High Plains Ag Week 11/29/2021 – CRP and Crop Return Comparison

Each year around this time we do a review of current Conservation Reserve Program (CRP) payment rates and compare them to expected crop returns. General signup for 2022 has not been announced yet. However, acres enrolled are the lowest since 1988, and a focus on sustainability in agriculture may lead to more incentives to enroll in the upcoming year.

CRP is a conservation program that provides an annual rental fee for farmers to remove environmentally sensitive land from agricultural production. In some cases CRP will also provide cost-share arrangements to plant new species of vegetation. The goals of CRP, considered by some as one of the most successful conservation programs in history, are to re-establish land cover that helps improve water quality, prevents soil erosion, and prevents loss of wildlife habitat. You can find more details on CRP here.

CRP on the Texas High Plains

The Texas Panhandle and the Southern Plains regions boast some of the greatest densities of CRP land in the nation. Counties in the western half of the area have anywhere from 50 thousand acres to over 250 thousand acres enrolled in CRP. In fact, most counties west of the Caprock have at least 7.5 thousand acres enrolled in the program. However, rental rates in the region are relatively low when compared to areas like the Midwest or the Corn Belt.

Conservation Reserve Program Acreage Map, 2019

Because of the density of CRP acres in the region, we want to spend time estimating the benefits of enrollment compared to the potential costs. Conceptually the costs and benefits of enrolling in CRP boil down to two main ideas:

Cost – Locked in returns. There is an opportunity cost to enrolling in that you might miss out on high crop prices. Additionally, you might miss out on income from leased grazing.
Benefit – Locked in returns. You are guaranteed a rental payment each year that is set at the beginning of the contract. In the same way that that set rate may eliminate returns from a bumper crop with good prices, it may also prevent losses from years in which crops perform poorly.

Other issues like government control of your activity on your land or grazing access during high feed cost periods are noteworthy. However it is important to remember that there are grazing provisions built in to CRP for severe circumstances. Other benefits include documented improvements in lowering soil erosion, habitat for wildlife, and documented improvements in surrounding water quality.

There have been several major changes in annual rental rates across the high plains. The most drastic increase in CRP rental rates occurred in Childress County, where average annual rental rates rose 22.7% from $22/acre to $27/acre. At the opposite end of the spectrum, average annual rental rates in Hemphill County fell 34.5% from $29/acre to $19/acre. Rental rates for Grassland CRP rose substantially in every county in the region.

Texas High Plains Conservation Reserve Program Average County Rental Rates

Evaluating the CRP Choice

The main concern for many producers is that they might miss out on years with high crop prices. So, let’s evaluate the potential outcomes from enrolling in CRP or keeping property in dryland production of cotton, sorghum, and wheat over the next ten years. We know the guaranteed values for CRP contracts enrolled this year. The regional minimum rental rate was $12/acre, the regional average rental rate was $23.89/acre, and the rental rate corresponding to the regional 75th percentile was $28.50/acre. Using a net present value (NPV) formula:

NPV = R/((1+i)^t)

we can calculate the value of enrolling in one of those contracts today. R is total returns over a given time, i is a discount rate, and t is the number of years. For example, let’s calculate the net present value of enrolling in a contract with a payment rate of $12/acre. In that case, R=$120 ($12/acre * 10 years), i = 2% (an average inflation/discount rate), and t= 10 (the length of a CRP contract). These values give us NPV, or current enrollment value, of $98.44. Note that this does NOT include the cost of converting your land from crop production to CRP. That cost may vary and NRCS has cost share programs, but any cost incurred this year would have no discount rate, so to include that cost simple subtract the amount from the NPV.

Select Texas High Plains CRP Rental Rates/Acre and Associated NPV/Acre for 10-Year Contract

We need to do the same for crop returns. I’ve taken forecast crop prices from the most recent 2021 Baseline Update for U.S. Agricultural Markets provided by FAPRI, included basis for wheat and cotton, and taken sorghum’s normal price relationship to corn, to establish prices through 31/32. Keep in mind that sorghum is priced higher than average relative to corn, cotton prices are through the roof, and wheat is up quite a bit too, though these forecasts should account for some of that variance. I then used AgriLife District 1 Budgets from 2021 for dryland crops, to calculate expected returns from 21/22-30/31. I kept input prices high for 21/22, but set them back to the previous 5-year average after, assuming/hoping those prices return to normal. Using the same NPV formula as above, I’ve calculated a base expected return over variable costs for five crop systems.

NPV for Select Texas High Plains Crop Returns over Variable Costs/Acre, 21/22 – 30/31

Values in red are NPVs that are less than the minimum NPV, from the CRP rental rate of $12/acre. Values in green are greater than the minimum CRP rental rate, but are all still less than the 2021 average rental rate. In addition to the base outcome I’ve also varied the potential returns to crops. Scenarios with 25% lower NPV than the base could represent a variety of scenarios; ten years of poor yield, ten years of low prices, ten years with high input costs, short term extreme deviations from the base expectations, or some combination thereof. Scenarios with better NPV outcomes represent the opposite possibility.

Should I Enroll in CRP?

The main takeaway appears to be that if you are able to secure the regional average CRP rental rate on land that would otherwise go into one of these dryland crop systems, you are better off doing so, all else equal. The regional average CRP rental rate provides an NPV approximately $85/acre higher than the average NPV of the five dryland systems we evaluated. In 12 of 26 counties on the Texas High Plains, the 2021 rental rate exceeded that average rental rate of $23.89/acre.

Lastly, keep in mind that this is worth evaluating for yourself. If you feel that I’ve used an inappropriate discount rate given the current economic environment, a different one might change the calculus here. If you are in a dryland cropping system with better-than-average yields for the region (sorghum = 25 cwt, cotton = 400 lbs, wheat = 20 bu. & 70 lbs. gain) CRP may not be the right choice for you. Alternatively, if you believe that input costs are destined to remain as high as they are, I might have overestimated crop returns, and therefore CRP may look more profitable. Also, don’t forget to include the cost to getting land into CRP shape when making this decision.

There are plenty more adjustments to CRP worth considering. We have not evaluated Grassland CRP, the potential for cost-share in getting land into CRP, a few updates to CRP, or CRP-adjacent programs like SAFE, EQIP, CREP, or Continuous Signup. For questions, contact your local NRCS office, or feel free to reach out to Pancho at pancho.abello@ag.tamu.edu, or myself at benavidezjustin@tamu.edu