Set aside programmes: Using U.S. experience to evaluate U.K. proposals

Journal of Rural Studies,

Vol. 4, No. 3. pp. 181-191, 1988

0743-0167188 $3.00 f 0.00 Pergamofl Press plc

Printed in Great Britain

Set Aside Programmes: Using U.S. Experience to Evaluate U.K. Proposals David E. Ervin” Department

of Agricultural

Economics,

University

of Missouri, U.S.A.

Abstract -

The lengthy U.S. experience with cropland diversion is helpful in evaluating U.K. set aside proposals. Acreage reduction for supply control in the U.S. has never reached its promised potential. Now, a new programme is using set aside for erosion control. Despite 50 years of practice, the past and current U.S. cropland diversions suffer serious problems. Three major U.K. set aside proposals have surfaced, two aimed at supply control and one at the provision of conservation and environmental services from farmland. Each has strengths and disadvantages, but none suffer all of the problems of American programmes, at least in their proposed forms. Too much can easily be expected of set aside which in barest form is just a land use constraint. Its best role may be as an interim supply adjustment mechanism with price restraint, which also provides compensation to disadvantaged farmers but, most importantly, secures non-market conservation and environmenta services.

Introduction During the current period of agricultural surpluses in many countries, set aside or cropland diversion is reqeiving heightened attention. The U.S. will idle over 68 million acres (about 18% of its total crc)pland) during 1987 (U.S. Department of Agriculture, 1987). Now the U.K. and the European Cammunity (EC) appear poised to divert some of theiz farmland also.

Given these events, it is timely to reflect upon the go@, procedures and possible consequences of various set aside approaches. The opening section of ths paper explains the goals, structure, operation and< performance of current cropland diversion efflarts in the U.S. Then the major set aside proposals which have surfaced in the U.K. are prqcented. In the third section, the U.K. schemes are discussed with the benefit of U.S. cropland diversion history. The conclusion tries to place set aside in realistic perspective with regard to supply * Professor, Department of Agricultural Economics, Ur$versity of Missouri-Columbia, U.S.A. This paper was prepared while the author was a Visiting Professor with the Agricultural Economics Unit, Department of Land Ecwomy, University of Cambridge, England. Appreciation is extended to Ian Hodge, Bill Boggess and Clive Potter for insightful and helpful comments. Any remaining ertiors are the sole responsibility of the author. Ccintribution from the Missouri Agricultural Experiment St&ion Journal Series.

control ment.

and conservation/environmental

enhance-

Cropland diversion in the U.S. Over the past 50 years, U.S. farm policy has predominantly attempted to prevent unacceptably low farm incomes and stabilize prices through price and income supports. To avoid the accumulation of excess supplies from the supports, a variety of acreage reduction programmes have been implemented. They have ranged from required annual adjustments for commodity price support participants to longer term approaches, such as the Soil Bank in the late 1950s and 1960s. Potter (1986) has summarized the evolution of U.S. cropland diversion programmes noting their direct and indirect relationships to environmental protection. The U.S. Congress generally writes omnibus legislation defining the federal government’s role in the agricultural sectors every four years. Known informally as the ‘Farm Bill’, it sets the tone for government intervention in the farm related sectors. In 1985, Congress wrote a new farm bill (85FB) facing three very important forces. First, excess capacity in the agricultural production sector appeared to be growing, which threatened rising commodity programme costs. Second, the farm industry was undergoing a severe financial crisis with 181

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David E. Ervin

as many as lo-20% of operators already having declared bankruptcy or being on the verge of doing so. Finally, there was significant public concern about the environmenta damages from soil erosion, both losses from on-site productivity reductions and off-site costs, such as water pollution. Faced with these pressures for government cost restraint, income support, and erosion control, Congress passed legislation establishing what may be the largest cropland diversion programme in modern history. Two components comprise the total effort. The first, titled the Acreage Reduction Programme (ARP), sets out the required annual cropland diversions for those U.S. farmers who wish to enroll voluntarily in the commodity price support programmes’ and avail themselves of those benefits. The Conservation Reserve Programme (CRP) is the second and is designed to withdraw highly erodible cropland from arable production for 10 year periods. Acreage reduction programme

As noted above, to limit federal budget exposure under agricultural price supports, voluntary participants in government commodity programmes must withdraw a given percentage of their normal crop acreage during the production year. Three different mechanisms were designed in the 85FB to accomplish this task. The first, labeled ‘set aside’, is the percentage of a farmer’s planted acres which must be idled without compensation in order to receive commodity programme benefits. The second, called ‘acreage limitation’, is identical to the first except the percentage applies to a farm’s ‘crop acreage base’,’ which is generally larger than planted acres because a farmer may choose to plant some of the normal acreage base for a crop to a different crop in any particular year. Therefore the acreage limitation has more production control effect. Finally, if the set aside or acreage limitation measures are considered insufficient, the government may compensate farms to idle a further percentage of planted or base acres. The compensatory payment for this ‘paid diversion’ is based on the foregone yield and the approximate net return for that production. On all of the ARP diversions, a minimum set of soil conservation

