Tuesday, March 7, 2017

Assessing Cost-effectiveness of the Conservation Reserve Program (CRP) and Interactions between the CRP and Crop Insurance

We examine the U.S. Conservation Reserve Program (CRP) enrollment design while accounting for the CRP’s interactions with the federal crop insurance program. We find that the current CRP is not cost-effective despite its intent to balance benefits and costs. Based on CRP contract-level data, we show that adopting a cost-effective enrollment design and incorporating crop insurance subsidies into the CRP’s Environmental Benefits Index would significantly increase the CRP acreage, environmental benefits, and savings on crop insurance subsidies, while leaving government outlay unchanged. Large geographical redistributions of CRP acreage would also occur. We further investigate the cost-effective design’s robustness to CRP benefit misspecifications....
Picture of CREP land in Pennsylvania

A January, 2016 version of the paper available at http://tinyurl.com/gtnxog3 reports:

... Simulation results where Baseline and Scenario 1 are constrained by the actual enrollment acreage that occurred under the two signups (2 million acres for Signup 26 and 2.8 million acres for Signup 41), while Scenarios 2 and 3 are constrained by the actual level of CRP real payment (defined as CRP rental payment minus saved crop insurance subsidies by CRP enrollment) that occurred under the two signups (i.e., $95.6 million for Signup 26 and $50.2 million for Signup 41) are presented. When comparing the scenario outcomes we focus on the following: (a) CRP enrollment acreage, program payment, and avoided crop insurance subsidies; (b) environmental benefits from CRP that are measured by environmental components of EBI (i.e., physical environmental benefits, labeled as EEBI); and, (c) geographic patterns in CRP enrollment changes under different designs.
Comparison II shows that when switching to the cost-effective targeting EBI design, enrolled acreage will increase significantly (42.3% and 26.6% for Signups 26 and 41, respectively) while keeping CRP real payments equal to that under Baseline. This shows the efficiency loss from using the current EBI, which is consistent with maximizing environmental benefits per acre instead of maximizing environmental benefits per dollar spent. Notice that the percentage change in acreage enrollment under Signup 26 is larger than that under Signup 41.... An explanation is that the comparison outcomes depend on acceptance rate (i.e., acreage accepted over acreage offered) for CRP offers. Under the Baseline the acreage acceptance rates in Signups 26 and 41 are 48% and 75%, respectively.... A smaller acceptance rate in Signup 26 indicates a more competitive selection and so a larger space for acreage increase starting from the Baseline. 

For Signup 41, when crop insurance subsidies are included in the current EBI design (i.e., Scenario 1), the total annual CRP real payment is about 8.1% less than that under Baseline while leaving CRP enrolled acreage the same. For Signup 26, including crop insurance subsidies in the current EBI design can reduce CRP real payment by 1%. The reduction in real CRP payment is much larger under Signup 41 than that under Signup 26 because subsidy per acre in 2011 (year of Signup 41) was almost quadruple that in 2003 (year of Signup 26)....

Adopting cost-effective targeting EBI and incorporating insurance subsidies into EBI design have significant impacts on avoided subsidies. Under the Baseline for Signup 26, the total avoided crop insurance subsidies equaled about $16.9 million, which amounted to about 15% of total nominal CRP payment (i.e., CRP rental rents) for enrolled acres. If cost-effective targeting is applied then the avoided subsidies would increase by 41.1% when compared with Baseline (see Comparison II in Table 2). When insurance subsidies are incorporated into cost-effective targeting EBI design, then the avoided subsidies would increase by 47.3% for Signup 26 (see Comparison III in Table 3). Under the Baseline for Signup 41, the saved crop insurance subsidies are about 63% of nominal CRP payments whereas under Scenario 3 the percentage becomes 68%. The crop insurance savings are much 
larger under Signup 41 than those under Signup 26 because, as mentioned above, subsidy per acre in 2011 was much larger.

