Integrating Conservation and Commodity Program Payments:
A Look at the Tradeoffs
A single payment program
that supports farm businesses while encouraging
environmentally sound farming practices could work,
but with tradeoffs.
Roger
Claassen and Marcel
Aillery
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A payment program that integrates characteristics
of conservation and commodity programs
could
simultaneously support working farms
and ranches while improving environmental
quality, with some tradeoffs. |
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If
policymakers structure payments to focus
on environmental gain, income support
benefits would be more broadly distributed
across the U.S. agricultural sector.
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If
policymakers seek to preserve the existing
distribution of commodity program payments
within an integrated program, environmental
gain would be lower and per unit costs
of environmental benefits higher than
under a similar program focused on conservation. | |
This
article is drawn from . . . |
Integrating
Commodity and Conservation Programs: Design
Options and Outcomes, by Roger Claassen,
Marcel Aillery, and Cynthia Nickerson, ERR-44,
USDA, Economic Research Service, November
2007. |
You
may also be interested in . . . |
Greening
Income Support and Supporting Green,
by Roger Claassen and Mitch Morehart, EB-1,
USDA, Economic Research Service, March 2006. |
Can a single program support farm
businesses while encouraging producers to adopt
environmentally sound farming practices? That is
the question underlying proposals to roll commodity
program payments and conservation payments into
a single program. This hybrid approach, sometimes
referred to as “green payments,” would
combine the farm income support feature of existing
commodity programs with those of conservation incentive
payments (see box, “Shades
of Green”). Under such an integrated payment
program, agricultural producers receiving commodity
program payments would also work to improve their
environmental performance (and vice versa)—an
intuitively appealing quid pro quo.
The challenge of a green payments
program is to meld conservation and commodity program
payments into a single, workable whole. Commodity
payments have a variety of intended goals, such
as fostering an abundant supply of food and fiber
and supporting and stabilizing farm income.
Conservation programs are more narrowly focused
on promoting environmentally sound farming practices.
Integrating commodity programs
and conservation programs would require revisiting
basic questions of program design: Who would be
eligible for payments? How large would payments
be? And what environmental actions would be required
of producers who receive them? The answers to these
questions will determine how much environmental
gain would be realized and how income support benefits
would be distributed across producers.
Although it is tempting to view
a merger of commodity and conservation programs
as a “win-win” proposition, policymakers
would face tradeoffs in attempting to balance commodity
and conservation objectives. At one level, the tradeoff
is clear: for a given level of payment, the contribution
to income declines as the cost of conservation increases.
The portion of a payment that compensates agricultural
producers for mandatory out-of-pocket costs, lost
production, higher risk, and other costs associated
with adoption of conservation practices does not
contribute to the net income of the farm or ranch.
A more subtle tradeoff may arise if agricultural
operations eligible for commodity program payments
differ from those that can produce the largest environmental
gain per dollar of conservation cost. Policymakers
could have to choose between (1) targeting payments
to meet commodity objectives while sacrificing some
environmental gain, or (2) targeting environmental
gain while recognizing the possibility of shifting
the distribution of payments away from producers
and regions that have traditionally received commodity
program support. Currently, recipients of the commodity
program payments are largely producers of major
field crops—grains, oilseeds, cotton, and
rice.
Where You End Depends
on Where You Begin
The level of environmental gain
and distribution of commodity program payments depends
largely on the starting point for program design—either
existing commodity programs or conservation programs.
Existing compliance provisions require soil conservation
on highly erodible cropland and conservation of
existing onfarm wetlands. Producers who fail to
comply could lose commodity program payments. Policymakers
could require additional conserving practices—such
as nutrient management, pest management, and soil
conservation on non-highly erodible land—as
a condition for future payments. The net income
support portion of such a payment would be equal
to the total payment, less the costs associated
with adopting conservation practices to address
compliance requirements.
On the other hand, integrated
payments could be viewed as an opportunity to refocus
farm policy on environmental performance, or stewardship.
Payments could encourage farmers and ranchers to
produce environmental “goods and services,”
such as clean water and wildlife habitat in the
same way that market prices encourage production
of traditional agricultural commodities like wheat,
corn, or beef. Agricultural producers could do this,
with respect to clean water for example, by controlling
sediment, nutrient, or pesticide runoff from their
operations. Payments could be commensurate with
the level of environmental gain or environmental
performance. Thus, producers who deliver the largest
gain or the best performance, relative to the cost
of their conservation practices, would receive the
highest level of net income support.
