Association for Public Policy Analysis & Management

The question of how agricultural subsidies affect farmland values and the concomitant issue of the distribution of the benefits of farm support programs has become critical in farm policy debates. Although the primary goal of U.S. agricultural policies over the past century has been to increase farmers’ income, whether agricultural subsidies actually benefit farmers is an open question. The Conservation Reserve Program (CRP), the largest private-lands conservation program in the U.S., was established by the Food Security Act of 1985. Under this program, farmers choose to convert highly erodible cropland to vegetative cover for the purpose of improving environmental health and quality; in return, they receive an annual rental payment for a contract period of 10 to 15 years. While the economic valuation of environmental benefits of the CRP has been well documented, only a few studies have focused on the impact of the CRP on farmland values or rental rates.

This study explores the impact of the CRP on farmland cash rents using the county-level panel data of the CRP enrolled acreages and payments as well as farmland cash rents in the U.S. The objectives of this study are twofold. First, we consider both the enrolled acreages and payments of the CRP, controlling for the endogenous allocation of the CRP. In specific, a fixed-effects method is used to control for unobserved heterogeneity related to time-invariant factors that affect subsidies, net returns, and rental rates. An instrumental variable (IV) approach is then employed for the CRP enrolled acreages or payments variable to address the endogeneity issue, estimated with a two-stage least square (2SLS) approach. Second, we investigate the direct effect of the CRP on both irrigated and non-irrigated cropland cash rents, and the indirect effect on pastureland cash rents.

We make two distinct contributions to the literature. First, no study, to our best knowledge, has evaluated the effect of the CRP on pastureland cash rents, although another type of land use, developed land, has been examined. While the primary goal of the CRP is to retire highly erodible cropland, prior research has found the significant impact of the CRP on pastureland acreage in Iowa. Given that the existing cropland acreage can create input and output marketing infrastructure network that affects the land market for other land uses (e.g., slippage effects), the CRP may also drive the demand for other land-use changes such as pastureland. An investigation of the indirect effect of the CRP on pastureland cash rents can offer some evidence to see if there exist any spillovers from the CRP. Second, most previous studies examined cropland in general, few of them have separated the irrigated cropland from the non-irrigated cropland in the literature. Since irrigated and non-irrigated agriculture affect local environmental conditions quite differently, especially those related to water and soil which is the primary goal of the CRP, an exploration of the potentially heterogeneous effects of the CRP on irrigated and non-irrigated cropland cash rents can provide more evidence on the outcomes of the policy implementation.