practices must be carried out where they are deemed necessary. Table 1 displays the relevant percentages chosen by the Secretary of Agriculture for each mechanism during the 1986 and 1987 crop years. Note that the Secretary opted to use the acreage limitation rather than set aside to maximize the number of acres idled. By recent standards of comparison, these are large numbers and reflect the high degree of excess capacity in U.S. agriculture today (Dvoskin, 1987). The ARP diversions in 1986 idled about 45 million acres, just over 11% of the nation’s usable cropland (U.S. Department of Agriculture, 1986). This total was easily exceeded in 1987 given the increased percentages, especially for feedgrains, and the continued depressed world prices encouraging a large percentage of producers to join the commodity programmes and avail themselves of the price support benefits. Indeed, the figure greatly exceeds the highest normal diversion in recent history, 50 million acres in 1969, and approaches the figure of 78 million for the infamous payment-in-kind (PIK) programme in 1983. A government programme without problems is a rarity indeed, and the ARP is not one of the rare exceptions (Cochrane and Ryan, 1976). To understand the sources of the problems, consider the inherent nature of the mechanism and the goals of those participating. Basically, the ARP diversions are constraints on cropland use, and the participating farmers are trying to maximize their profits with the least influence (cost) by the constraint. The first problem is the celebrated ‘slippage’ as a result of which the impact on production by the ARP control is lower than expected. Producers’ actions to offset the consequences of the constraint generally take three forms: (1) participating farmers idle the poorest yielding areas; (2) remaining cropland on participating farms is operated more intensively if the programme has the effect of lifting crop prices above levels that would otherwise occur; and (3) farmers not participating may bring potential cropland into production due to the higher crop prices. The effects under (2) and (3) assume that U.S.

Table 1. Acreage reduction programme percentages,

1986-1987

Feed grains

Wheat

Rice

1986

1987

1986

1987

1986

1987

Set aside Acreage Iimitation Paid diversion

0 22.5 2.5

0 27.5 0

0 17.5 2.5

0 20 15

0 3.5 0

0 35 0

Total

25.0

27.5

20.0

35

35

35

Set Aside Programmes output changes due to the ARP can have a significant effect on world supply and therefore on world price, and that U.S. farmers are affected by world prices under a deficiency payment system. The second major difficulty is that the ARP acreage constraints arbitrarily distort agricultural production resource use. By constraining the amount of land, the farmer is free to substitute other inputs, such as fertilizer, pesticides and machinery, but the costs of production will generally be greater than if the land weire unconstrained. Moreover, the substitution of other resources often replaces the labor that was necessary to farm the idled acres, thus increasing labor displacement from farming (Cochrane and Ryan, 1976). Finally, the increasing production intensity on remaining cropland and conversion of potential cropland due to higher prices has caused more acute land and water environmental problems. Relevant examples include groundwater contamination from nitrates and pesticides, and conversion of wetlands to crop production. C~~serv~t~on Reserve Progra~~e

Deliberations on the 85FB saw the entry of a new and effective political interest group, a coalition of environmental organizations dedicated to the passage of the largest soil conservation programme in U.S. history (Ervin, 1986). Their success in getting the CRP and several other measures passed may hint at a new political structure affecting future agricultural policy and a possible decline of agricultural interest group influence on farm political issues. The CRP differs from the ARP in two very important respects: its primary goal is erosion control rather than supply management, and it is long term (10 years) not annual. In many respects, the CRP resembles the Soil Bank programme of the 19QOswhich offered farmers compensation in return for idling cropland for 3-10 year contract periods. However, the Soil Bank had supply control as its miin goal, not soil conservation. Nevertheless, the economic success of the Soil Bank in idling land at lo\krer cost than the annual programmes (Brandow, 1977) may have provided enough justification to politicians to try the CRP. Twin major goals drive the CRP: (1) decrease soil erosion which causes on-site productivity damages and off-site environmental costs, and (2) reduce excess crop production thereby lowering expected go~rnment commodity programme payments. To a certain extent the goals can be complementary, i.e. enrolling more cropland to control soil erosion also reduces crop production. But, they are not perfectly complementary (i.e. achieving the most erosion

183

control does not simultaneously achieve the most supply reduction) and conflicts occur as discussed below. The basic procedures for CRP operation follows (Dicks et al., 1987):

are as

1. The Secretary of Agriculture is empowered to enter into 10 year contracts with owners and operators of highly erodible cropland during announced sign-up periods. 2. Eligible cropland must satisfy technical criteria for high erosion susceptibility, have been cropped during 2 of the past 5 years, and have been purchased before 1 January 1985 or owned for 3 years prior to enrollment. 3. Qualifying owners or operators submit voluntary bids to be reviewed by the U.S. Department of Agriculture’s Agricultural Stabilization and Conservation Services (ASCS) at the state and national levels. 4. Lowest bids are accepted first and bids above a maximum acceptable level (determined from land productivity, land value and land rental information by ASCS) are rejected. 5. Bids are reviewed by state and sub-state pools which are allotted enrollment limits based on their respective percentages of eligible cropland in the U.S.; pools not filling their allotment during a sign-up lose their remaining quota to other pools assigned by the national ASCS office. 6. The maximum authorized acreage is 45 million acres with a goal of 40 million by 1990; enrollment targets were for 5 million in 198610 million in each of 1987, 1988, and 1989 and a final 5 million in 1990. 7. One-eighth of the CRP enrollment is targeted to tree planting. Several contract provisions define the responsibilities and obligations of the cropland owners and operators and therefore affect bid levels. a. Commercial harvest of crops during the contract is prohibited except if the Secretary declares an emergency (e.g. drought) or if approved forestry management practices yield salable products (e.g. thinning). b. The owner must establish an approved conservation cover (e, g. grass, trees) as soon as possible with 50% of the costs paid by the ASCS. c. An owner’s or operator’s commodity programme base acreage upon which payments are calculated is reduced by the product of the ratio of the farm’s base acreage to total farm cropland times the CRP enrolled acres. d. If the CRP land is sold, the new owner can elect to continue the contract and receive the contract