An ERS study of green payment
program options considered four hypothetical program
scenarios (see box, “Defining
and Modeling Program Scenarios”). The
scenarios were developed for illustrative purposes
only, and were not intended to mirror specific proposals.
Rather, the scenarios were defined to capture key
features of alternative program designs. The analysis
is intended to show how program design might affect
the environmental cost effectiveness of the program
and the distribution of payments.
Getting the Most for Conservation
Dollars
Conservation payments are environmentally
“cost effective” when they produce the
largest possible environmental gain for a given
level of spending. Although both environmental performance
and compliance scenarios leverage environmental
gain, performance scenarios produce much larger
environmental gains for a similar level of conservation
expenditure. The differences in environmental cost
effectiveness across the four green payment program
scenarios are largely a function of three key determinants:
the broadness of program requirements that define
the pool of possible participants, the effectiveness
of payment incentives in encouraging the participation
of producers who can deliver large environmental
benefits at low cost, and the flexibility that producers
have in responding to payment incentives.
The Improved Performance
scenario is the most environmentally cost-effective
alternative, partly because virtually all farms
are eligible to participate in the program. Moreover,
as payments are proportional to environmental gain,
participation incentives are focused on producers
who can deliver large gains at low cost; such producers
stand to make the largest monetary return on producing
environmental benefits. Finally, program applicants
are free to select which tracts of land are offered
for program enrollment and which resource concerns
are addressed on those tracts. Again, given the
structure of payment incentives, producers will
offer combinations of land and conservation treatments
that yield large payments relative to practice adoption
costs, thereby maximizing the return on program
participation while providing cost-effective environmental
gain.
The Good Performance
scenario is slightly less cost effective in producing
environmental gain because payments are structured
around an environmental threshold that producers
must reach before they qualify for payments. With
this approach, producers who have already achieved
a relatively high level of environmental performance
are rewarded with payments based on environmental
performance rather than environmental gain.
No additional conservation is required to receive
payments. At the same time, some producers who could
make cost-effective environmental gains may decline
to participate because they are required to reach
the environmental threshold in order to receive
payments.
Extended Compliance is
the least environmentally cost-effective scenario.
Eligibility is restricted to current commodity program
participants, payments are not tied to the potential
to deliver environmental gain, and producers are
presented with a take-it-or-leave-it package of
environmental requirements. To retain eligibility
for income support payments, producers must satisfy
all requirements regardless of cost (or environmental
benefit). The Modified Compliance scenario
is more environmentally cost effective than Extended
Compliance because it allows producers to opt
out of some requirements, with a reduction in payment
proportional to the loss of environmental gain due
to the opt-out. Environmental cost effectiveness
is improved because producers are encouraged to
drop expensive, low-benefit activities while complying
with relatively high-benefit, low-cost requirements.
Moreover, because producers are free to focus on
cost-effective environmental gains, some producers
who would not participate in Extended Compliance
would probably sign up for Modified Compliance.
Scenario Implications
for the Distribution of Green Payments
In attempting to merge programs
that support farm operations with those that encourage
environmentally sound farming and ranching practices,
policymakers face tradeoffs. Although each of the
green payment program approaches would result in
substantial net income support for producers, the
four scenarios result in very different distributions
of income support across agricultural operations.
The distribution of payments in the environmental
compliance scenarios is similar to that under existing
commodity programs. Net income support is different,
however, because conservation costs vary across
operations. On the other hand, the environmental
performance scenarios result in a very different
distribution of payments and net income support
across farm types, commodity specializations, and
regions.
The design features that make the
environmental performance scenarios relatively cost
effective at producing environmental gains—a
broader pool of eligible participants and payments
based on environmental performance—also drive
the distribution of payments and income support.
Under the environmental performance scenarios, smaller
payments per farm operation are spread over an increased
number of program participants, with a substantial
share of payments allocated to producers who are
not eligible for current commodity programs. Larger
commercial farms (with gross annual sales of more
than $250,000) continue to capture the largest share
of overall payments. However, payments would generally
increase for intermediate-sized operations and smaller
rural-residence operations. The share of payments
to producers of grain crops and cotton decreases,
whereas the share to producers of livestock and
other crops increases. Beef producers, in particular,
would benefit if grazing lands become eligible for
environmental performance-based payments. Regionally,
payments would shift from the Corn Belt and Plains
States, where grain production is concentrated,
to areas where livestock and specialty crop production
dominate.
