Linkage between Federal Crop Insurance Program and the Conservation Reserve Program: Implications for Budgetary Outlays and Environmental Efficiency

We recently published a study in Land Economics that reveals a potentially significant overlooked budgetary cost savings by linking the Conservation Reserve Program (CRP) with the Federal Crop Insurance Program (FCIP). To explain, we will first briefly describe the two programs. Established in 1985, the Conservation Reserve Program (CRP) involves federal government contracts with farmers to set aside environmentally sensitive cropland for 10-15 years. As compensation for forgone cropping returns, farmers who place land in CRP contracts are paid a fixed annual rent over the contract period. CRP is the largest voluntary land conservation program in the United States. Cropland acreage under the program peaked at about 37 million acres in 2007 and then gradually decreased to about 24 million acres at the end of September 2016.[1] FCIP is now considered the pillar of Federal farm support policy. Costing the government about $7 billion per year over 2011-2014, the premium subsidies that FCIP provides reduce farmers’ cost of entering contracts that insure against adverse price and yield events. On average, for every dollar of premium, the government pays 62 cents and the farmer pays 38 cents.[2]

The study points out that in addition to the environmental benefits, CRP also has an overlooked budgetary savings for the federal government: saving tax dollars spent on crop insurance subsidies. This is because once cropland is enrolled in CRP then it is not cropped and so does not receive crop insurance subsidies from the federal government. The saving is not trivial because, as the study shows, in some areas crop insurance subsidies are comparable in size to CRP rental rates. For instance, over 2011-2015, the annual average CRP payment in North Dakota was about $37-47/acre whereas the premium subsidy was about $25-30/acre, implying a range of 54-80% of the CRP rental payment (Table 1). Even in Iowa, where soils are fertile and hence CRP rents are high but premium subsidies are low, the premium subsidies accounted for about 11-21% of CRP rents over 2011-2015.

The study estimates the budgetary savings by using Signup 41 as an example. Conducted in 2011, Signup 41 received 38,677 offers (3.8 million acres), of which 29,861 (2.8 million acres) were accepted. The study estimates that saved crop insurance subsidies in 2011 due to this signup amounted to about $84 million, accounting for about 63% of the nominal annual CRP payments under Signup 41. If this estimate holds proportionally for all CRP acreage in 2011 (i.e., 31.1 million acres), then the total crop insurance premium subsidy saving was $933 million in 2011, which accounted for about 55% of total CRP payment and 13% of total premium subsidies ($7.46 billion) occurred in that year.

However, the current CRP land enrollment mechanism does not account for saved crop insurance subsidies when enrolling land into CRP. To enroll land a farmer first submits an offer to a local Farm Service Agency (FSA) office where the offer includes information regarding the land and the amount of annual rent the farmer requests. Then the local FSA office evaluates the offer and assigns an Environmental Benefits Index (EBI) to it. Offers with an EBI no lower than a national cut-off EBI point are accepted into the CRP program. In the current design, CRP rental payments requested by farmers undergo a simple transformation and are then subtracted from CRP offers’ environmental scores so that, everything else being equal, an offer requesting larger payments will be ascribed a lower priority for enrollment.

The study further calculates that if the saved premium subsidies were to be counted for as a cost reduction in the current CRP enrollment design by subtracting saved premium subsidies from the CRP land rent requested by the farmer, then the crop insurance premium saving effect can be strengthened. This is because offers with higher insurance subsidy premiums would be ranked higher in the revised design. Again, the study uses Signup 41 as an example and finds that in this alternative CRP enrollment design the crop insurance premium saving would be $87 million, a 3.4% increase when compared with the saved premium under the status quo. One interesting finding is that if premium subsidy savings were to be included in the CRP’s enrollment mechanism then the program’s environmental benefits would also improve. This is because risky cropland that receives larger crop insurance premium subsidies is often environmentally sensitive.

The study also explores the subsidy saving effects of CRP under a cost-effective enrollment mechanism design that maximizes environmental benefits per dollar spend on CRP. Under this cost-effective design, total premium subsidy savings under Signup 41 would be $106 million, a 26% increase when compared with the status quo. The study shows that under this cost-effective design the total acreage enrolled and total environmental benefits would increase by 26.6% and by 15.3%, respectively, while holding total program outlays constant. Under this cost-effective design, the Midwest would lose CRP acreage whereas the Great Plains would see a significant increase because cropland rent is much higher in the Midwest than in the Great Plains.

In sum, the study reveals a hidden budgetary saving (i.e., saving crop insurance premium subsidies) due to CRP and illustrates the importance of CRP enrollment design for program outcomes. Given the federal government’s desire to tighten budgets, considering this hidden budgetary saving benefit of the CRP under various CRP designs might enable the federal government to reduce program outlays. Recognizing the link between CRP and FCIP may allow for smaller federal costs at given CRP environmental benefits, or larger benefits at given costs, or a combination of both.

The authors are:

Ruiqing Miao, Department of Agricultural Economics and Rural Sociology, Auburn University

Hongli Feng, Department of Agricultural, Food, and Resource Economics, Michigan State University

David A. Hennessy, Department of Agricultural, Food, and Resource Economics, Michigan State University

Xiaodong Du, Department of Agricultural & Applied Economics, University of Wisconsin-Madison

References

Miao, Ruiqing, Hongli Feng, David A. Hennessy, and Xiaodong Du. 2016. “Assessing Cost-effectiveness of the Conservation Reserve Program and Its Interaction with Crop Insurance Subsidies.” Land Economics 92(4):593-617.

[1] Data source: Conservation Reserve Program Statistics, Farm Service Agency of the U.S. Department of Agriculture. Link: https://www.fsa.usda.gov/programs-and-services/conservation-programs/reports-and-statistics/conservation-reserve-program-statistics/index (accessed on November 7, 2016).

[2] Data source: Summary of Business Reports and Data, Risk Management Agency of the U.S. Department of Agriculture. Link: http://www.rma.usda.gov/data/sob.html (accessed on July 25, 2016)