David E. Ervin payments; if the new owner declines, then the former owner may be required to return some or all of the payments plus interest. e. Enrolled land can be returned to crop production at the end of the contract, but the owner or operator will lose eligibility for all federal government agricultural programme payments if the land is not operated according to an approved soil conservation plan. (This provision is termed the ‘sodbuster’ and was designed to remedy the Soil Bank problem of land returning to production and causing erosion damages anew.) A last but crucial CRP detail is funding. To insure protection from budget cutting pressures, Congress specified that funds for 1986 and 1987 contracts would come ‘from the Commodity Credit Corporation (CCC) which appears to be exempt from the Graham-Rudman deficit reduction measure. In the remaining years, CRP funding would have to compete with other Congressional appropriations. Thus there is considerable pressure in the opening years to show the CRP is a cost effective method to control erosion and reduce productive capacity. An evaluation of the CRP’s performance to date may reveal its chances of receiving full funding over the implementation period. Table 2 presents the summary data on acres enrolled and average rental price for the four sign-ups through July 1987. Note that the rental price does not include conservation cover cost sharing which has averaged about $6 per acre per year. The data show that participation began slowly but increased markedly in the early 1987 signup, albeit at a sharply increased average rental price. Such a pattern is not surprising on two counts. First, new government programmes relying upon voluntary participation often start slowly, then increase as participants become more informed. During the first Table 2. Acres enrolled and average annual rental price by CRP sign-up period

Sign-up period March 1986 May 1986 August 1986 February 1987 July 1987 Total

Acres enrolled (millions)

Average rental price* ($/acre/year)

0.75 2.77 4.70 9.48 5.29

42.06 44.05 46.96 51.19 48.08

23.00

49.12

Source: U.S. Department

of Agriculture, 1987. *The rental price only includes the annual payment made to participants during the 10 year contract. Neither the cost sharing payment for establishing conservation cover nor the one-time bonus paid to enroll corn base acres in the February 1987 sign-up are included.

four sign-ups, there were insufficient bids to operate the ‘lowest bid accepted first’ rule, i.e. there was a lack of competition. All bids under the maximum acceptable level were accepted. Second, the increase in average rental price is consistent with the economic theory that to obtain larger quantities of a good, the average price will rise. In this case, the price increase may reflect the rising average reservation price demanded by eligible landowners to cover their foregone cropping net returns.3 The rising average is also consistent with new participants discovering the maximum acceptable bid in their region and submitting bids just under that cap. There is insufficient empirical evidence to judge which type of behavior has been predominant. Since early USDA estimates were that the average annual rental price should be around $40 per acre (in 1986 dollars), the higher prices will surely be scrutinized by Congress very carefully. Questions about why the average rental prices exceeded expected levels must await detailed analysis of the bid data. However, preliminary information from a late 1986 phone survey of landowners and operators may give some clues (American Farmland Trust, 1987). Survey results showed that many landowners who thought that their land was not eligible did in fact own eligible cropland. If this finding is representative of the U.S. in general, then competition and participation in the early rounds would have been reduced with a higher average rental price the result. This obstacle to participation was determined to be caused by insufficient CRP information reaching farmers. The 10 year length of contracts was also noted as a major obstacle to participation by survey respondents. Finally, older persons and nonoperators (owners who do not operate their farms) indicated less willingness to participate than other owners and operators. It is important to emphasize that these findings are based on responses to a phone survey about potential impediments to participation rather than analyses of CRP participation and bid data. Table 3 reveals the regional allocation of CRP participation to date. Two patterns are noteworthy. First, the western U.S. (i.e. the northern plains, southern plains, mountain and Pacific coast states) have a greater percentage of total CRP enrollment (column 3) than the sum of their eligible proportions (column 2). They accounted for nearly two-thirds of all acres enrolled but only about 49% of eligible acres. In contrast, the corn belt and Appalachian states show the reverse enrollment pattern. While just over 30% of the eligible acres reside in those two regions, only 17.5% of enrollments came from them. Two observations flow from these early results. Cropland from the plains and western states

Set Aside Programmes

185

Table 3. Regional CRP enrollment statistics (total of 1986 and 1987 sign-ups)

(1)

(2)

(3)

(4)

Percent of region’s cropland eligible*

Percent of total U.S. cropland eligible

Percent of U.S. total CRP accepted

Average rental price ($/acre/year)

Corn belt La.k/z states Northern plains Southern plains MO ntain states Pat’I$ic coast

17.69 21.59 15.53 11.97 17.94 12.71 13.73 20.59 21.68 14.61

4.34 6.92 4.07 3.73 23.58 7.93 18.28 13.12 13.32 4.71

0.43 3.31 4.31 2.95 14.25 8.64 22.64 16.31 20.88 6.27

56.50 53.56 41.08 42.44 69.61 57.96 47.33 39.66 39.44 48.63

U.S, average or total

16.71

Region North-east Ap alachian Sou4 h-east Delia states

100

100

49.12

Sou ce: Dicks et al., 1987. *El i’gible cropland includes cropland in land capability classes II-V eroding in excess of three times the soil loss tolerance level, all cropland in land capability classes VII-VIII, or cropland with an erodibility index of 8 or greater (Dicks, 1987). Total eligibility is limited to 25% of the total county cropland except in those cases where this limit has been waived by the Sedetary

of Agriculture.

