Thursday, March 13, 2008

Taking Land Out of the CRP

I thought I would take a little bit of time today to share some of what we have learned about taking land out of the Conservation Reserve Program (CRP) ... you can read about what the CRP is HERE. As I have mentioned before most of the land we are in the process of buying is in CRP right now. In fact of the 38 acres there are 31.5 acres in CRP right now, and as far as we can tell they have been in for about 14 years. But, taking land out of CRP isn't as easy as just deciding to do it ... it takes money and time!

We are planning on taking out the 26 acres of pasture and leaving the other 5.5 acres in the program. Normally land that is placed in the Conservation Reserve Program needs to be land that could be in crop production, but our land owner must have know somebody! The 5.5 acres we are leaving in is mostly a wooded hill on the other side of a ravine. We will leave it in as long as we can and collect the money ... probably until the contract ends.

I have heard of CRP contracts running for different amounts of time, but I think normally they are around 7-10 years in time. When you sign up you must basically leave the land alone, although you are allowed to do some waterway improvements and seeding or even mow a path through the land. It can be used for hunting and mowed down in the winter. But, if you want to take it out of the program before the contract is up you will have to do a few things ... and by a few things I mean give them money.

You must pay back all of the money that has been paid out during the time of the contract. Those payments include the contract money and any other cost sharing money that was given for land improvements. Next you must pay interest on that money which varies from year to year. In our case the interest was as low as 2% for one year and as high as 5.5% for another. Really, the interest isn't that big of a deal. Finally, you must pay 25% of one years payment for "Liquidated Damages". They are quick to point out that the "Liquidated Damages" fee is not a penalty!

Now, it is important to recognize that you must pay this back regardless of whether or now you received it and in some cases if your contract was extended (instead of ended and then a new one put in place) you may have to go a long ways back. I talked with someone the other day who had recently found out that they would have to pay back 14 years worth of payments! I'm not saying it is right or wrong ... just saying how it is.

For us, we are just looking at the CRP buyout money as part of the land expense and we decided that it still made the land reasonably priced for the market. I can understand why some farmers are pushing for a provision in the new Farm Bill that would allow them to take the land out without having to pay back anything, but I don't think it is going to happen.

If you have any CRP questions fire away ... because of this I have learned a lot more about the program than I knew going in! I wish we wouldn't have to pay to take the land out, but it is what it is...

18 comments:

Steven said...

It sure doesn't make a lot of sense to me, but then again not many government programs do. It seems that if you have a 7 year contract and 5 years are up, the land was still a wildlife haven, etc. for the 5 years. It doesn't seem right to have to pay it ALL back... with interest... with a fee.

Rich said...

This is a good illustration of the problems associated with our nation's "Farm" policies.

Both of my grandfathers made their livings as full-time farmers, one of my grandmother rented the farm out after my grandfather's death and lived off the proceeds, and I started farming it again last year.

One small wheat field was signed up for the CRP program by the renter, and it is my understanding that since he was farming it on a share basis, he received 2/3 of the payment because that was his share at the time of signing. Thankfully, the contract expired long ago and I don't have to deal with ending a CRP contract early.

I wasn't involved in that decision, and don't know if Grandma understood completely what she was agreeing to, but there is something fundamentally wrong when the renter receives ANY kind of payment when they have nothing invested, and the landowner could be forced in the future to repay the payments the renter received.

I might be mistaken in my observations, but it is a personal sore spot with me whenever I hear people and politicians talk about the virtues of the CRP program.

Tim said...

Having to pay back all of that money that you never benefitted from, in my humble opinion, is a load of CRP! :)

Yeoman said...

Well, let me be the contrarian here.

This may all seem odd, but it really isn't. It's a commercial contract, and there's all sorts of commercial contracts that have punitive features to them.

The farmers incentive to enroll the land is that they get paid. The incentive not to back out is that you have to pay the money back.

Sort of like a contract for deed (installment land contract). If you quit paying 29 years into a 30 year contract for deed, the seller takes it back. Too bad for you if you default. And lots of folks buy land and houses that way.

