COMING OUT OF CRP. DEPARTMENTAL SPECIAL REPORT #20 February James B. Johnson Walter E. Zidack

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1 Department of Agricultural Economics and Economics Montana State University DEPARTMENTAL SPECIAL REPORT #20 February 1997 COMING OUT OF CRP James B. Johnson Walter E. Zidack

2 The programs of the Montana State University Extension Service are available to all people regardless of race, creed, color, sex, handicap, or national origin. Issued in furtherance of cooperative extension work in agriculture and home economics, acts of May 8 and June 30, 1914, in cooperation with the U.S. Department of Agriculture, Andrea Pagenkopf, Vice Provost for Outreach and Director of Extension, Extension Service, Montana State University, Bozeman, Montana

3 Coming Out of CRP This report presents the handbook, contract, and interim rule options available to CRP contract holders. The appendix to this report presents the descriptions of a template to estimate partial USDA payment for options with prorated payments. Introduction Some CRP contract holders want to return land under expiring CRP contracts back into production. Under provisions of the Food Security Act of 1985 permissible post-contract uses were enumerated. Upon contract completion land can be retained in a conserving use for the production of grasses or grass-legume mixes for hay production and/or for livestock grazing. Or the contract holders may leave the conserving use for wildlife habitat or other uses. CRP lands can also be returned to crop production. The majority of the land coming out of CRP in Montana is expected to be returned to annuallyplanted crop production. CRP lands that are highly erodible (which includes more than 90 percent of the Montana cropland in CRP) which are returned to annuallyplanted crops grown in rotation must be managed under an approved conservation plan if the operator wants to remain eligible for most USDA benefits including Market Transi-tion Payments and federally-subsidized crop insurance. The approved conservation plan will include an alternative conservation system that provides for a substantial reduction in erosion from historical levels that are economically achievable. Certain CRP contract holders who wish to rebid lands into the reauthorized program may find that they cannot pursue the option. Lands with an erodibility index (EI) less than 8 cannot bid into CRP. (The exceptions to this restriction are croplands determined by the Natural Resources Conservation Service to be eligible for certain practices such as shelter belts, field windbreaks and to establish salt-tolerant vegetation.) Less than 10 percent of the land currently in CRP in Montana has an EI of less than 8. Some CRP contract holders with expiring contracts who wish to rebid their land may find that the maximum payments they will receive under the reauthorized CRP are substantially less than the returns that their resources would realize if the resources were in other uses such as annually-planted crops in rotation, hay, or grass. Other contract holders may not score high in the environmental benefits assessment that will be conducted for each periodic CRP bid submitted. And finally, some current contract holders may find that they are located in counties that will have reached the CRP enrollment limit of 25 percent of their county s cropland by the time they want to submit a bid for participation in the reauthorized program. Whatever the motivations for bringing land out of the CRP, there are several options for when to initiate renovation, depending on producer intentions, the land resources involved, and the economic returns associated with each option. Statutory, rule and handbook provisions pertinent to bringing lands out of CRP for contracts scheduled to expire September 30, 1997 are: 1) initiate seedbed preparation on or after May 1; 2) initiate seedbed preparation on or after July 1; 3) allow the contract to ter-minate on September 30th; and 4) request an early release from the contract. The details of each option are explained in the following pages.

