Alternative B, which addresses ineligibility of 2009 contracts for program participation).
4Table 3. Characteristics of CRP Farms and Land.

Characteristic Quantity

Num ber of farms 1 128,000

Average farm size (cropland only) 1 487 ac.

CRP acres 1 16.0 mil. ac.

CRP acres per farm 1 125 ac.

Average rental payment 1 $39/ac.

Average age of owner/operator 2 58 years

Percent full

- time farming 2 35%

Percent retired 2 25%

1 Farm Service Agency CRP contract data files, based on contracts expiring 2009

- 2012.

2 Lambert, D. et al (2009), based on 2001 survey.

*Whole

- field CRP grass plantings expired or expiring 2009

- 2012.

Also affecting potential participation is the spa tial correlation between the location of beginning and socially disadvantaged farms and that of eligible CRP lands. As the maps on pages 13 and 14 illustrate, the spatial correlation is fairly low and will tend to keep participation relatively low.

In o ther words, much of the expiring CRP land is located in areas that have relatively few socially disadvantaged or beginning farmers.

VI. Costs and Benefits of This Rule

Alternative A. Implement the Program as Specified in the Rule, Using Maximum

Flexibi lity Provided in the 2008 Farm Bill

Retired or retiring CRP farmers . An owner or operator selling or long

- term leasing CRP

land to a non

- family member would receive an additional 2 years of CRP rental payments. As specified in the 2008 Farm Bill, total payments can not exceed $25 million through FY 2012. Because of the added CRP payments, and depending on the competitiveness of land markets, an owner or operator may be willing to accept a lower rental rate or sales price from a member of the eligible po pulation groups than they would from another potential buyer. The recipient of the land could thus benefit from the lower land acquisition costs. Participating owners and operators are required to permit the buyer access to the expiring CRP land before t he sale of the land has occurred, which could serve to discourage retired or retiring farmer participation.

Beginning and socially disadvantaged farmers and ranchers . Members of these targeted groups would have enhanced opportunities to begin or expand o perations. Acquisition costs and lease agreement rental amounts would average lower for participants, although

5it is not possible to estimate how much lower. The amount of discount that any beginning or socially disadvantaged farmer would receive will de pend on the degree of competition for land in the given geographic area, which can vary widely. Where competition for land is strong, little (or no) discounting would likely occur, and benefits would accrue primarily to the CRP contract holder. In contra st, if competition is weak (it’s a buyers’ market), more benefits would accrue to the purchaser (the beginning or socially disadvantaged producer). It is not known to what extent discounting would occur, so no estimates of the potential benefits to the ta rgeted groups can be made, although it can be assumed to be somewhat less than $25 million (see later discussion).

In addition to possibly receiving a discount on the purchase price or lease rates, the beginning or socially disadvantaged participant becom es eligible for enrollment in USDA’s Environmental Quality Incentive s Program (EQIP), the Conservation Stewardship Program (CSP), and for re

- enrollment of expiring continuous signup CRP practices. The current 12

- month waiting period for new owners before CRP enrollment is allowed is waived for participants in this program.

The following simplified examples illustrate two extremes of the possible distribution of benefits between a seller and buyer. This analysis does not consider a leasing situation.

Exa mple assumptions:

• All parties know that the fair market value of the land is $2,000 per acre. 2

• Two years of CRP rental payments amount to $100 per acre ($50 per year per acre).

• The CRP plot is 120 acres.

• The tax implications and tran saction costs are identical for all parties.

• All non

- eligible entities (buyers who are not beginning or socially disadvantaged farmers or ranchers) offer fair market value ($2000 per acre) for the CRP plot.

• Net returns to production on the former CRP land are the same for all parties.

Example 1: An eligible entity competes against any number of non

- eligible entities. Using only economics as the basis for decision making, the eligible entity’s offer need only exceed the highest non

- eligible entity’s offer by $0.01 to be selected by the seller. In this case, the eligible entity pays a discounted purchase price ($1,900.01 per acre) and the retired or retiring seller receives $0.01 per acre more ($1900.01 from the buyer plus $100 from USDA = $2000.01) than th ey would have if they had sold to the non

- eligible entity. Almost all the benefits ($99.99 per acre) accrue to the eligible buyer.

