Crop Production/Industries, Land Economics/Use, Resource /Energy Economics and Policy,

Di Corato, Luca

Lagerkvist, Carl Johan

Mandal, Maitreyi

English

Research Papers in Economics

Title of Poster: Farmer Participation in the Conservation Reserve Program and 
Bio-fuel Production under Uncertainty and Irreversibility
Authors: Luca Di Corato*, Maitreyi Mandal & Carl Johan Lagerkvist
Corresponding address: Department of Economics, SLU, Box 7013, Johan Brauners väg 3, 
Uppsala, 75007, Sweden. Email: luca.di.corato@slu.se. Telephone: +46(0)18671758. Fax: 
+46(0)18673502.
Department of Economics, SLU, Uppsala, Sweden. 
Poster prepared for presentation at the Agricultural & Applied Economics Association’s 
2011
AAEA & NAREA Joint Annual Meeting, Pittsburgh, Pennsylvania, July 24-26, 2011
Copyright 2011 by Luca Di Corato, Maitreyi Mandal & Carl Johan Lagerkvist . All rights 
reserved. Readers may make verbatim copies of this document for non-commercial 
purposes by any means, provided that this copyright notice appears on all such copies.Farmer Participation in the Conservation Reserve Program and 
Bio-fuel Production under Uncertainty and Irreversibility
Luca Di Corato* Maitreyi Mandal** Carl-Johan Lagerkvist***
Department of Economics, Swedish  University of Agricultural Sciences, Uppsala, Sweden
Introduction
The Conservation Reserve Program (CRP) is a voluntary agricultural 
land program established in the 1985 Farm Bill as a strategy to 
environmentally enhance and benefit farmlands. The program’s 
provisional benefits offer the mitigation of soil erosion and 
sedimentation, the improvement of watershed control, and increased 
biodiversity and wildlife habitat conservation. It technically and 
financially supports farmers to switch marginalized and unproductive 
acreage to vegetative cover. 
The 1985 Farm Bill exercised strong restrictions on the commercial 
development of CRP land. Following much debate, in 2002, amendments 
were made to the Farm Bill which incorporated the opportunity for CRP 
land management to include grazing, haying and biomass harvesting. The 
stipulations in the revised legislation maintain that land use for grazing, 
haying or biomass energy crop cultivation shall be assessed a 25 percent 
reduction in annual rental payment, as well as limit harvesting or grazing 
management to a maximum of once every three years (Mapemba et al., 
2007). Changes in energy policies, by supporting the growing demand for 
biomass production, are influencing land competition and consequently 
impacting CRP participation. 
Objective: To focus on the impact that policies subsidizing energy 
crop cultivation may have on CRP participation. 
This paper focuses on the biomass energy crop, switchgrass (Panicum
virgatum), which is a warm-season perennial grass native to North 
America. After establishment, switchgrass for biomass feedstock is 
expected to have a productive life of 10-20 years if managed well. 
Switchgrass is an extremely well competitor within the stand; though it is 
not considered to be an invasive plant. It adapts well to a variety of soil 
and climatic conditions and is most productive on moderately well to 
well-drained soils of medium fertility with a soil pH at 5.0 or above.
Farmed switchgrass can be grown on marginalized land as a 
renewable and carbon neutral alternative to corn ethonal
production. Credit: Photo provided by the USDA-ARS.
If Interested in Learning More:
* luca.dicorato@slu.se
** maitreyi.mandal@slu.se
*** carl-johan.lagerkvist@slu.se
Department of Economics
Swedish University of Agricultural Sciences (SLU)
P.O. Box 7013, Johan Brauners väg 3
SE-750-07 Uppsala, Sweden
The nominal returns have been deflated to a 1982 base using the PPI available 
from the Bureau of Labor Statistics. Finally, we have calculated the drift (α) and 
volatility (σ) parameters of the associated Geometric Brownian motion (GBM). 
A risk free rate of 9% which is equal to the current yield of 3-moths US treasury 
notes (source: Bloomberg) was used. Table I represents various exogenous 
model parameters which are characteristic of Nebraska. 
For convergence purpose, we use a drift of 0.04 (drift < risk free rate) 
though our calculated drift was 0.15. We take $45/dry ton as offered by the 
BCAP program as the current level of subsidy to biofuel producers. There is 
some ambiguity regarding the exact amount of subsidy a bioenergy farmer will 
be entitled to in future when the actual commercial production will take place. 
We also take the cost of switching (k) between growing switchgrass as 
bioenergy stock and joining the CRP program as 0 as the representative farmer 
here grows switchgrass in both the cases. For numerical simulation purpose, 
we have created 4 subsidy scenarios representing a subsidy share of full 100% 
