Daniel Hellerstein, Economic Research Service, USDA
Presented at the “Conservation Tenders in Developed and Developing
Countries - Status Quo, Challenges and Prospects” workshop
Jakobsberg, Boppard, Germany, Sept 12 2013
1
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA.

The CRP is over 25 years old, and is shrinking in size
The CRP relies on an auction mechanism that incorporates a ranking mechanism (the EBI) and a maximum bid (a “bid cap”, aka the SRR)
The bid cap may be problematic
Alternative auction mechanisms may be more effective
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA.
2

What is the Conservation Reserve Program (CRP)
• Established in 1985.
• Focus is on retiring cropland
• As of July 2013, about 11m ha (27m ac) enrolled in 10 to 15 year contracts; at total cost of around $1.6 billion/year.
• 8.7m ha in general signup, 2.2 m ha in continuous signup
• Originally targeted at highly erodible land.
•
Since 1990s, a broader array of concerns
 Soil erosion
 Water quality
 Air Quality
 Wildlife habitat
 Enduring benefits
 Carbon sequestration
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA.
Slide 3 of 24

Land is entered into CRP in two ways:
1. General signup
–
Competitive enrollment
–
Most land enters the CRP this way
2. Continuous signup
–
Non-competitive enrollment
–
Many contracts, less land (smaller contracts on average)
–
Focus on priority land
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA.
4

CRP 2013 acreage: general
General signup acres
1 dot = 800 ha
Approximate centroid of general signup
acreage
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA.
5

CRP 2013 acreage: continuous
Continuous signup acres
1 dot = 800 ha
Approximate centroid of continuous
signup acreage
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA.
6

CRP 2013 acreage: general and continuous
1 dot = 800 ha
Brown: continuous
Green: general
Approximate centroid of all acreage
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA.
7

8
6
4
2
0
16
14
12
10
Recent trends in CRP enrollment: shrinking size, with
“continuous” enrollment a growing share
35% decline since 2007!
New & re-enrolled general
Source: CRP contract data (FSA/USDA)
Existing general
New & re-enrolled continuous Existing continuous
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA. 8

The CRP – the operational environment
•
Optional participation
•
Land costs, and environmental benefits, are heterogeneous.
•
Landowners can increase the environmental values of offered lands (quality improvement)
•
The government has limited information on the opportunity cost of the land (noisy assessments)
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA. Slide 9 of 24

The CRP’s general signup enrollment mechanism
• Several week enrollment period every year
• Parcels must meet eligibility criteria:
 cropland history and
 either erodibility or location (in a Conservation Priority Area).
• Landowners submit offers that specify land cover and a bid
 Results are announced several weeks later.
.
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA. 10

Key features of the general signup
•
Offers are “sealed bid”
•
Accepted offers are paid their requested rental rate
•
All offers are ranked using an “Environmental Benefits
Index (EBI)
 The EBI incorporates the requested rental rate
•
The requested rental rate can not exceed a parcel specific maximum price.
 This “bid cap” is called the Soil Rental Rate (SRR)
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA. 11

The General Signup Environmental Benefits Index (EBI),
100
150
45
50 100
100
Circa 2012
Wildlife
Water quality
Erosion reduction
Enduring benefits
Air quality
Cost savings
Note: the EBI is not a benefit/cost ratio. Instead, cost enters as an additive factor.
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA. 12

2012 County average bid caps (SRR)
2012 Acreage
Mean: $51
Median: $39
10%ile $25
90%ile $97
Source: FSA data
$ per acre
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA. 13

Soil rental rates and commodity prices (relative to 1997 )
2,5
2
1,5
1
0,5
0 corn price wheat price US average SRR
•
Commodity prices and the CRP’s SRR were fairly stable from 1997 to 2006
•
Since 2007, commodity prices have been substantially higher
•
Since 2007, the CRP’s SRR have increased somewhat
Source: Average SRR computed from USDA/FSA offer files.
Commodity prices from http://www.indexmundi.com/commodities/ 14

Trends in general signup offers…
10
9
8
7
6
5
2
1
0
4
3
Number of acres offered varies over time, as does the acceptance rate
0,6
0,5
0,4
0,3
0,2
0,1
0
1
0,9
0,8
0,7
1997 1998 1999 2000 2003 2006 2010 2011 2012 2013 ha offered ha accepted Accept rate
Source: CRP contract and offer data (FSA/USDA)
15
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA.