If policymakers intend to refocus
farm policy to enhance environmental stewardship,
payments based on environmental performance would
reallocate net income support across the sector.
If policymakers want to maintain income support
levels to traditional constituents of commodity
programs, a compliance requirement may be a better
option, although it will come at the cost of substantially
smaller environmental gain.
Shades
of Green |
The term “green payment” has
had different meanings in different contexts.
In this article, a green payment is a payment
to agricultural producers that addresses
both commodity and conservation objectives.
Sometimes, however, the term refers to any
agricultural conservation or environmental
payment, regardless of its relationship
to commodity objectives. Green payments
should not be confused with payments made
under “green box policies.”
Green box policies under World Trade Agreement
(WTO) rules include programs that have little
or no impact on commodity prices or trade.
These policies are given the green light
to go forward under WTO rules, and do not
necessarily require a link to conservation
objectives.
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Defining
and Modeling Program Scenarios |
The
four scenarios considered in the ERS analysis
represent alternative green payment program
designs. Two ERS scenarios focus on strengthening
the compliance requirements tied to existing
commodity programs—Extended Compliance
and Modified Compliance. Under Extended Compliance,
payments accrue to crop farms eligible for
existing commodity programs (about 25 percent
of all farms), but require participants to
satisfy extended compliance provisions (e.g.,
soil erosion control on all croplands, plus
nutrient and pest management). Modified Compliance
is similar to Extended Compliance, except
that producers may opt out of high-cost conserving
practices by accepting a reduction in payments
commensurate with the reduction in environmental
benefits delivered.
The other two program scenarios—Improved
Performance and Good Performance—are
similar to current conservation programs in
their emphasis on providing environmental
benefits. Under the Improved Performance scenario,
payments are based on the change in environmental
performance relative to a producer’s
current level of stewardship. Improvements
in environmental performance are measured
by an environmental index, similar to the
Environmental Benefits Index (EBI) used to
rank proposed contracts for Conservation Reserve
Program general signups. EBI points could
be obtained for undertaking a wide range of
conservation treatments: soil erosion control,
nutrient management, pest management, and
enhancement of wildlife habitat, among others.
Nearly every U.S. farm and ranch would be
eligible for a green payment, not just those
producing crops targeted by traditional commodity
programs (i.e., grains, oilseeds, cotton,
and rice).
Good Performance
is similar to Improved Performance,
except that payments are based on a level
of environmental performance over and above
an established minimum environmental threshold,
rather than the change in environmental performance.
In contrast to the Improved Performance
scenario, Good Performance would
allow producers already operating at a high
level of environmental stewardship to receive
payments without taking additional action
to improve their environmental performance.
On the other hand, producers with relatively
poor levels of environmental stewardship would
have to improve performance to reach the threshold
before becoming eligible for payments.
These four scenarios were
analyzed using data on a nationally representative
group of farms derived from USDA’s Agricultural
Resources Management Survey. Using a simulation
modeling framework, ERS assessed how a producer
might decide to participate in a green payment
program, given the nature and location of
the farming operation, program options available,
and resource concerns specific to the farm.
For each farm, researchers estimated the number
of acres where the application of conservation
practices would yield environmental benefits,
how much environmental gain could be realized,
what level of payment the producer could expect
for applying those practices, and how much
it would cost the producer to apply those
practices. It was assumed that agricultural
producers would participate in the payment
program when the payment offered exceeded
the cost of adopting required practices.
In the four scenarios described,
the share of program payments representing
conservation spending and net income support
is not fixed. The allocation of funds between
these purposes would arise naturally from
producer responses to incentives provided
under the voluntary programs. As the model
allows for estimating the cost of adopting
qualifying practices, payments can be separated
into two components: (1) conservation expenditures
and (2) net income support—the difference
between total payments and conservation expenditures.
In the analysis, each of
the four green payment scenarios implicitly
allocates a substantial portion of program
payments to income support. Depending on the
scenario and overall program size, 50 to 90
percent of producer payments represent net
income support, as payments generally exceed
average costs of conservation practices installed
on enrolled acreage. These results also suggest
that all four scenarios would result in substantial
environmental gain. How much environmental
gain is actually realized will depend on how
effectively conservation expenditures are
used in leveraging environmental gain. |
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