Agricultural Land Values and Rents under the Conservation Reserve Program

One objective of the Conservation Reserve Program (CRP) is to reduce the erosion of fragile land. Additional objectives are to decrease surplus production of agricultural commodities and to provide income support for farmers. The direct net impact on farm income is the CRP payment less the farmer share of establishing cover on the land and the lost returns from taking the acreage out of production. It has long been recognized that farm program payments tied to production are capitalized into land values (see, e.g., Herdt and Cochrane 1966; Floyd 1965; Offutt and Shoemaker 1988). Traditional price support programs have this effect because the increases in returns tend to accrue to land because of its relatively inelastic supply. However, the existing target price program provides farmers with a trade-off between increased market earnings due to supply control and receiving deficiency payments. Because existing supply control programs are voluntary, participation in the program requires the payment to be more economically attractive at the margin than producing on the acreage, in which case the program benefits are directly tied to acreage reductions and will tend to be capitalized into land values. As with target price and acreage reduction programs, the impact of the CRP on land values depends on the net effect on expected farm income and returns to land. That is, how big is the increase in land returns over the next best alternative and