Ethanol demand and the CRP
Dr. Daryll E. Ray, University of Tennessee

In a time of large federal deficits, budget cutters see the
elimination of the Conservation Reserve Program (CRP) as a potential
place they can save as much as $1.6 billion a year. At the same
time, agribusinesses have several reasons for clamoring for the end
of the CRP. On the one hand they recognize that when it comes to CRP
acres, farmers spend little money on seed, fertilizer, farm
chemicals, machinery, and repairs. On the other,agribusiness
processors depend upon an abundant supply of inexpensive grains
and seeds and CRP acres do not add to that supply.

The growth in the ethanol industry, which presently uses corn as its
primary feedstock, has provided both groups with a marketable
rationale for calling for the virtual elimination of the CRP.

Well over a year ago, researchers here at the Agricultural Policy
Analysis Center, University of Tennessee (APAC), began to study the
effect of the elimination of the CRP on crop prices and government
payments.

The study carried out by Dr. Daniel De La Torre Ugarte and Chad
Hellwinckel was funded by a grant from the American Corn Growers
Association, Pheasants Forever, National Farmers Organization,
American Agriculture Movement, Association of Fish and Wildlife
Agencies, Theodore Roosevelt Conservation Partnership, Wildlife
Management Institute, and Environmental and Energy Study Institute.

The result of this study is an APAC publication, "Analysis of the
Economic Impacts on the Agricultural Sector of the Elimination of
the Conservation Reserve Program," which is available online at
http://www.agpolicy.org/crp.html.

In the time between the inception of the project and the final
report, the USDA rolled over the renewal of expiring CRP acreage for
time periods of up to five years, and the price of oil spiked,
radically increasing interest in ethanol production.

Because one of the foci of the study was the impact of the
elimination of the CRP on crop prices, the temporary renewal of CRP
acreage simply alters the years in which the price impacts are felt,
but not the magnitude of the price change. To account for the
increased demand for ethanol we used the February 2006 USDA baseline
which was the latest published baseline available at the time the
study was released.

The APAC study estimates that if CRP contracts are eliminated as
they expire, 37 percent of today's 34.7 million CRP acres, or 12.6
million acres, will return to crop production by 2015. Seventy-one
percent of returning acres, or 9 million, will grow corn, soybeans
and wheat.

"With additional CRP acres coming into production, corn prices would
be 31 cents below current expectations with wheat prices
experiencing a 63 cents per bushel decline. Soybean prices would
suffer from a 90 cents per bushel drop" said Daniel De La Torre
Ugarte. "These lower prices are the trigger that brings about a nine
year $33 billion increase in farm program spending," De La Torre
Ugarte continued.

Instead of saving $1.6 billion a year or $14 billion over the nine
years of the study, the elimination of the CRP would trigger a net
increase in government costs of over twice that amount.

According to De La Torre Ugarte, "As of April 1, 2006, 34.7 million
acres of farmland had been converted from crop production to soil,
water and wildlife conservation uses under the Conservation Reserve
Program.

In addition to protecting highly erodible watersheds, protecting and
providing new habitat, and reducing pollution, the CRP has reduced
supplies of crops that would have been produced on that land if it
had not been placed in the CRP. APAC simulations indicate that
significant reductions in CRP acreage will have major impacts on
crop production crop prices, net market income for producers, and
government payments."

From our perspective a far wiser policy would be to allow the
increase in corn acreage to respond to any ethanol-driven price
increase. In addition to bringing in acreage from other crops,
rising prices would undoubtedly convince some farmers to convert
existing pastureland into crop production when it would be
profitable to do so. Once these additional acreages are drawn into
production, then and only then in our view, should the USDA's CRP
renewal and extension rules be slanted to bring the least highly-
erodible acreage back into production.

To us a couple of things stand out. First, the reason that most CRP
crop acreage became eligible for the program was because it was
declared to be erodible, often highly erodible. For that reason, it
would seem that the CRP would be the last place to look for
additional crop acreage, a last resort.

Secondly, this is not the first time in which a promised-land of
high prices and the need for all-out production have been dangled in
the view of eager farmers. But history has not been kind - by the
time full production is achieved the need for the increased output
has waned and prices plummet.

It is important to remember that corn, while the current dominant
ethanol feedstock, will eventually play second fiddle to cellulose
as an ethanol feedstock. Cellulose comes in many forms, some
agricultural, some not.

Exuberance is fun, but let's hope it does not get too irrational.

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Daryll E. Ray holds the Blasingame Chair of Excellence in
Agricultural
Policy, Institute of Agriculture, University of Tennessee, and is
the Director of UT's Agricultural Policy Analysis Center (APAC).
(865) 974-7407; Fax: (865) 974-7298; dray@...;
http://www.agpolicy.org. Daryll Ray's column is written with the
research and assistance of Harwood D. Schaffer, Research Associate
with APAC.