Environmental benefits from CRP. Larger environmental benefits from CRP, as measured by total EEBI, are achieved with cost-effective targeting EBI than the current EBI. For example, Comparison II shows that total EEBI of enrolled acres increases by 20.5% and 15.3% in Signup 26 and Signup 41, respectively. The increased total EEBI is largely from the increased enrolled acres under Scenario 2. Since enrolled acres increase more under Signup 26 than under Signup 41 (i.e., 42.3% versus 26.6%), the total EEBI increase under Signup 26 is larger than that under Signup 41. For the same reason, the EEBI per enrolled acre decreases under Scenario 2 when compared with the Baseline scenario, and the decrease is larger under Signup 26 than under Signup 41 (-15.3% versus -9%).
... Incorporating crop insurance subsidies into the current EBI design will increase total EEBI of enrolled acres, average EEBI per enrolled acre, and average EEBI per dollar of CRP real payment. For Signup 26, the increases are small. For Signup 41, since an 8% decrease in CRP real payment occurs under Comparison I, we see a relative larger increase in EEBI per real payment dollar under Comparison I, namely 11.2%. The reason for the relatively small impacts when incorporating crop insurance subsidies into the current EBI is that the cost component has significantly fewer points available than the environmental component. For both Signups 26 and 41, maximum points available for the cost component are 150, whereas maximum points available for the environmental component are 395. Incorporating crop insurance subsidies by subtracting these subsidies from the rental rate only changes the cost component. When crop insurance subsidies are relatively low, as in 2003, they are a small fraction of the rental rate and so incorporating subsidies had little impacts.

Geographic patterns in CRP enrollment changes. When compared with Baseline scenario, Scenarios 1–3 result in noticeable geographical patterns for the changes in CRP enrollment.... The Great Plains and Southeastern United States would gain CRP acreage and payments while the Midwest will see reductions. Accordingly, the Midwest would gain more commodity revenues and crop insurance subsidies under Scenarios 1–3 than under Baseline. These regional differences in CRP enrollment are important because of implications for welfare distribution and regional politics, and also because spatially distinct environmental and natural resources are concerned.

Table 2 also presents the amount of acres that change status. That is, these acres either changed from being accepted to being rejected or vice versa. The largest differences are observed under Comparison III, under which a total of 46.8% and 24.5% of total offered acres would change enrollment status in Signups 26 and 41, respectively. Figures 1 and 2 shows changes in CRP acres under Comparisons I, III, and IV for Signups 26 and 41, respectively. The patterns of CRP acreage changes are similar. CRP enrollment will increase in areas with high subsidy-rent ratios, such as the Great Plains and Southeastern States. These are in the main marginal cropland regions where CRP enrollment costs are low and environmental benefits may be high. What makes these locations marginal for cropping and environmentally sensitive often also makes them poor crop insurance prospects, which indicates high insurance premiums and subsidies.

By contrast, under Scenarios 1–3, the Midwest would lose CRP acreage relative to the Baseline because cropland in this region requires higher CRP rental rates and receives lower crop insurance subsidies when compared with cropland elsewhere. For example, in Iowa the CRP rent and subsidies in 2011 are $128.1/acre and $32.4/acre, respectively, whereas in North Dakota these two numbers are $36.2/acre and $55.3/acre, respectively (Table 1). Notice that the CRP acreage change across regions is not significant in Comparison I because 
the total enrolled CRP acreage in Scenario 1 and Baseline is the same. However, large differences exist between cost effective targeting EBI and current EBI as shown by Comparison III (Figures 1 and 2).

Cost effective targeting would overwhelmingly favor low rent regions whether or not crop insurance subsidies are incorporated. Our analysis suggests that the central Corn Belt will have an even lower enrollment rate if cost effective targeting is used. Furthermore, the region along southern Iowa and northern Missouri will be less competitive compared to other regions based on EEBI points and rental cost information submitted in Signups 26 and 41...
by Ruiqing Miao, Hongli Feng, David A. Hennessy, and Xiaodong Du
Land Economics via University of Wisconsin
Volume 92, Number 4; November 1, 2016; Pages 593-617

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