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Ethanol demand and the CRP

Agriculture.com Staff 10/10/2006 @ 2:53pm

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 on 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 virtually elimination of the CRP.

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

The study carried out by 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.

In the time between the inception of the project and the final report, the U.S. Department of Agriculture 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% 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-cent-per-bushel decline. Soybean prices would suffer from a 90 cents per bushel drop," De La Torre Ugarte said. "These lower prices are the trigger that brings about a nine year $33 billion increase in farm program spending."

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.

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