$/Acre Eligible entity pays: $1,900.01 USDA pays: $100.00

2 According to NASS, the avera ge value of U.S. cropland in 2009 was $2,650 per acre.

6CRP contract holder receives: $2,000.0 1

Non

- eligible entity offers: $2,000.00 Benefit to eligible entity: $99.99

Example 2: As in the prior example, multiple eligible entities compete against any

number of non

- eligible entities. In this example, however, strong competition for

la nd increases bids that must to be offered by eligible entities. The successful purchase price would be $2,000.00 per acre (the fair market value), and no added benefit would accrue to the eligible entity. The seller would receive $2

, 100 per acre ($2

, 000 from the buyer and $100 from USDA)

. All benefits ($100 per acre in CRP payments) would accrue to the seller.

$/Acre Eligible entity pays: $2,000.00 USDA pays: $100.00

CRP contract holder receives: $2,100.00

Non

- eligible enti ty offers: $2,000.00 Benefit to eligible entity: $0.00

Thus, in these simple examples, the benefit to the eligible entity purchasing the land would range from $0 to $11,998.80 ($99.99 per acre times 120 acres). The benefit to the seller range s from $1.20 to $12,000. In both cases, the seller would receive the $6,000 in annual CRP rental payments for each of 2 years (calculated as 120 acres times $50 annually, or $12,000 for 2 years), but in the first case the seller would discount the per

acr e price below market value by nearly the entire CRP rental payment amount.

In general, the spatial correlation between the geographic location of expiring CRP lands and of targeted farmers and ranchers appears relatively weak (see attached maps on pages

1 3 and 14). As a result, competition among eligible targeted group members would likely be on the lower end of the scale, and targeted group members could be expected to receive some discounting of purchase or lease prices. In other words, the beginning and socially disadvantaged farmers and ranchers who do participate are expected to be able to put in competitive bids for expiring CRP land against primarily non

- eligible buyers (the Example 1 scenario), and thus capture at least some of the financial bene fits of this

program.

Eligibility and Participation

It is difficult to estimate how many eligible CRP farm owners or operators will be interested in selling or leasing their expiring CRP lands through the T ransition I ncentives

P rogram, or how many of tho se in the targeted groups will be interested in participating. Beginning farmers and ranchers are defined as owners or operators who have been farming or ranching for 10 or fewer years, which would include anyone who is not currently farming or ranching a s well as those with limited experience in farming. Due to

7lack of available data, an estimation of how many persons who are not currently farmers or ranchers would start farming as a result of this program was not considered in this analysis. Data on cu rrent beginning and socially disadvantaged farmers was used.

Recent data on CRP participants’ intentions upon expiration of their contracts does not appear to exist. A nationwide survey of CRP participants reported that 3 percent of CRP

acres in 1992 wou ld be sold after contracts expired. Many factors are relevant to the percent of eligible CRP acres likely to be sold or leased under this program. Incentives provided by this program could cause an increase in the percentage that was reported in

the 1992 survey. In addition, any long

- term leasing that would occur would also increase the percentage. In contrast, some of the expiring CRP land could be sold for non

agricultural uses, meaning a lower percentage would apply for sales to farmers or

ranchers. On balance, these reasons suggest a slightly higher percentage rate of expiring CRP land sold, which in this analysis is assumed at 4 percent.

Assuming beginning and socially disadvantaged farmers purchase farms in proportion to their population relative to all currently operating farms (34%

-- see Table 4), and that on average 4 percent of expiring CRP is sold or leased, then in the absence of the incentives provided by this program, about 1.4 percent of expiring or expired CRP land would be bought by a be ginning or socially disadvantaged farmer annually.

Table 4. All Farms and Farms that are Owned or Operated by Beginning or Socially Disadvantaged Farmers or Ranchers. Quantity

Data from Census of Agriculture

All farms 2,205,000 Beginning f arms (less than 10 years) 653,000 Socially disadvantaged farms 142,000 Percent of all farms that are beginning farms 30% Estimates Based on Census of Agriculture Data Percent of socially disadvantaged farms that are also beginning far ms 43,000

Beginning or socially disadvantaged farms 752,000 Percent of farms that are beginning or socially disadvantaged 34%

Source: USDA, National Agricultural Statistics Service website.

As noted earlier, much of the expiring CRP land i s not suitable for cultivation, and would be difficult to crop sustainably. Some land could be used for livestock production, but generally that activity requires large tracts of land. Only 11 percent of expiring CRP tracts (about 46% of CRP acres) are 2 00 or more acres in size (FSA Contract Data).