.. . bids tend to be close to their bid cap
Differences between bids and SRR, by year and SRR
1
0,98
0,96
0,94
0,92
0,9
0,88
0,86
0,84
0,82
22 27 33 40 49 60 73 90 109 134 164 200 244
SRR (the bid cap)
Source: Linear regression using CRP contract data (FSA/USDA)
•
Lower productivity lands tend to bid their maximum,
1998
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA. 16

.. . bids tend to be close to their bid cap
Differences between bids and SRR, by year and SRR
1
0,98
0,96
0,94
0,92
0,9
0,88
0,86
0,84
0,82
22 27 33 40 49 60 73 90 109 134 164 200 244
SRR (the bid cap)
Source: Linear regression using CRP contract data (FSA/USDA)
•
Lower productivity lands tend to bid their maximum,
•
Over time, bids across all parcels are closer to bid caps
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA.
1998
2004
17

.. . bids tend to be close to their bid cap
Differences between bids and SRR, by year and SRR
1
0,98
0,96
0,94
0,92
0,9
0,88
0,86
0,84
0,82
22 27 33 40 49 60 73 90 109 134 164 200 244
SRR (the bid cap)
Source: Linear regression using CRP contract data (FSA/USDA)
•
Lower productivity lands tend to bid their maximum,
•
Over time, bids across all parcels are closer to bid caps
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA.
1998
2012
2004
18

Parcel specific bid caps and cost heterogeneity
–
If a single price were paid to all offers, owners of low cost parcels could earn substantial rents
–
A precise bid cap (equal to a parcel’s opportunity cost) could deliver substantial savings

Slide 19 of 24 The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA.

Simple Example: bid cap issues
•
Assume a population of 10 parcels with opportunity costs ranging from 1 to 10
•
Goal is to enroll 5 parcels
Type of offer Total cost
Actual value 15
Single price (6 th highest value) 30
Using an upwardly biased assessment
(+2% to +5% greater than actual)
18.7
Using accurate & unbiased assessment
(+/- 2% of actual )
31.5
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA. 20

Lab results -- Impacts of different bid caps
4 “types” of tickets; tickets of the same type have the same bid cap
Variable Coefficient (T-Stat)
Intercept 4.6 (9.4)
90% Bid cap 90% of “type” maximum
100%
120%
-0.13
-0.25 
-0.064
(-29.3)
(-2.9)
(-1.4)
200% Bid cap 200% of “type” maximum 0.0019 (0.03)
Y = aggregate efficiency : values closer to 1 are “better”
Coefficients can be interpreted as fractional changes compared to a baseline treatment of an 80% bid cap (i.e.;
-0.10 = 10% decrease in over all cost)
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA. 21

Alternative mechanisms
Are there enrollment mechanisms that would use available information more effectively… that would replace bid caps with auction design?
We considered two alternatives
Quota auctions
Reference price auctions
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA. 22

Quota
Description
A two stage acceptance procedure:
Classify all offers into groups. For example, a “low”, “medium”, and a
“high” soil productivity group.
1. Within each group, the worst scores are dropped
2. The survivors are pooled, re ranked, and the best offers are accepted
Example of a score calculation
(lower scores are better)
Score= BID – q
(q=quality enhancement purchased)
The same bid, hence same, score is used in both “stages”
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA. 23

Reference
Price
Description
A reference price is assigned to each parcel. This could be the SRR.
•
Bids below the reference Price : better score
•
Bids above the reference Price : worse score
Offers are ranked by score, and the best scoring offers are accepted
Example of a score calculation scores are better)
Score= BID - 0.5q +
(BID– referencePrice)
The impact of two identical bids will depend on the referencePrice
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA. 24

Experimental results: the impact of quota and reference price mechanisms
Dependent variable
Variable
Reference Price
Aggregate efficiency
(cost of acquisition / full information cost)
-0.18 (-8.9)
Average Profit
-10.5 (-12.9)
Quota -0.14 (-5.81) -7.7 (- 8.3) maxPrior
R-square [ f-stat ]
0.0054 (6.8)
0.66 [< 0.001]
0.21 (7.1)
0.58 [< 0.001]
Negative values on the Reference Price and Quota dummies imply these mechanisms are more cost effective.
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA. 25

Summary
The CRP has evolved over time
•
Currently a mix of competitive enrollment (general signup) and targeted (continuous signup)
Is the competitive ranking mechanism (the general signup) effective?
•
Experimental evidence, and recent history, suggest a need to rethink the bid cap
•
Alternative auction mechanisms may improve performance
•
Is continuous, with its explicit targeting, better?
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA. Slide 26 of 24