was more likely to be in wheat production rather than feedgrains, and more likely to cause wind erosion damages rather than water erosion effects. A central question is whether this enrollment pattern maximizes net social benefits from the CRP. Several problem areas have already emerged in CRP implementation. Most apparent is the conflict, potential and realized, between the erosion control and: supply management goals. It takes three forms: (a) prohibiting commercial use of enrolled land raises the expense of erosion control since the land must remain idle while in the contract rather than grow a crop; (b) reducing the farm’s commodity programme base also raises the rental cost by decreasing the acreage upon which price support payments are made; and (c) enrolling the lowest bid andi most highly erodible land first generally yields less physical supply control, albeit more cost-effective to do so. Even though dual goal-single instrument programmes can be managed theoretically to achieve maximum net social economic welfare, Tinbergen (1952) has argued that in practice a separate instrument is necessary for each goal. The second and perhaps most important problem is the lack in precision in identifying CRP benefits with pre$cnt enrollment criteria. Implementation to data has jimplicitly assumed that each acre provides the same net social benefit. Such an outcome is highly unlikely. Designing enrollment criteria and procedures to select high net benefit lands, especially those generating large non-market costs both on-site andi !away from the field, is crucial to achieving maximum net social benefits for a given budget. One commentator (Phipps, 1987) has suggested even

rudimentary criteria would improve significantly upon present performance. For example, limits could be set on the amount of land admitted subject to wind erosion damage (generally in the western U.S.) to improve the achievement of water quality goals, and land that poses risks to groundwater or that causes salinity or toxic materials contamination could be enrolled. A third problem is the familiar slippage affecting all supply control efforts. In the CRP case, some slightly different types emerge. First, farmers can bring new environmentally-sensitive potential cropland into production if sufficient disincentives are not present. The penalties defined by the sodbuster and swampbuster provisions of the 85FE3 only apply to government agricultural programme participants since only they risk losing the benefits of those programmes. Also, farmers may switch enterprises on land not enrolled in the CRP due to changing relative prices and costs, and thereby diminish any reduction in excess crop supplies. Finally, the CRP runs a large risk of being socially inefficient since an inherent benefit-cost balancing mechanism is not present and many of the programme’s benefits are non-market and extremely difficult to measure. Under such conditions, it is entirely possible that different lands should have been enrolled and/or 40 million acres is too large or too small to maximize net social benefits. A first improvement as alluded to above is to implement procedures to incorporate the variation in CRP benefits across parcels even though the procedures may be imperfect. Then some type of assessment of the relative programme benefits vs social economic

186

David E. Ervin

costs for enrollment is necessary. There are difficult problems to overcome in implementing such a scheme. The oft-cited commodity programme cost saving benefits and land rental costs can be poor indicators of true economic welfare gains and losses (Ervin, 1987). In the U.S., savings in agricultural programme payments are often not net gains to society because they are transfers back to taxpayers rather than new economic growth. Also, CRP land rental costs may incorporate lost commodity programme benefits which are not increased costs of food production caused by the cropland diversion.

U.K. set aside proposals

Until recent revelations of growing cereals surpluses, set aside of U.K. farmland appeared to be relegated to a rather small scope. Efforts along these lines to preserve sites of special scientific interest (SSSIs) and to maintain environmentally sensitive areas (ESAs) apply to only about 600,000 acres (Countryside Commission, 1987; Adams, 1986). Both of these programmes use voluntary agreements to restrict certain environmentally damaging practices in the areas in exchange for compensation to offset foregone net returns. Supply management is only an incidental by-product. During 1986, however, three major proposals for large-scale set aside programmes surfaced. In addition, the EC approved an ‘extensification scheme’ in 1987 which resembles cropland diversion. A brief description of the outline of each follows. Ministry of Agriculture,

Fisheries and Food (MA FF)

The U.K. tabled a cereals land diversion proposal with the EC in September 1986. Born of concern over mounting cereals stocks, the primary purpose is to reduce cereals supplies and thereby decrease the FEOGA (EC agricultural fund) and member states’ agriculture budget contributions for supporting intervention stocks. Aid to more marginal growers who wish to contract production or exit from the industry is also mentioned as a programme objective. The pursuit of conservation and environmental services on set aside land did not appear in the proposal. Thus the overall focus is on providing cereals supply restraint and some compensation for marginal growers. In some respects, the MAFF proposal resembles the CRP: (a) voluntary participation, (b) enrolled land would not be permitted to produce a crop (unless a crop not in excess supply was planted), (c) multi-

year contract (5 years), (d) eligible land must have been in crop production causing surplus supplies (enrollment criteria are not specified however). But there are also important differences: (a) the rate of compensation would be offered by MAFF rather than soliciting and selecting bids from farmers; (b) criteria for enrollment do not concern possible conservation and environmental (C&E) benefits, (c) restrictions, such as the sodbuster, do not apply to returning the land to arable production, and (d) enrolled land could be rotated to different fields. Since MAFF offered the proposal only in outline form for EC discussion, the necessary administrative procedures are not spelled out. Thus that approach should be viewed only as a starting point for the development of an EC programme, but one that reveals the initial philosophy of the U.K. agriculture ministry toward cropland diversion. National Farmers Union (NFU)