Actually, I think we cattle farmers, who are after all grass farmers, ought to be grateful for CMP. It puts a lot of land back into grass, effectively. In the end, if you take it out, it's grass. A lot of that land would go from wheat one year, to corn another, ect., if it weren't for CMP.

Steven said...

Yeoman,
I understand that what you're explaining is how the program works. I just don't like it. You could take away the part about having to pay it back and say that the "incentive not to back out" is that you won't get paid anymore. I guess the way they are looking at it is that if the land isn't fallow for a minimum number of years then it isn't worth leaving it fallow.

Rich said...

Besides the financial aspect of CRP, (which I dislike), the irritating thing about the CRP program is the fact that it is almost entirely based on the false premise that agriculture has destroyed a piece of land and the only way it can be repaired is to entirely remove the influence of the farmer and the grazier for a set portion of time (if not forever).

I admit that some cropland should have never seen the plow and should have remained grassland. But, it can be almost as damaging to remove
grazing from grasslands.

Lisa said...

Couldn't you negotiate something with the seller to help pay the money back? I mean, if they are trying to sell the land, and it has a CRP contract that makes it very expensive for the buyer to do anything with their new land but keep it as is, wouldn't the seller has an interest in helping with that?

The Beginning Farmer's Wife said...

Lisa- Ethan is out of town for a couple days (I have been sending his posts up for him), but I think I can answer your question.

We were told by our realtor that this farmer was going to hold out until he got every penny he was asking for. He was an older gentleman that had the land paid for and was getting paid to have it (because of the CRP payments). The reason that he was selling it was because it was the only piece of his farmland that was on that side of town, and if he sold it now, he could get all of his money at once instead of over the years in CRP payments.

We were told that he had had some offers that were very close to what he was asking, but he didn't even counter.

When we decided to put in our offer, which was what he was asking, the realtor found out he had gone to Arizona for a month plus. He didn't want to do the paperwork by mail but wanted to wait until he got back. On his way back, a month later, he took the train back and got off a day or two here and there to break up the trip. So obviously he wasn't too concerned about selling his land - which is why we were directed to just offer full price.

Even with paying off the CRP, we feel it still was a good deal compared to similar land in our area.

As for all of the other questions . . . I better wait until Ethan gets back to let him answer.

Yeoman said...

Steven and Rich, I don't disagree with your logic, but I think here that the government's logic (as much as I hate to admit it) might be better on this one.

To start with, CRP is not a farming program. It's a conservation program. It's designed to take crop lands out of production, for the benefit of wildlife, over a contractual period. As the government doesn't trust the landowner to keep the cash around for the full time period if the landowner breaks the deal, they pay it in installments.

It's much like an installment land contract that way. The Seller agrees to take his payments in installments, but if the buyer breaches, he gets the land back. . .all of it, and the buyers is just out of luck.

Another aspect of this is that we should remember that the landowner can get out, as Ethan is demonstrating. Yes, there's a penalty, but the government's deal with the original landowner was for a full term.

Also, the government tends to be fairly willing to give farmers a break for drought and the like, much over the objection of nearly everyone else. We should remember that, as this is a popular program, but it's a program which is often the target of farm critics. When farmers complain about not being able to get out early for free, it's a big deal to non farmers. We tend to not realize it, but this is cited as an example of how short sighted farmers are, and how untrustworthy with the publics' cash we are. I'm not saying that's true, but the public feels if we signed up for X years, we signed up for X years.

Shoot, for that matter, if I sell cattle to another farmer over time, I want the money. I figure if I gave farmer Brown 5 years to pay, I'll get paid over five years. I don't expect farmer Brown to come back after 4 years, with cows that are four years older, and give them back.

On the effectiveness of CRP, it's far from perfect, and it's abused. In some areas people "farm the government", by putting in wheat crops they never intend to harvest, and couldn't if they wanted to as the soil is so bad. They then commit them to CRP. So it has a lot of problems. Having said that, I don't agree fully with Rich as the long history of this goes back the Great Depression when some farmers really were destroying their farms through overproduction in a desperate effort to stay afloat. Farmers were plowing fence line to fence line with no market, and the government reasoned that to save farmers they had to encourage some land to go out of production. It's far from perfect, but it isn't without some basis to it.