($139.6/acre), 80% (111.6/acre), 50% ($69.75) and 20% ($27.9/acre) as 
received by the feedstock producers. Subsidy at state 1 i.e. = $0/acre. We also 
take 2 different contract lengths of 10 and 15 years each to represent the effect 
of contract size in our model.
Conclusion
Results are preliminary but consistent with our expectation. We expect
that the enrollment threshold will be lower with increasing subsidy. As
subsidy goes up from $27.9/acre to $139.5/acre, the switching threshold
of enrollment ($/acre) at State 0 goes down from $14.4/acre to $2.9/acre
in case (a) and from $12.26/acre to $1.8/acre in case (b). A longer
contract length effectively lowers the switching thresholds as longer
contract period increases uncertainty.
Methods
The farmer is considered as holding the option to participate to the CRP. 
The exercise of such option is triggered by a critical threshold at which, 
accounting for uncertainty on agricultural returns and subsidy, enrolment 
is preferred to the cultivation of energy crops. Intuitively, we must have 
two thresholds at which according to the policy state the farmer enters 
the CRP. Three possible scenarios are of interest:
a)  t≤ *0: profit are so low that the farmer switch to CRP in any case,
b)  *0< t≤ *1: the farmer wait if under state 0 and enroll under CRP
c)  *< t : the farmer waits and cultivate energy crops in any case.
This is formulated as an optimal stopping problem in continuous time 
which, completely characterizes the optimal enrolment strategy as a 
critical time threshold triggering participation. We regulate the switches 
between the two possible policy regimes, 0 and 1, where subsidies s0
and s1 = (1- )s0 with 0 <  ≤ 1 are paid, respectively. The switch regimes is 
irreversible and regulated by a Poisson process with intensity  and a 
jump probability  dt. This will allow us to isolate the impact that subsidy 
policy and its expected duration have on farmer willingness to 
participate. 
The optimal enrolment time threshold under state 0, 0≤ 1 solves the 
following equation (see paper for details):
and in terms of economic insight in can be shown that this requires that 
the net instantaneous benefit from enrolling cover the rental cost of the 
capital invested.
Study Area
State of Nebraska in USA has been chosen as the study area to estimate the parameters of
our model. CRP program was first introduced in Nebraska in 1986 and as of December 2010,
it covers a total area of 919714 acres. The return is equal to the farm gate price of
switchgrass times yield minus the various production costs. Ethanol price in $/gallon is
available from the Department of Energy Office of Nebraska from 1982 onwards. We have
used an estimated biofuel conversion cost of $ 1.4 per gallon (Babcock et al, 2007) and a
production cost of $194/acre as reported by Duffy and Nanhou (2001), respectively.
Transportation cost is assumed to be $8 per ton (Babcock et al. 2007). Switchgrass yields are
based on pilot experiments (Khanna et al. 2008, Khanna 2008, US-EPA, 2009) and the average
switchgrass yield is 3.10 tons/acre and the standard deviation is 0.20 tons/acre. It is also
assumed that a ton of switchgrass produces 100 gallon of ethanol (Schmer et al. 2008).
Preliminary Results & Discussion
Table 1: Characteristic Model Parameters of State of Nebraska
Numerical simulations
a) Contract length 10 years
b) Contract length 15 years
Motivation
Energy policies, by supporting energy crops, have increased land 
competition and consequently impacted on CRP participation. In the 
period 2010-2014, 20.6 million acres of land under CRP contracts across 
the US will expire. Hence, it is crucial to undertake research focusing on 
land-use choice after contract expiration. This will allow the design of 
CRP contracts able to promote enrolment (and re-enrolment) under the 
rising pressure of energy crops. 
Parameter Representation Value used in the study
p Fixed CRP Rental Payment of 
Nebraska
$60.83/acre
r Risk Free Interest Rate 0.09
α Drift of Switchgrass return 0.04
σ Vol. of Switchgrass return  0.544
Enrollment 
Threshold 
($/acre) at 
State 0
Enrollment Threshold 
($/acre) at State 1
Subsidy Level 100% (i.e. 
$139.5/acre)
2.927 16.53
Subsidy Level 80% (i.e. 
$111.6/acre)
6.757 16.53
Subsidy Level 50% (i.e. 
$69.75/acre)
11.006 16.53
Subsidy Level 20% (i.e. 
$27.9/acre)
14.479 16.53
Enrollment
Threshold
($/acre) at State 0
Enrollment Threshold 
($/acre) at State 1
Subsidy Level 100% (i.e. 
$139.5/acre)
1.832 15,38
Subsidy Level 80% (i.e. 
$111.6/acre)
4.196 15,38
Subsidy Level 50% (i.e. 
$69.75/acre)
8.027 15,38
Subsidy Level 20% (i.e. 
$27.9/acre)
12.268 15,38

Farmer Participation in the Conservation Reserve Program and Bio-fuel Production under Uncertainty and Irreversibility

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