A different set aside scheme has been proposed by the NFU (Gourlay, 1987). Arising from the organization to which the scheme would apply, it is surprising that the proposed provisions would be mandatory rather than voluntary, and not provide compensation.5 Such a decision may reflect the NFU’s concern for fairness across its membership (i.e. prevent free-riders from enjoying set aside benefits without incurring costs), and/or desire that any supply control scheme should appear effective to the public. The basic mechanism is simple in approach: each farmer who wishes to grow wheat would be required to annually fallow a given percentage of the total area devoted to wheat production, with no limit on the total acres growing wheat. For example, a farmer planning to seed 100 acres must plant only 90 acres if there is a 10% set aside requirement. The area diverted may be changed to different fields each year, thus serving the role of rotation fallow often used in extensive farming systems. Self-policing would be in force as set aside must be next to the planted field or its location made public. Not unexpectedly, the basic structure and procedures except for mandatory participation permit wide flexibility for farmers to meet the set aside requirements. The proposal’s primary goal is to limit cereals production and reduce the cost of the Common Agricultural Policy (CAP). It is viewed as a temporary measure while longer-term solutions are sought. C&E objectives are not stressed, but arguments are put that the set aside land will serve a variety of environmental services, e.g. landscape diversity, and may be preferred to land use patterns under price pressure.

Set Aside Programmes Burnham-Green-Potter

(BGP)

Researchers studying the possible relationships between set aside and C&E services offer the final proposal (Burnham et al., 1986). Revealed by use of the term ‘environmental set aside’, this policy proposal stresses the use of cropland diversion to provide a variety of nature conservation values. Thus, the programme’s primary objective is to enhance a number of C&E benefits which are perceived to be undersupplied under existing institutional arrangements. Control of excess crop supplies is relegated to a secondary purpose given the: problems explained above that the U.S. has experienced in reducing production through cropland diversion. The proposed mechanism embodies three main principles: (1) diversions are for long terms, sometimks permanent; (2) enrollment is targeted to land tracts and not farmer groups; and (3) specific land use and management practices are prescribed to advance desired C&E services. Three land uses are advanced for C&E goals: (1) encourage forestry production especially in the wetter and more remote retions where land values may fall fastest under coutinued price restraint; (2) promote heritage or lanpjiscape farming which yields C&E benefits characteristic of low-intensity farm enterprises (e.g. grazing marsh and hay meadows); and (3) allow suitable agricultural land (e.g. converted from rough pasture, marsh, moors) to revert to natural wilderness vegetation. Three types of set aside are envisioned to provide specific nature conservation values on each of the land uses: (a) fallowing; (b)j headlands; and (c) part or whole farm set aside.

Implementation of such a scheme appears to be moire complex than the MAFF or NFU proposals. The fallowing and headlands activities would be mandatory and enforced by denying eligibility for farm grants or with fines, similar to the conservation compliance provision@ of the 85FB. Part or whole farm set aside would be voluntary, wherein owners would bid necessary compensation similar to the U,$. CRP. To realize the desired C&E services, especially on whole farm diversions, the eligible land would be evaluated for conservation potential, ecological vulnerability and land suitability with current farm enterprises. Data sources for this land evaluation are critical and include soil type, land capability class and spatial environmental hazard andl constraint information. While some data are avaiilable on these land characteristics, whether they are sufficient for programme implementation must await BGP’s analysis.

187

EC extensification scheme

In June 1987, the EC Council approved amendments to 1985 structures regulations that require member countries to implement voluntary extensification programmes (hereafter EXP) (Council of the European Communities, 1987). This effort is aimed both at the conversion of production from surplus to nonsurplus crops and as an aid to extensification of the production of surplus crops. Notably, the regulation lists protection of the environment and conservation as an objective in addition to supply control and structural adjustment purposes. The EXPs are aimed primarily at cereals, beef a’nd veal, and wine production, and require a 20% reduction in output of the product over 5 years for each participating farm. Finally, the programmes will be eligible for compensation from FEOGA funds at the rate of 25% of eligible expenditures. A U.K. proposal for an EXP has not been issued at the time of writing. Thus it is impossible to project the impact of the new EC regulation on British set aside policy. Many different programme forms fit within this EXP regulatory structure, including the MAFF proposal outlined above. However, the amended Structures Regulations inject conservation and environmental objectives into set aside which were absent in the MAFF scheme. Because of the considerable uncertainty over the final form of any U.K. EXP, the following analysis will only treat the three proposals described above. Evaiuating Four

the U.K. proposals

major problem diversion programmes of U.K. schemes.

areas with U.S. cropland help to organize assessment

Goals

None of the U.K. proposals seem to suffer the affliction of the CRP which has dual and competing goals. Indeed, the MAFF and NFU plans only address supply control, while the BGP plan emphasizes C&E benefits with only secondary attention to supply control. Although multiple and competitive goals can be detrimental to programme performance, specifying and achieving a secondary goal within the primary goal boundaries is acceptable. That is, implementation procedures should be followed that permit maximum C&E services given the enrollment of lands for supply management under the MAFF and NFU schemes. Similarly, the

188

David E. Ervin

BGP plan should incorporate excess supply control to the extent that more important C&E objectives are not sacrificed. Slippage

