USDA Announces No Penalty Free Early Out For CRP

Published on: 14:59PM Jul 29, 2008

By Jim Wiesemeyer
via a special arrangement with Informa Economics, Inc.

Officials say crops won't be hurt as much as expected

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USDA today announced they will not allow penalty-free early out on Conservation Reserve Program (CRP) contracts at this time.

In making the announcement, USDA Secretary Ed Schafer said, "The indications, so far, are the impact on this year's corn and soybean crops will be less than what was originally feared."

As for whether this is the "final" word on this issue,
Schafer said that he wouldn't commit totally to that as conditions could change.

FSA Deputy Administrator for Farm Programs John Johnson detailed that in April of this year, CRP contract holders paid the penalty to extract 34,000 acres from the CRP and 37,000 in May.
"That's the high point we've seen," he noted. "Over the last 19 months, we have seen an average of over 15,000 acres per month" where the penalty for exiting those contracts early was paid. Over the 19 months, 288,726 acres have paid the penalties to exit CRP early, he detailed.

Schafer also pointed out acreage was going to be exiting the program already via regular maturities.  USDA data shows contracts 1.15 million acres of CRP ground will mature as of Sept. 30, 2008, and 3.855 million will mature on Sept. 30, 2009. Of those maturing as of Sept. 30, 2008, USDA data shows 134,954 acres are in North Dakota, 134,024 acres are in Iowa and 123,353 acres are in South Dakota. No other states have more than 100,000 acres maturing this September.

As for the 2009 maturities, Texas leads with 776,086 acres, followed by Colorado at 717,347; Kansas with 429,411; North Dakota at 236,857; South Dakota at 235,663; Montana at 184,834; Oklahoma at 160,859; Nebraska at 153,744; Iowa at 113,090 and Washington at 110,252 acres.

In addition, Schafer noted the acreage cap in the CRP was lowered in the 2008 Farm Bill and therefore USDA was not contemplating holding any new general CRP signups at this time.

Asked about the coming increase in the Renewable Fuels Standard to 10.5 billion gallons of corn-based ethanol for 2009, versus the 9 billion gallons for 2008, Schafer said a lot of people commented on this on "both sides of the equation." He noted acres continue to come out of the CRP, so "we are trying to understand everyone's concerns."

Comments: This no-go decision could come back to haunt USDA and the business of agriculture for a host of reasons, including (1) the coming big boost in the RFS mandate for corn in 2009, (2) the coming mandate for biodiesel, (3) the need for some feed price relief for livestock producers, and (4) the potential impact on food prices. This decision would explode on the Bush administration if there is an early frost in the Midwest this year, or if there are any other major weather-related problems.

I have confirmed several times that USDA was pressured not to allow early out -- even if some in the Ag Department wanted to do so. Those top level Bush administration officials included Vice President Dick Cheney, Office of Management and Budget (OMB) Director Jim Nussle, and the Council of Environmental Quality (CEQ).

I have also been told that in CRP meetings, Schafer would frequently ask, "What will be the impact on wheat producers?" Schafer was the former governor of North Dakota. Hmm.

And although USDA's Schafer and Conner told me last Friday that last week's court decision against USDA's handling of the Critical Feed Use (CFU) program would not have any impact on the decision on early out for CRP acres, other sources tell me otherwise.

A former USDA analyst told me, "I was surprised given how high prices have been and still are, and the difficulties facing livestock, dairy and poultry producers, and the highest food price inflation in 18 years, that USDA would have decided not to allow more land to come back into production to help with these issues. In addition, the increasing mandates under the RFS mean more land will be needed for both corn and soybeans And, this is not just a one-year decision, as the RFS mandates continue higher. This is a long-term decision to try to help meet the expected demand, to keep commodity prices in general at more reasonable levels. I would be interested to see the analysis USDA did over the next three to five years to see the impact of today's decision. USDA obviously feels that $7 corn and $14 soybeans and $8-$9 wheat is not something that needs to be addressed, and the implications they have on food prices. What is clear today is that USDA does not feel the other stakeholders in this decision are important enough to warrant change."

Another analyst asked, "What would it actually take, in terms of prices, in terms of supply, in terms of demand, in terms of food price inflation, and losses in livestock enterprises... what would it take for this administration to offer early out? When Schafer said no early out at this time, again I ask: What would it take for the Bush administration to alter their no-go decision?"

Bottom line: This makes the Environmental Protection Agency's (EPA) coming decision on the RFS mandate waiver even more important because any EPA modification in the RFS mandate would have more impact short-term than would have been the case even if USDA decided on early out on CRP acres -- a reduced mandate means reduced need for additional corn acres and would help blunt what some believe is a USDA policy miscue today.

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