Table 5 illustrates participation rates using different assumptions about which Land Capability Class CRP expiring acres are sold or leased by participants in this program.

8Using a 1.4 percent participation r ate results in a range of 53,000 acres (see scenario 3 in Table 5 below) and 220,000 acres (scenario 1) in the T ransition I ncentives P rogram, depending on which LCCs are assumed to be sold or leased. Scenario 1 assumes that

CRP lands in LCCs 1

- 6 participa te equally. Scenario 3 assumes that members of the targeted groups only buy or lease lands in LCCs 1 or 2.

Based on the average CRP acres per eligible farm of 125 acres, between 413 beginning and socially disadvantaged farmers and ranchers (Scenario 3) and 1,758 farmers and ranchers (Scenario 1) would benefit.

Table 5. Participation Estimates Under Different Scenarios. Land Capability Class

1

- 6 (Scenario 1) 1

- 3 (Scenario 2) 1

- 2 (Scenario 3) Eligible *

CRP land 16.0 mil. ac. 10.2 mil. ac. 3.7 mi l. ac.

CRP farms 128,000 82,000 29,000 Participation Estimates

Land sold or leased 220,000 ac. 144,000 ac. 53,000 ac.

Farms 1,758 1,148 413 * See earlier designation of eligible lands.

Due to lack of available data on the retirement plan s of CRP owner s or operators with expiring contracts, and those who are planning to retire within 5 years, this analysis assumes all otherwise eligible CRP participants would be eligible for the T ransition

I ncentives P rogram. This is a reasonable assumpti on, given that the average age of CRP participants with expiring contracts is 58 (see Table 3).

Cost Estimates

Total cost estimates for the program depend in part on the CRP rental payments associated with estimated participation rates. The average rent al payment for all eligible CRP acres is $39 per acre. If only the more productive CRP acreage is transferred, however, the average payment rate would be higher, because the rental payments on more productive land are typically higher. (The LCC and EI pr ovide indicators of productivity levels, but there are exceptions. Lands in higher LCCs and with higher EI levels can be more productive than lands in lower LCCs or with lower EI levels. The LCC only determines limitations for cropping, and the EI only de termines the degree of conservation needed to maintain productivity if cropped.) It is likely that the land transferred under this incentive program will be the land more suitable for cropping, with slightly higher average rental rates than the average fo r all CRP land.

9<$25 $25-$34 $35-$49 $50-$74 $75-$106

$/Acre 0 1 2 3 4 5 6 7 8MillionsAcres Per-Acre Rental Payments for Eligible CRP

The bar chart above shows the distribution of per

- acre rental payments for eligible CRP acres and Table 6 shows the regional distribution of acres and the associated average rental payments. Rental payments in the most pro ductive regions, such as the Corn Belt, average $72/acre, with 135,000 eligible acres. In the Plains and Mountain regions, where most of the eligible CRP acreage is located, payments average between $32/acre and $36/acre. To provide cost estimates, three rental payment averages are used: $39/acre ($78 over 2 years), $44/acre ($88 over 2 years) and $49/acre ($98 over 2 years). These estimates reflect the expectation that the more productive lands are more likely to be

transferred.

Table 6. Whole

- Field C RP Grass Plantings*

Region Eligible CRP (Acres) Average Rent ($/A)

Northeast 36,000 49 Appalachian 224,000 60

Southeast 101,000 39

Delta States 98,000 41

Corn Belt 135,000 72

Lake States 613,000 52

Northern Plains 4,462,000 36

Southern Plains 3,4 19,000 34

Mountain 4,811,000 32

Pacific 908,000 44

U.S. 16,021,000 39 Source: Farm Service Agency CRP contract data files.

*Whole

- field grass plantings expired or expiring 2009

- 2012.

Combining the participation estimates derived above (CRP sold or l eased acres) with alternative average rental payment rates yield obligation estimates between $5.1 million

10(scenario 3, $49/acre CRP rental payment) and $17.1 million (scenario 1, $39/acre CRP rental payment) (see Table 7). This results in an average prog ram cost per farm owned or operated by a beginning or socially disadvantaged farmer or rancher between $9,750 and $12,250.

