Reviewing the Proposed Expansion of the SHIPP Cropland Set-Aside Program
Market Intel / July 16, 2020
USDA administers a variety of conservation programs with an emphasis on voluntary land retirement, working lands and conservation easements. The most notable is the Conservation Reserve Program, a voluntary land retirement program that provides financial compensation to landowners who voluntarily remove highly erodible and environmentally sensitive lands from agricultural production and install resource-conserving practices or preserve wildlife habitat. Annual expenditures under the CRP total nearly $2 billion, and since 1987 USDA has provided more than $50 billion in CRP rental payments to farmers and ranchers.
In addition to modifying CRP, the 2018 farm bill also created a pilot program, the Soil Health and Income Protection Program, designed to promote the use of cover crops. Under the pilot program, a maximum of 50,000 acres could be enrolled across Iowa, Minnesota, Montana, and North and South Dakota for three to five years. Designated for land that was recently in crop production with a limitation that no more than 15% of the farm acreage can be enrolled in the program, SHIPP is not available for expiring CRP contracts. Farmers who enroll acres in SHIPP receive an annual rental payment and are also provided flexibilities in haying and grazing the cover crops outside the primary nesting season without a reduction in the annual rental payment – providing an additional revenue stream on acres enrolled in SHIPP.
Expansion of SHIPP Proposed
Enrollment in the 2018 farm bill’s SHIPP program was already open through August 2020. Now, following COVID-19-related disruptions to the farm economy, the House’s recently passed Health and Economic Recovery Omnibus Emergency Solutions Act proposes expanding SHIPP from 50,000 acres to 5 million acres and establishing a new sign-up deadline of December 2021 – potentially impacting the 2021/22 through 2023/24 crop years. The expanded SHIPP is a de facto expansion of the CRP land retirement program and is designed to provide additional direct payment support to producers enrolling acreage in the program.
The proposed expansion of SHIPP would allow up to 5 million acres nationwide to enroll in a three-year SHIPP contract with an annual rental rate of $70 per acre and an additional $30 per-acre cost-share payment to establish a cover crop, for a total payment of up to $100 per acre. In contrast, the existing program provides rental rates equal to 50% of the county rate. Similar to the existing program, the emergency SHIPP would provide flexibility for haying and grazing outside of the primary nesting season without a reduction in the payment.
Importantly, the emergency SHIPP provisions in the HEROES Act would allow USDA to make an advance payment for the three-year SHIPP rental rates. Given the maximum SHIPP payment of $100 per acre, the emergency payment would represent an upfront and direct payment of $300 per acre. Given the 5-million-acre cap and three-year contract length, the emergency SHIPP expansion is estimated to cost $1.5 billion. In addition to the $300-per-acre direct payment, the flexibility for haying, grazing and harvesting for seed would provide additional revenue-generating opportunities for producers with SHIPP acreage.
Will SHIPP Expansion Enhance Farm Income?
As currently proposed, SHIPP would provide a maximum rental rate – including the cover crop cost-share – of up to $100 per acre. When considering the advance payment on the three-year contract, up to $300 per acre would be paid to enrolled producers – regardless of the local county rental rates -- and would then be supplemented by additional revenue from haying, grazing and harvesting for seed. As a result, the financial benefits of the emergency SHIPP would be significant for producers with enrolled acres in the program. It would be even more significant for enrolled producers in areas with lower average county rental rates. In many cases, the per-acre returns and profitability from SHIPP would exceed those from conventional row crop production given the likelihood that SHIPP ground would be low productivity cropland. It’s also unclear if cropland with base acres enrolled in SHIPP would still qualify for farm program payments such as Price Loss Coverage.
During 2019, U.S. farmers planted more than 5.3 million acres of cover crops. Nearly 1 million acres of cover crops were planted in South Dakota, followed by Minnesota at 692,000 acres, and Texas at 460,000 acres. The top 10 states in planted cover crop area in 2019 represented nearly 4 million acres, or 75% of total cover crop acreage. Given that not all cropland is suitable for cover crops, the cover-crop cost share of $30 per acre is likely to lead to the financial benefits of the emergency SHIPP being concentrated in areas with intense cover-crop utilization, such as the Prairie Pothole Region. This, in turn, could create competitive advantages for producers with SHIPP acreage. Figure 1 highlights county-level cover crop acreage during 2019.
For producers without SHIPP acreage, the emergency SHIPP is unlikely to significantly enhance farm income in the long-run, as shown in a recent University of Illinois analysis, World Market Conditions Suggest Set-Asides Not an Effective Farm Policy for Corn and Soybeans, that suggests large-scale acreage set-aside programs provide only a short-term boost in commodity prices. The price-enhancing effects of these programs are short-lived because higher prices and profitability provide economic incentives to expand production in areas outside the U.S.
As evidence, consider that over the last two decades the U.S. market share of global corn exports has fallen from 64% to 33%. During this same period, the U.S. market share of corn production has fallen from 43% to 33%, and the U.S. market share of corn harvested has fallen from 21% to 17%. The dramatic decline in the market share of corn exports is in large part due to increased domestic demand associated with ethanol production. Similarly, for soybeans, the U.S. market share of exports is now at 35%, compared to 50% or more two decades ago. Due to a significant expansion in South American production, the market share of U.S. soybean production and harvested area has fallen to 31% and 26%, respectively, from 43% and 39% two decades ago. Figure 2 highlights the U.S. market share of U.S. corn and soybean exports, production and harvested area.
To provide additional financial support to producers impacted by COVID-19, the House-passed HEROES Act creates an emergency three-year acreage set-aside program to facilitate the planting of cover crops. Under the current proposal, SHIPP would be expanded from 50,000 acres regionally to 5 million acres nationwide, with returns up $300 per acre. The program also provides participating producers the opportunity to earn additional income through haying, grazing and harvesting for seed. The expanded SHIPP is expected to cost $1.5 billion.
The economic benefits of the emergency SHIPP are likely to be concentrated in areas with intense cover-crop utilization, such as the Prairie Pothole Region. In the long-run, the significant and de facto expansion of voluntary acreage set-aside programs is unlikely to boost crop prices or farm income given the rapid expansion in acreage globally alongside the diminishing market share of U.S. crop production, acreage and exports.
Current Farm Bureau policy opposes the expansion of the CRP acreage cap – which SHIPP effectively does in the short-run. However, some form of SHIPP is likely to be included in the Senate’s next COVID-19 relief package. To minimize the likely market-distorting effects of the emergency SHIPP associated with a high regional concentration in program participation and large program payments, lawmakers could consider aligning the rental rates with local county rental rates, instead of a fixed rental rate; lowering the acreage cap such that it does not expand the existing program as significantly; capping acreage enrollment at the state- or county-level at a percentage of planted area (5% is approximately equal to 1.5 million acres nationwide and 10% is equivalent to 3 million acres nationwide); removing the advance payment component; or including additional limitations on the ability to hay, graze or harvest for seed without financial penalty. These changes would reduce the economic incentive to enroll SHIPP acres by more closely aligning SHIPP payments with expected per-acre returns from conventional crop production.