USDA: Penalties remain in place for existing CRP contracts

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For weeks people have been anticipating, or some may say nagging, for a USDA decision on whether or not the agency should allow for penalty-free early outs from the Conservation Reserve Program (CRP). And at least the answer for now is "no" according to an announcement made Tuesday by Secretary of Agriculture Ed Schafer.

"After carefully considering the recent crop reports, weather conditions, the price trends we're seeing in the grain markets and the likelihood of increasing land for crop production, we have decided not to allow the penalty-free release of CRP land at this time," Schafer said in a news conference. (Click here for the full transcript.)

He explained that despite the damage and disruption caused by the severe floods earlier this summer, "the indications so far are that the impact on this year's corn and soybean crops will be less than what was originally feared."

Crop progress conditions continue to improve as USDA reported Monday conditions above the 5-year average. Schafer also shared record high prices in June corn prices have retreated 25% while soybean prices backed off 14%.

Without taking any action, land is and will be brought back into production, Schafer said. The 2008 Farm Bill lowers the cap of CRP acres from the current 39.2 million acres to 32 million, Schafer said.

The 34.7 million acres currently enrolled will have to shrink, he said. On Sept. 30, 2008, 1.1 million acres expire, followed by 3.8 million in 2009 and 4.4 million in 2010 totaling 9.3 million acres set to expire within the next 3 years. Some of those will be reenrolled, while others will expire and enter into production.

Currently there are "no plans at this point in time of doing any new enrollments for CRP acres," Schafer said. Most of the CRP acreage lies in the High Plains states where wheat is the main crop. A smaller percentage of acreage is located in the traditional corn and soybean belt, USDA officials said.

CRP contract holders have the option of taking their acres out of the program early in exchange for returning all payments they have received plus interest and pay a 25% penalty. For some it made economic sense. This spring the number of acres being withdrawn early with financial benefits being repaid was 50% higher than year earlier levels, Schafer said.

Farm Service Agency Deputy Administrator of Farm Programs John Johnson said in the past 19 months, producers farming a total of 288,726 acres have accepted the penalty for ending their CRP contracts early. The number of acres pulled out averaged 15,000 acres a month and peaked in April and May with approximately 34,000 and 37,000 acres respectively.

Mixed reviews

Clearly there are winners and losers with this decision. One major winner who may not be able to tell his or her story is the contract holder who paid the penalty for ending the CRP contract early. In a game of what's fair, it is fair that the government upheld its commitment to contracts.

The USDA left the door open for a potential change of heart on the issue. In defending the decision, Schafer did say he felt it was "an appropriate call" at this point in time. "If something changes in the future, we may be back revisiting the issue," he clarified.

Normally the decision wouldn't be made until August or September after more information was known about the final crop. But in the comments from Schafer with reporters today you could tell it was a mix of industry anxiety and media coverage pressuring an earlier decision. In addition, wheat growers needed to know if they could pull out their land and seed it in the upcoming weeks.

According to the National Pork Producers Council, an additional 5 million to 7 million corn acres will be needed in 2009 to meet the ethanol industry's demands and to keep the U.S. pork industry from contracting even more than the 10% predicted by many over the next several months.

"That million acres will allow us just to keep our heads above water going into 2010," Black said, "but that only works if we have strong corn yields in 2009. Bad weather next year, without additional CRP acres in production, will again mean producers going out of business and even further consolidation in the pork industry.

It isn't just livestock users who recognize the supply crunch at hand. One individual from the ethanol industry said surprisingly the most important political decision for the ethanol industry is not whether EPA reduces the ethanol mandate or eliminates export tariffs, but rather if USDA opens up additional CRP acres by eliminating the penalties.

The National Grain and Feed Association encouraged the administration to "keep the door open to reassessing the situation, saying that CRP penalty-free early outs were a 'prudent' policy response that is necessary to give producers the flexibility to help relieve the precariously tight supply situation confronting grain and oilseed markets." The group cited growing food inflation and a need to supply growing world food, feed and fuel needs with CRP acres as "the most readily available tillable acreage to produce more grains and oilseeds."

But if USDA comes back in August or September after crop production estimates don't become reality, what does it do to the credibility of USDA?

Tell me what you think about a penalty-free early out? Enter your comments below.

 

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