Assessing Cost-Effectiveness of the Conservation Reserve Program and its Interaction with Crop Insurance Subsidies
Ruiqing Miao, Hongli Feng, David A. Hennessy, Xiaodong Du
November 2014 [14-WP 553]
Miao, R., H. Feng, D. Hennessy, and X. Du. 2014. "Assessing Cost-Effectiveness of the Conservation Reserve Program and its Interaction with Crop Insurance Subsidies." Working paper 14-WP 553. Center for Agricultural and Rural Development, Iowa State University.
Strong demand for agricultural commodities, high crop prices and pressure to reduce government budget deficits heighten the need for land retirement programs to be designed to maximize environmental benefits for any given budget outlay. The Conservation Reserve Program (CRP) is the largest land retirement program while the federal crop insurance program (FCIP) is the largest federal program supporting U.S. agriculture. We examine the environmental and budgetary implications of alternative CRP enrollment mechanisms in the context of the program’s interactions with FCIP. We demonstrate that the current CRP enrollment mechanism is inconsistent with cost-effective targeting. We also identify a cost-effective targeting enrollment mechanism that maximizes total environmental benefits under a budget constraint. Since federal crop insurance subsidies will not be incurred when a tract of land is retired from agricultural production, we consider the impacts when avoided subsidies are accounted for in designing a land-retirement program. Based on contract-level CRP offer data in 2003 and 2011 across the contiguous United States, we find that adopting the cost-effective targeting enrollment mechanism can increase CRP acreage by up to 45% and total environmental benefits by up to 21% while leaving government outlay unchanged. Incorporating crop insurance subsidies into the land retirement design can increase avoided subsidies caused by CRP enrollment and environmental benefits obtained from CRP. The government can enroll significant acres at zero real cost. Under cost-effective targeting, CRP acreage and payments would increase in the Great Plains and the Southeastern states but would decrease in the Midwest.