4 Option 1: May 1st Seedbed Initiation For CRP contracts that are expiring this September 30th, a Farm Service Agency Handbook provision applicable in arid areas where the intent is to plant a fall-seeded crop allows contract holders to begin seedbed preparation as early as May 1st. However, there are reductions in the final CRP payments under this provision. Specifically, this provision is applicable to CRP participants in areas where summer fallow rotations are normal farming practices and in other areas where maintaining CRP cover through June 30th would inhibit normal plant-ing of a fall-seeded crop. Formal requests to participate in this option must be filed with the local Farm Service Agency office. Acceptable requests must be signed by all contract participants. The final CRP payment, which will be made after October 1st, will be prorated to exclude payment from the date seedbed preparation was initiated (on or after May 1) through June 30th. Consider, as an example, a CRP contract with an annual $40-per-acre payment. As proration is only for the May 1st through June 30th period, the maximum reduction would be two twelfths of the final payment. For seedbed preparation that was initiated May 1st the final payment would be $33.32 per acre. If seedbed prep-aration was initiated May 31st, the final pay-ment would be $36.60 per acre. CRP contract holders who elect this option must recognize that they can only engage in seedbed preparation activities during the May 1st through September 30th period. Under the current interpretation of this provisions, pro-ducers must wait until September 1st to plant. They cannot hay or graze these lands during this period. Option 2: July 1st Seedbed Initiation Another Farm Service Agency Handbook provision allows CRP contract holders to initiate seedbed preparation on July 1st if their intent is to begin seedbed preparation performed according to an approved conservation plan for a fallseeded crop. There are no reductions in the final CRP payments under this option. CRP contract holders who pursue this option are not required to make a formal request through their local Farm Service Agency office. How-ver, verbal notice to the local Farm Service Agency office would reduce perceptions of noncompliance with contract provisions. Participants can only engage in land preparation activities during the July 1st through September 30th period. Under the current interpretation of this provisions, producers must wait until September 1st to plant. They cannot hay or graze these lands during the 90-day period from July 1st through September 30th. Option 3: Allow Contract to Mature A third option for CRP contract holders with contracts due to expire this September 30th is to allow the contract to mature. However, in contrast to the first two options, under this option the contract holder can pursue any post-contract land use that is desired. There is no expectation that a seedbed be prepared for a fall-seeded crop. For instance, the contract holder can leave or renovate the conserving use for subsequent hay production or grazing, or begin to bring the land out of the conserving use through a series of steps that involves grazing and subsequent tillage passes for eventual seedbed preparation. 2

5 Coming Out of CRP For each of the three options discussed above there will be a period, October 1st through November 30th, following the fulfillment of the CRP contracts wherein contract holders can enroll in Production Flexibility Contracts to make the contract acres eligible for Market Transition Payments. Producers enrolled under Production Flexibility Contracts can receive Market Transition Payments irrespective of the postcontract use of the land. Although the first two options are applicable only when the intent is to plant a fall-seeded crop, under the third option Market Transition Payments will be forthcoming if the land is left in a conserving use for haying, grazing, or wildlife habitat or if renovated and returned to annually-planted cropland. Option 4: Early Release The fourth alternative included in the Farm Service Agency Handbook and the proposed rule for the reauthorized CRP provides that some contracts that have been in place for at least five years will be eligible for early release from the CRP contracts. To be eligible for early release, the contracts must have soils with an erodibility index of 15 or less as determined by the Natural Resources Conservation Service. Contract holders must contact their local Farm Service Agency office and request an early release. There is no specific period for filing requests for early termination. There is, however, a 60-day waiting period between the request date and the effective date of the early release. During this 60-day waiting period the contract holder is expected to fully abide by the terms and conditions specified in the CRP contract. In 1997 and subsequent fiscal years the contract holders granted an early release will be eligible for either a prorated final CRP payment or Market Transition Payments, but not both. For most Montana CRP contract holders, the prorated CRP payments will probably be most desirable. Consider a CRP contract with a $40 per acre payment where the request for termination is made March 1st and the effective date is May 1st. The prorated final CRP payment of $23.12 represents a five-twelfth reduction in the final CRP payment. For those contract holders electing the currentyear Market Transition Payments instead of a prorated CRP payment, they must request termination so that the CRP contract ends on or before August 1st. The contract acreage also must be enrolled in a Production Flexibility Contract no later than August 1st to receive Market Transition payments in the current year. Under the early release there is no requirement that any fall-seeded crop be planted or, more generally, that any seedbed preparation be initiated. For instance, a contract holder can obtain an early release and hay or graze the former CRP lands in the summer and/or fall. Certain CRP lands are not eligible for early release. In addition to those lands with an erodibility index greater than 15, lands with practices such as field windbreaks, grass waterways, and shelterbelts, and lands within 100 feet of a stream or permanent water body are ineligible for early release. Additionally, CRP lands on which there is a useful life easement are not eligible. 3

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7 Appendix A Payment Estimator for CRP Contracts Expiring in 1997 and Early Contract Terminations This appendix contains a Quattro Pro 6.0 for Windows 95 computer template that calculates prorated payments for the relevant options. Persons wishing this computer software can contact their local MSU Extension Service office or call Walter E. Zidack at