With acreage likely to decrease, and with tight budgets, changes in the CRP are likely.
•
Growing interest throughout the government in “evidence based” policy, which could lead to changes in program design
•
Improved data and models on environmental performance could mean better targeting – with a goal of “landscape impacts” rather than parcel specific metrics.
•
Personally, I foresee increasing willingness of USDA to try new methods, which means interesting possibilities for experimental work (both lab and field)
The end
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA. 27

The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA.
28

The CRP is not the USDA’s first land retirement program
CRP enrollment and other diverted acreage, 1982-2002
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Year
Set asides were mostly for production control, and were not managed for conservation purposes.
Source: Land use data (FSA/USDA)
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA.
4

7,0
The CRP is USDA’s largest conservation program
(though not as “largest” as it once was)
Trends in USDA Conservation Expenditures, 1983-2011*
6,0
5,0
Ag Land Preservation (FPP and GRP)
Working Land Conservation (EQIP and predecessors,
CSP, WHIP, and others)
Land Retirement (CRP and WRP)
Conservation Technical Assistance (CTA)
4,0
3,0
2,0
1,0
0,0
1983 1988
*Constant (2010) dollars
1993 1998 2003 2008
Source: http://ers.usda.gov/topics/natural-resources-environment/conservation-programs/background.aspx
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA.
5

At the peak of the CRP-Soil Bank program in 1960, 28.7m acres were under contract.
31

Million acres
40
35
30
25
20
15
10
5
0
CRP 1982-2009
enrollment, rental payments, and notable events
Billion dollars
2,5
2
1,5
1
0,5
0
CRP acres Continuous Annual program outlays
32

Program
Budget
All
Farmers
All
Eligible
Farmers
Program
Applicants
Program
Participants
Program
Performance
• Economic
• Environmental
• Distributional
Eligibility usually broad
• Land types
• Land use
• Location
• Practices
Participation
Incentive
What action?
• Fields
• Practices
What payment?
• Fixed
• Bid
Enrollment Screen
(targeting)
Benefit-cost index
• Field Location
– Soils
– Topography
– Population
• Practices
• Cost (bid)

General signup acreage declining since 2007
Change in CRP acreage: 2007 to 2013
Dec 2012 crp acreage
1 dot = 1000acres = 404ha.
~35% acreage decrease in general signup acreage since 2007, with greater proportional decreases in the plains.
Source: CRP contract data (FSA/USDA)
34

Change in CRP acreage from 2007 to 2013 : overall changes
Counties where continuous and general acres are: bothDown both down bothUp both up contDown continuous decrease > general increase continuous increase > general contUp decrease genDown general decrease > continuous increase genUp general increase > continuous decrease nochanges noChanges
Million acres % acreage # counties % counties
3.02 11 589 22
0.49
0.04
2
1
61
65
2
2
2.16
21.14
0.14
0.01
8
78
1
1
445
1443
27
99
16
53
1
4
35

Maximum available EBI points in CRP signup #39 (2010)
Wildlife [100] =
Water quality [100] =
Cover (introduced grass, native grass, trees) [50]
+ Wildlife enhancement [20]
+ Wildlife priority zones [30]
Location within designated State water quality zone
[30]
+ Groundwater quality [25]
+ Surface-water quality [45]
Erosion [100] =
Enduring benefits [50] =
Air quality [45] =
Costs [150] =
Source: FSA; see their program fact sheet for more details.
Erodibility index [100]
Enduring benefits (tree plantings, wetland restoration, existing trees, grass seeding) [50]
Wind erosion impacts [25]
+ Wind erosion soils [5]
+ In air quality zones [5]
+ Carbon sequestration [10]
Per-acre rent [125]
+ Bid below maximum rate [25]
36

Location of CRP Conservation Priority Areas (CPA). 2010 37

Simple Example: bid cap issues
Assume a population of 10 parcels with heterogeneous values (but otherwise the same)
Goal: accept 5 of the 10 parcels, by making parcel specific offers
Type of offer Total cost
Actual value 15
38
Actual value
Accurate and unbiased assessment
Less accurate/upwardly biased assessment
Single price (6 th highest value)
30
Using less accurate assessment (upwardly
biased +2 to +5%)
18.7
Using accurate & unbiased assessment
(+/- 2%)
31.5