Experience in the U.S. suggests that farmers will find ways to minimize the production control impact of diversion programmes. This type of behaviour, often referred to as ‘farming the government programmes’ is not surprising if farmers seek to maximize profits under existing constraints. The lesson is that planned production cutbacks are difficult to realize. For these reasons, U.S. farmers have taken offsetting actions and U.K. farmers can be expected to follow similar paths. One qualification is necessary however, Much of the U.S. slippage problem has stemmed from the higher prices which occur with whatever production control is achieved. These higher prices happen because the U.S. output has a significant impact on world supplies and the deficiency payments do not insulate the producers from world price movements. In the U.K. and EC, the political determination of intervention prices received by all farmers would probably block any signals to farmers from such supply reduction effects caused by set aside. Thus, the major impetus for slippage may be missing in the EC. Still, farmers may find it to their advantage to reorganize resources in the short-term, to minimize set aside production effects, by utilizing fixed immobile and/or indivisible resources most efficiently (e.g. large tractors) and/or to meet cash flow requirements. Indeed, low income farmers faced with continuing cuts in price support may attempt to farm their lands more intensively for a short period to meet existing financial obligations and thereby induce greater environmental damage. To lessen this effect, the set aside programme could be targeted to those likely to undergo severe financial stress, thus also serving as a structural adjustment mechanism. Both the MAFF and NFU proposals are probably subject to slippage. The NFU plan is mandatory, but farmers will minimize the production control impact given the short term rotational character of the constraint. In fact, the rotation fallow may increase yields on the field after fallow. The MAFF scheme would suffer from the least productive lands entering voluntary schemes first, like the U.S. diversion programmes, and possibly the rotational fallow shortcomings. Finally, if EC intervention prices are increased due to political pressures to offset stringent set aside requirements, then both plans would suffer the incentives for intensification characterizing the U.S. slippage experience.

Programme

cost

A general perception is that government cost savings for the ARP and CRP have fallen short of projections. While this may reflect a near universal law of all such public programmes, agricultural supply control efforts seem especially vulnerable. Several components comprise the total government cost impact: (a) reductions in deficiency payments, export subsidies and/or storage expenses; (b) payments to producers for set aside under voluntary administrative schemes; and (c) programme expenses. Each deserves brief discussion in relation to the U.K. alternatives. If cropland diversions do effectively reduce supplies, then U.S. commodity programmes gain in four ways. First, the amount of production on which deficiency payments (difference between the guaranteed target price and market price) must be paid will be less. Second, if the reduced supplies raise the market price, then the deficiency payment differential will decrease, Third, the amount of grain in storage will be less, thus lowering storage costs.’ Finally, any amount in storage that the government wishes to export will require a smaller subsidy because the world market price is higher. Since the U.K. and EC do not have a deficiency payment system, the savings for their set aside efforts would be confined to reduced storage expenses and export subsidies from lower intervention stocks, and a smaller export subsidy rate if world price is increased non-marginally. The proposal which garners the greatest cost savings is that which most reduces excess crop production (independent of other policy initiatives, e.g. price restraint). Although it is difficult to assess supply control efficacy because the programmes are only in outline form, the mandatory NFU scheme seems to have the edge. This conclusion assumes that the MAFF will encounter funding constraints before reaching the NFU mandatory level. If that assumption is not valid, then, of course, the conclusion does not follow. Not su~risingly, the BGP scheme should achieve the lowest supply control cost savings because it is not oriented primarily to that goal. Still, the authors stress the need for a linked reduction of price support for an effective set aside programme (Green and Potter, 1987). Voluntary set aside programmes require compensation to entice participants (and perhaps to win political approval). Imposed mandatory systems do not. Consequently, the voluntary schemes will have a higher government cost. Obviously, the NFU plan wins in this regard. However, even though the mandatory scheme does not require compensatory

Set Aside Programmes payments, society incurs a cost equal to the lost net social returns that would have been achieved had the land remained in production. The MAFF and BGP proposals would require compensation, but those amounts are transfers from taxpayers to landowners8 One way of lowering that programme cost component is to employ a bid mechanism (BGP) rather than an offer basis (MAFF). It appears however that the CRP bid system did not achieve full cost saving potential as participants quickly learned the maximum acceptable bids and raised their rental payment requests to that level. Two further comments are relevant to controlling programme cost (and enhancing performance). First, a government facing accumulations of excess crdp supplies should attempt to lower producers’ commodity price support benefit expectations. This wilU not only lower requested compensation for voluntary set aside schemes, but will also reduce the incentives for slippage and work toward reducing investment in excess agricultural capacity. In the US., that means lowering target prices. In the EC, intervention prices should be decreased. The MAFF proposal stresses the need for continued price restraint as does the BGP plan, while the NFU understandably opposes it. Second, where conditions permit, the diverted land should be permitted to produce alternative crops not in excess supply and which are less environmentally damaging than arable production (e.g. forestry, forage). Society pays a real cost if the idled land could profitably produce an alternative crop. In this respect, the BGP proposal is superior to the NFU plan, while the MAFF scheme may allow production of hops not in excess supply or tree planting, but is not firm in design. The final government cost consideration is administrative expenses. The U.S. is well equipped with a large existing bureaucracy to implement the ARP and CRP. Still, the introduction of the CRP caused reallocation of many government resources and losses in some traditional services. The U.K. will face a formidable task in administering any set aside plan and will likely have to decrease other government services or extract larger tax revenues. The NFU scheme appears to be the lowest cost alternative in this respect assuming that policing does not become a serious problem. In second place is the MAFF proposal which would necessitate an administrative apparatus to judge eligibility, conduct the compensation process, and ensure contract performance. Finally, the BGP plan appears to require the, greatest administrative commitment, including substantial resources for determining eligibility for the various activities, implementing the mandatory anti voluntary/compensatory components, and polic-