In reading all this, one of the ironies that strikes me is that around here CRP ground is used as a marketing tool. There isn't much of it, but it has a value in a unit in that it derives a certain income. Ranches with CRP are more valuable on the market than those that don't have it. Most don't have it.

Steven said...

I just have to wonder if the founders intended for the FEDERAL government to be doing these kinds of things. Just rubs me the wrong way.

Yeoman said...

Well, in regards to farm land, you'd have no such early concept by the Founders. That doesn't mean that its a good or bad idea, however. And its hard to know what they'd think of it, although it might not really matter.

On farmland, there were likely a variety of opinions, but most of the founders held an agrarian view of agriculture. They thought that having self sufficient farmers on the land was necessary for a free state. Suffice it to say, what they'd probably find most abhorrent about modern American agriculture is the presence of so many corporate farms, industrial farms, and absentee farmland holders.

Probably the first big change in farm holdings, from the government's prospective, was the idea that the Federal government could keep all the public lands when states came in to the Union. Early on, any unoccupied land was believed to belonged to the states themselves, once they became states, except for reserved Federal lands. Later, however, the Federal government was not so generous to the States. They were more generous, however, with the public, as they allowed members of the public to homestead the land up until 1932. States usually sold the land.

I've sometimes wondered if it would be worth it to try to argue that the homestead acts contemplated individual agricultural use of the land, not corporate use of it, and not uses of it that weren't agricultural. That's a loosing argument, however, and I know there's no real legal support for it.

Ethan Book said...

I think I said something along these lines in my post ... but, for me at this time, "it is what it is". It was not a secret going in, and when we made our final offer we were fully aware of the situation. My problem with CRP is that it is a system that just doesn't seem to work (maybe like some other government programs). I personally know PLENTY of farmers who are getting large checks to "conserve" land that they already were conserving because it was not possible to farm (hay or crop) and because the didn't have livestock. Others are getting paid to "conserve" land that they couldn't even get an implement to (again and they have no livestock). In fact a perfect example of this is the 5.5 acres that we are leaving in. It is a forest (which the do have a forest program, but it isn't as profitable as CRP). We will receive four hundred dollars a year to not do anything with land we couldn't have done anything with anyways. It is on the other side of a steep ravine (so animals couldn't have gotten there), it would cost a bundle to fence, and it is covered with trees (I bet the would allow me to cut the trees anyways). In fact, maybe I can cut our fire wood from that piece and then get paid to heat the house :)

Good debate, and it is always great to look at two sides of the issue. Like I said, "it is what it is" ... my main point in writing was to get the word out about how to take the land out because the government isn't very clear on it most of the time.

Janelle said...

We are looking to buy some land from a farmer who has his land in CRP...the contract is up in October, our question is can he sell it to us before his CRP contract is up?

Jay said...

I am buying land that has a crp on it, if I refuse to sign onto it, am i held liable for the back payments or are the previous owners?

Jay

Anonymous said...

I bought a farm and bought out the crp contract and paid the government about 42K.
Now it's tax time. How do I claim the expense on my tax return?

theSchleyer said...

Hey Guys,

I'm trying to buy 2 acres out of CRP to build a house on. Our local ASCS office agent told me it would take her a long time to calculate the interest. That was three weeks ago. I personally think I could do this in 15 minutes or less. If I can find the information, I'm going to create a spreadsheet for her to use going forward to make this an easier process for the next guy. Based on this article, I have an idea of the fees charged, but I need to know what interest rate they use. Do they use CPI or something like that? Please help! My wife is really excited to have our own place.

Anonymous said...

On Apr. 11, 2013 Anonymous said that they bought out the CRP contract and paid the goverment about 42K. Now it was tax time and they were wondering how to take the expense. Any answer? Does it add to basis, is it amortized or can the expense be taken on the Sch e or F?

Rhonda said...

Can I receive my crp payment a few months early?

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