.. expiring general signup parcels tend to be re-offered, and sometimes are the dominant set of offered acres
0,90
0,80
0,70
0,60
0,50
0,40
0,30
0,20
0,10
0,00
1997 1998 1999 2000 2003 2006 2010 2011 2012 2013
% of all offered acres that are "expiring"
% of "expiring acres" that were re- offered
Source: CRP contract and offer data (FSA/USDA)
39

40
Lab results -- Impacts of different bid caps
4 “types” of tickets; tickets of the same type have the same bid cap
Variable Coefficient T-Stat
Intercept
90%
Bid cap 90% of “type” maximum
100%
120%
200%
Bid cap 200% of “type” maximum
Q10
Q20
Q40
200% x Q40
Several other parameters are not displayed …
4.6
-0.13
-0.25

-0.064
0.0019
0.08
-0.065
-0.17
-0.13
N
F-stat
Rsquare
183 (all treatments)
44.5 (prob<0.0001)
0.88
9.4
-29.3
-2.9
-1.4
0.03
1.2
-1.4
-2.9
-1.6
Y = aggregate efficiency =
(observed quality adjusted cost ) / (full information cost for same quality)
Lower values mean greater cost effectiveness. Coefficients on dummies can be interpreted as fractional changes (i.e.; 0.10 = 10%)

Experiments: quota and mechanism
•
Using two ticket types, imposing a quota reduced acquisition costs by an average of 8%.
•
Cost reduction due to reduced bids by “low costs” tickets was greater than cost increases due to accepting higher cost tickets
41

42
60
50
40
30
20
10
0
Experimental results: quota and reference price enrollment mechanisms
Average results within a round for different treatments
Standard
Reference price
Quota
Cost
Profit
Profit rate

Continuous signup has many variants
As of July 2013, the 2.2m ha of continuous signup CRP includes:
•
0.13m ha in the Farmable Wetlands Program
•
0.51 in 46 CREP agreements in 33 states
•
0.67 in several “initiatives”
First
Year
Cumulative
(Acres)
Continuous initiatives (maximum acres allocated)
Flood-plain wetlands (600,000 ac.)
Bottomland hardwood trees (250,000 ac.)
Non-flood plain and playa wetlands (350,000 ac.)
Upland bird habitat buffers (500,000 ac.)
Longleaf pine plantings (250,000 ac.)
Duck nesting habitat (300,000 ac.)
State acres for wildlife enhancement (1,250,000 ac.)
Highly erodible lands (750,000 ac.)
Pollinator habitat (100,000 ac.)
2004
2004
2005
2005
2007
2007
2008
2012
2012
230,722
84,573
224,804
241,678
117,066
204,259
726,142
56,817
826

1 dot = 800 ha
Brown: continuous
Green: general
CRP acreage: general and continuous
44

Continuous signup
Continuous CRP is focused on environmentally sensitive land, with more stringent eligibility requirements.
Buffers for Wildlife
Habitat
Wetlands Buffer Riparian Buffer Wetland Restoration
45
Filter Strips Grass Waterways Shelter Belts Living Snow Fences
Contour Grass
Strips
Salt Tolerant
Vegetation
Shallow water areas for wildlife
Source: USDA/FSA http://www.fsa.usda.gov/FSA/webapp?area=home&subject=copr&topic=crp

46
Continuous acreage is more targeted …
•
Eligibility for continuous signup is determined at the local level (for example, proximity to a waterway).
•
Enrollment is non-competitive: if you are eligible, you will be automatically accepted
•
Since various bonuses are available, payment rates under continuous signups are higher than under general signups (for the same parcel of land)
•
A number of Initiatives address particular issues – such as wildlife enhancement, flood plain wetlands, and pollinator habitat
•
The Conservation Reserve Enhancement Program (CREP) is a subset of continuous, that comprises 1.3 million acres spread over 45 joint State and
Federal programs

0
4
2
General vs continuous
A limited comparison of the effectiveness of general and continuous signup
(results of unpublished research from University of Illinois)
Average Sediment
Abatement (ton/acre)
Average Nitrogen Abatement
(kg/acre)
20
10
0
CREP IL CRP IL CREP MN CRP MN
CREP IL CRP IL CREP MN CRP MN
200
150
100
50
0
Cost of Enrollment per
Acre
I
L
CREP CRP
M
N
2
0
6
4
Sediment Abatement per
Dollar
CREP CRP
The views expressed are those of the author(s) and should not be attributed to the Economic Research Service or USDA.