189

ing the wide range of diversion activities providing a variety of C&E services. Enrollment

criteria

The discussions of the ARP and CRP highlighted the importance of enrolling land which yielded the greatest social benefit, whether in terms of production control or C&E services. A programme may fulfil its enrollment allotment but yield very low social benefits because of poor selection procedures. In a sense, this is the most crucial determinant of the level of programme social benefits. The NFU and MAFF plans for supply control should attempt to enroll land that maximizes the avoided storage costs and export subsidies net of lost production net returns. In the NFU case, farmers will be likely to enter their least productive land and also their least profitable land, but all producers would be forced to participate. MAFF’s proposal would attract the same type of lands. but with narrower coverage due to likely budget constraints. It is impossible to tell a priori which effort would yield the highest net social benefits. The BGP scheme is decidedly superior in targeting enrollment to maximize the C&E benefits sought. Emphasis is placed on enrolling lands capable of yielding the desired C&E services and structuring contracts to insure their provision. Conclusions

Without a great deal more information on each of the U.K. proposals, a full assessment of their economic desirabilities is impossible. From the foregoing partial analysis, one can conclude that each has strengths and possible weaknesses. The NFU proposal is probably preferable to the MAFF scheme if it can be effectively policed and price restraint is continued. The BGP plan appears well constructed with regard to achieving the desired C&E services, but the individual land selections and programme scope will determine the net social benefit pattern through time. In fact, all of the proposals suffer from having to rely on administrative assessments of social economic desirability. That, of course, is not uncommon for government programmes dealing with services which are not traded on well organized markets.g But, it becomes most challenging when the government costs and benefits (cost savings) may be faulty economic cost and benefit measures (Ervin, 1987). It is worth remembering that even if the U.K. found one of the set aside programmes desirable, imple-

190

David E. Ervin

mentation in the EC is a significant step forward (Buckwell, 1986c). recision-making with 12 member countries is obviously a complex task. The recently approved EC extensification scheme provides the basic structure within which national set aside schemes can be implemented. Now the U.K. must devise an EXP which satisfies the general requirements outlined in the amended Structures Regulations. It is possible however that the EC will issue further guidelines affecting EXP development, thus complicating the national programme development process.

5.

6.

In closing, it is useful to place set aside in perspective

in the total agricultural (and environmental) policy context. Too much can be expected from this rather simple tool, which when stripped of fancy acronyms is only a constraint on land use. Based on the U.S. experience, it is at best an imperfect method to control supply and has never reached the potential which was first projected. Perhaps a more realistic perspective is to view cropland diversion as an interim measure to control suppty in conjunction with continued price restraint. In that role, it can also offer compensation to some producers who find changing government policies or market conditions have imposed serious financial constraints on continuing their operations. lo The EC extensification scheme offers potential compensation in this regard under the socio-structural policy. Finally, and most importantly perhaps, cropland diversion may be one of the least expensive ways to recover and add some important non-market conservation and environmental services associated with extensive agricultural systems which were diminished by more intensive practices brought on by high price and grant supports.

7.

8.

9.

Notes In return for withdrawing some cropland from production to meet the ARP requirements, the farm operator is eligible for: (a) a non-recourse loan for the farmer’s production of a program crop at a previously announced loan rate, plus; (b) a deficiency payment equal to the difference between the announced target (support) price minus the nationaf average market price or loan rate, whichever is higher, times the production level. The farm’s crop acreage base is the average annual amount of land that has been planted to the crop in question over a specified period, e.g. the previous five years. A proper comparison of the average rental prices would discount all values back to the initial 1986 starting date to reflect the time value of money. The swampbuster denies eligibility for federal government agricultural programme benefits if qualifying wetland is converted to cropland without a conser-

IO.

vation plan approved by a local soil and water conse~ation committee. There is some uncertainty about whether the NFU plan would or would not involve compensation. The formal proposal explained by Gourlay does not explicitly mention compensation. However, some commentators (e.g. Buckwell, 1986b) have assumed the NFU scheme would necessitate raising intervention (support) prices as compensation for the land diversion. Conservation compliance requires all owners of highly erodible cropland to begin implementing an approved soil conservation plan on that land by 1995 to remain eligible for government commodity programme payments and other programme benefits. The sodbuster and swampbuster measures which deny eligibility to the same programme benefits if owners of pasture or prairie and wetlands convert those acres to cropland without an approved conservation plan are also types of conservation compliance and took effect in 1986. EC programmes strictly comparable to these measures are not possible because the CAP operates with higher internal market prices through variable import levies. It thus involves lower direct government transfer payments to producers than the U.S. agricultural programme system. As mentioned earlier, it can be shown that most of the U.S. commodity programme savings from reduced deficiency payments are not true economic benefits, but only transfers back to taxpayers (Ervin, 1987). In contrast, any reduction in storage expenses and part of the decrease in export subsidies are real economic benefits in both the U.S. and U.K. The land diversion compensation payments can also be misleading indicators of the real social cost of set aside. Only if crop prices are not significantly affected by the supply reductions would the costs approximate the lost net returns to idling the land resources. In practice, the compensation required will reflect not only net return reductions, but losses in the value of immobile resources and changes in the risk of agricultural production enterprises (Ervin et al., 1987). A novet approach would be to design a set aside programme such that beneficiaries, e.g. C&E service users, could display their willingness to pay for those services for ready comparison with the social losses in cropping net returns by producers. These novel approaches generally do not enter the policy arena because of the difficulty of structuring satisfactory markets and the opposition of potential losers in any compensation scheme. Whether the compensation would equal, exceed or fall below the lost net returns from normal crop production is an unanswerable question until the precise compensation mechanism is defined. Under the U.S. CRP bid system, the level of payment should approximate the farmer’s Iosses in net returns, any risk aversion premium, and decreases in immobile asset values if there is sufficient competition in the CRP bid market (Ervin et al., 1987). However, under the MAFF offer system, it is distinctly possible that some farmers will enjoy a surplus over their losses in farm net returns, change in risk aversion premium, and decrease in asset values if the offer level exceeds their minimum amount necessary to enroll in the programme. That is, any offer will be based on the average payment necessary to solicit sufficient participation, but some farmers would likely enroll for a figure below the average due to varying farm cost and profit conditions.