Table 7. Potential Participation and Obligation Estimates for FY 2010

- 20 12*. Land Capability Class

1

- 6 (Scenario 1) 1

- 3 (Scenari o 2) 1

- 2 (Scenario 3) Participation Estimates

Land sold or leased 220,000 ac. 144,000 ac. 53,000 ac.

Farms 1,758 1,148 413

Costs Average rent per acre @$39/acre @$44/acre @49/acre .Total obligations $17.1 mil. $12.6 mil. $5.1 mil. Cost per Farm $9,750 $11,000 $12,250 * The obligation estimates reflect the three

- year total from FY 2010

- 12. Note that outlays would be made over a number of years, depending on when contracts expire.

Environmental and other potential impacts . Fa rmers and ranchers participating in this program will be required to obtain and follow a conservation plan, which would minimize many of the potential adverse environmental impacts of agricultural production on former CRP land. Therefore, this program may have qualitative environmental benefits. In addition, participants are eligible for two USDA programs, the Environmental Quality Incentives Program (EQIP) and the Conservation Stewardship Program (CSP). The current 12

- month waiting requirement for CRP e ligibility that applies to new owners and operators is waived for participants in this program, allowing for immediate enrollment in continuous CRP practices. Some beginning and socially disadvantaged producers may choose to apply for organic certificatio n, which would have additional environmental benefits. However, if this program causes land that would have remained in CRP or a conserving use, or in grass for forage production, to be returned to annual cropping, environmental benefits could be reduced in those instances.

Costs could be incurred by NRCS in providing technical assistance for conservation plan development to participants. In addition, the National Organic Certification Cost

- Share Program could have increased demand for its resources, as could the Loan Program for Beginning Farmers and Ranchers. However, since it is likely that some of the land transferred under this program would need conservation plans, undergo organic certification, or participate in the loan program without this prog ram, it is not appropriate to attribute these cost impacts solely to this program

.

11Costs, Benefits, and Other Impacts of Alternative B

- Definition of Expiring CRP

Lands is Not Retroactive.

Under Alternative B, only CRP participants with contracts expir ing in 2010 and later would be eligible for the 2 additional CRP rental payments. Under Alternative A, the selected alternative, CRP participants with CRP contracts that expired in 2009 would be eligible for the 2 additional years of CRP rental payments. Making CRP participants with land under contracts that expired in 2009 (after 2008 Farm Bill passage) ineligible would decrease eligible land by 2.5 million acres relative to Alternative A, and would reduce the number of eligible farms by 20,200 (Table 8) . Assuming the owners of these acres participate in the T ransition I ncentives P rogram at the same 1.4

- percent rate as the owners of other expiring CRP lands, estimated obligations would decline by 16 percent and the estimated number of targeted farmers an d ranchers who benefit would decline by 16 percent.

Table 8. CRP Acres Eligible for Transition Incentives by CRP Contract Expiration Year.

FY 2009

- 2012 FY 2010

- 2012 FY 2009

Number of Contracts 127,964 107,746

- 20,200

Acres 16,021,000 13,525,000

- 2,4 96,000

Percent of Total Acres 100% 84%

- 16%

Costs, Benefits, and Other Impacts of Alternative C

- One Year of Annual Rental Payments

Section 2111 of the 2008 Farm Bill provides authority to make no more than 2 years of additional CRP rental payments t o qualifying CRP contract holders. The rule specifies that participants receive the full 2 years of payments. One year’s worth of payments, rather than two years’ worth, would both reduce the incentive for CRP participants to accept lower prices for thei r land and decrease the benefit to targeted populations. Although in theory more land could be transferred under the $25 million dollar funding limit, participation would likely be reduced due to the lower incentive structure. Because this program is not expected to use all the available funding with the offer of 2 years of CRP payments, it follows that reducing the incentive to participate would reduce participating acres relative to Alternative A. The reduced participation, combined with a

50

- percent r eduction in the payment rate, would cause obligations (and outlays) to decline by more than 50 percent.

References

Lambert, D., P. Sullivan, R. Claassen, and L. Foreman. 2009. Conservation

- Compatible Practices and Programs. Who Participates? Economic Research Report Number 14. U.S. Department of Agriculture, Economic Research Service.

12Osborn, C.T., M. Schnepf, and R. Keim. 1993. The Future Use of Conservation Reserve Program Acres: A National Survey of Farm Owners and Operators. Soil and Water Conserv ation Society.

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