Set Aside References

Adams, W.M. (1986) Nature’s Place: Conservation Sites and Countryside Change. Allen & Unwin, London. American Farmland Trust (1987) Unpublished results of ~nservation Reserve Program phone survey, Washington, DC. Brahdow, G. (1977) Policy for commercial agriculture. 1945-71. In A Survey of Agricultural Economics Literatare, Vol. I, Martin, L. (ed.). University of Minnesota Press, Minneapolis. Buqkwell, A.E. (1986a) Acreage reduction and supply control. Department of Agricultural Economics Disctission Paper, Wye College, University of London. Buckwell, A.E. (1986b) Controlling cereal surpluses by area reduction programmes. Discussion Paper in Agricultural Policy 86/2, Department of Agricultural Economics, Wye College, University of London. Buckwell, A.E. (1986~) What is a set-aside policy? Ecos 7, 6-11. Butnham, P., Green, B. and Potter, C. (1986) A set-aside policy for the United Kingdom. Working Paper No. 3, Department of Environmental Studies and Countryside Planning, Wye College, University of London. Busy, P. (1985) Agriculture and countryside conservation. F!arm Business Unit Occasional Paper No. 10, Wye aollege, University of London. Coehrane, W. and Ryan, ME. (1976) American Farm Policy 1948-1973. University of Minnesota Press, Minneapolis. Co+ncil of the European Communities (1987) Council Regulation (EEC) No. 1760187. Official Journal of the &ropean Communities No. L 167, 1-8. Countryside Commission (1987) New ~pportun~tiesfor the Countryside. Countryside Commission, Manchester. Dessylas, M. (1987) Commission proposals adapting agriculture to new market conditions - preservation of the countryside. CPREIIEEP Seminar Proceedings, Removing Land from Agriculture - the Implications for Farming and the Environment. London.

Dipks, M.R. (1987) Definition consistency for conserration provisions of the 1985 Food Security Act. USDA, ERS Staff Report NO. AGES8961214. Dicks, M.R., Llacuna, F. and Linsenbigler, M. The Conservation Reserve Program: summary of accomplishments 1986-87. USDA, ERS Statistical Bulletin (in press).

Programmes

191

Dicks, M.R., Reichdelderfer, K. and Boggess, W. (1987) Implementing the Conservation Reserve Program. U.S. Department of Agriculture, Economic Research Service, Washington, DC. Dvoskin, D. (1987) U.S. farm excess capacity, Choices. American Agricultural Economics Association, Herndon, VA. Ervin, D.E. (1986) Conservation in the 1985 Farm Bill: another perspective. 1986 Outlook Proceedings. U.S. Department of Agriculture, Washington, DC. Ervin, D.E. (1987) Cropland diversion (set-aside) in the U.S. and U.K.: a comparative economic assessment. Journal of Agricultural Economics, in press. Ervin, D.E., Blase, M.G., Abdelkafi, B., Dicks, M.R., K&a, 0.. Noweg, G., Thomas, R. and Kurtz, W.B. (1987) Conservation Easements: an Integrated Policy Approach to Soil Erosion Control and Agricultural Supply Management. Research Project Final Report,

U.S. Department of Agriculture Soil Conservation Service and Resources for the Future, Washington, DC. Gourlay, S. (1987) The NFU and set-aside. Speech notes to CPREiIEEP seminar on agricultural policy, London (January). Green, B.H. and Potter, CA. (1987) Environmental opportunities offered by surplus production. Unpublished paper to Council For the Protection of Rural England and Institute for European Environmental Policy Seminar, January 1987, London. MAFF (1986) Diverting land from cereals. Unpublished note by United Kingdom to meeting of Agriculture Ministers, September 1986. Phipps. T. (1987) The Conservation Reserve: a first year progress report. Resources 86, 14-16. Resources for the Future, Washington, DC. Potter, C. (1986) Environmental protection and agricultural adjustment: lessons from the American experience. Working Paper, Department of Environmental Studies and Countryside Planning, Wye College, Ashford, Kent. Tinbergen, I. (1952) On the Theory of Economic Policy. Elvesier-North Holland, Amsterdam. U.S. Department of Agriculture (1986) Agricultural Resources: Cropland, Water and Conservation Situation and Outlook Report. Economic Research Service, AR-

4, Washington, U.S. Department

DC. of Agriculture

(1987) Agricultural Resources: Cropland, Water and Conservation Situation and Outlook Report. Economic Research Service, AR8, Washington,

DC.