BY SCOTT YAGER, ESQ., MARGARET TODD, ESQ., AND SARAH EVERHART, ESQ.
The Biden Administration is exploring various options to mitigate climate change and the most promising approach may be to incentivize farmers to implement practices that sequester carbon in the ground. U.S. Department of Agriculture (USDA) Secretary Tom Vilsack made overtures supporting this approach and is working in earnest to create the first-ever carbon bank of this sort. Secretary Vilsack asserted that USDA has the legal authority to enact a carbon bank, and the agricultural industry is coalescing behind policy principles that generally support a voluntary and incentive-based approach. Policy alignment of the government and industry could be enough to breathe life into it.
While a government bank designed to pay farmers for carbon storage is a novel and exciting prospect, the blueprint of implementing such a program is already on file at the USDA. Agricultural conservation programs being carried out by USDA’s Natural Resources Conservation Service (NRCS) help farmers pay for the cost of implementing practices that promote productive lands and healthy ecosystems. Although carbon banking is a relatively new concept, the on-farm practices that farmers will need to have in place to participate in the banking program are nothing new for farmers. This is especially true for Maryland farmers who have comparatively high rates of conservation practice implementation and are well aware of how these practices improve water quality and factor into the ongoing Chesapeake Bay clean-up process.
Now is an opportune time to bone up on agricultural conservation programs so you can advise your clients on what opportunities may come. Understanding how these programs function and being able to advise on any pitfalls therein is a must for a legal practitioner representing farmers.
OVERVIEW OF FEDERAL PROGRAMS
Federal conservation programs have been around since 1935 when the Soil Conservation Service, now known as NRCS, was created as part of the New Deal, shortly after the Dust Bowl shut down farming in the Southern Plains. In the 85 years since, conservation programs have greatly expanded and are now administered by two agencies within the USDA – the NRCS and the Farm Service Agency (FSA). The NRCS uses science-based technology to provide conservation planning and assistance to farmers/farm landowners to benefit the soil, water, air, plants, and animals for productive lands and healthy ecosystems. The FSA is involved in conservation through the administration of the Conservation Reserve Program (CRP) and the Conservation Reserve Enhancement Program (CREP). NRCS administers over 20 programs and subprograms that are directly or indirectly available to financially and technically assist farmers and landowners who wish to practice conservation on agricultural land.
Conservation programs fall into various categories depending upon the intended use of requested funds. For example, CRP and CREP, offer yearly rental payments to participants for temporarily (a period of 10-15 years) removing environmentally sensitive land from agricultural production and planting the area with native plant species that will improve environmental quality. Environmental improvement programs, like the Environmental Quality Incentives Program (EQIP), provide farmers/landowners with technical and financial assistance for the planning, installation and implementation of structural, vegetative and management conservation practices on agricultural land and forest land. Easement programs, such as the NRCS Agricultural Conservation Easement Program (ACEP), focus on preventing conversion of productive working lands to non-agricultural uses by helping landowners, land trusts, and other entities protect and restore working farms and ranches through conservation easements. Other program focus areas include emergency assistance after natural disasters, compliance assistance, and those specifically for wetlands and grazing/rangelands.
To apply for conservation programs, individual farmers/landowners must meet the eligibility criteria, including requirements for active farm engagement, adjusted gross income limits, and conservation planning. Some agricultural conservation programs require program participants, either individuals or legal entities, to provide significant contributions to the farming operation and be “actively engaged in farming.” Contributions can consist of capital, land, or equipment, as well as active personal labor or active personal management. The management contribution must be critical to the profitability of the farming operation and the participation must involve some risk. All participants in programs subject to the “actively engaged in farming” requirements must complete a CCC-902 Farm Operating Plan, either for an individual or legal entity. (Some programs like CRP do not require the actively engaged determination.)
In order to receive federal cost-share payments, the program participant cannot have an adjusted gross income (AGI) of more than $900,000 (averaged over the last three years). As part of the application process, applicants will be required to complete an Average Adjusted Gross Income Certification Form CCC-941 and consent to Disclosure of Tax Information. If an applicant exceeds the AGI limit, he/she can still participate in a program but will not be eligible for federal payments. Each member of an entity or beneficiaries of trusts will have to complete an AGI form and meet the AGI limitation. If an owner exceeds the limit, the entity can still qualify and that member’s share will be reduced.
Participants in agricultural conservation programs are required to have a farm number – a unique identifier used by the USDA that runs with the land, not the farmer. The local FSA office can check if the land already has a farm number. If not, the office can issue one with proof of identity and control of the land (i.e. deed or lease). Participants are also typically required to have and comply with, a Soil Conservation and Water Quality Plan (Conservation Plan). Conservation Plans are tools designed to help farmers better manage a farm’s natural resources. Staff at local Soil Conservation District (SCD) offices create Conservation Plans by assessing the farm and creating a custom plan for how best to manage the farm’s natural resources. Normally, the creation and compliance with the Conservation Plan is a voluntary act, however, participation in a federal conservation program requires mandatory compliance.
Legal practitioners should be aware that the structure of an agricultural lease can impact eligibility for conservation program participation. For instance, a landowner who cash leases land is considered a landlord under the payment limitation rules and may not be considered “actively engaged in farming.” In a cash lease situation, typically only the tenant is considered eligible. Landowners may become eligible for program payments if the landowner is taking on some of the risk associated with the farming and lease payments are based on a share of crop production, proceeds, or gross revenue. Lawyers who draft agricultural leases will want to ask clients about participation in conservation programs and include lease terms that align with program participation requirements.
If funded, program participants are required to sign a contract and agree to implement the planned conservation practices to NRCS standards and within a defined time frame. Participants must typically commence a practice, in the first 12 months of the contract and complete all practices according to the schedule included in their contract. Also, participants cannot start any financially assisted practices that are included in their application prior to obligation of their contract. Practices started before contract obligation will be considered ineligible for payment. Participants must also agree, by certifying on USDA Form AD-1026, that they will not: (1) produce an agricultural commodity on highly erodible land without a conservation system; (2) plant an agricultural commodity on a converted wetland; or, (3) convert a wetland to farmland. These restrictions, known as the Sodbuster and Swampbuster provisions, are meant to remove incentives to farm on converted highly erodible land and/or converted wetlands and a violation of the provisions can result in ineligibility for numerous USDA farm program benefits.
Although SCD and NRCS staff explain the cost-share contracts to applicants, ultimately it is up to the farmer/ landowner to read the terms and comply with the contract provisions. One of the first things to realize about conservation program contracts is that the details are all in the Appendices, separate from the page where the client signs their name. Reminding your client to read the fine print before signing can help avoid noncompliance issues or contract termination.
Contract violations (aka noncompliance) occur when a program participant fails to adhere to the terms and conditions of the contract. Noncompliance can occur when the participant fails to complete conservation practices as scheduled in the contract, the participant loses control of land under contract (e.g. lease termination or land transfer), a conservation practice or activity fails within its lifespan and prior to contract expiration, or the participant fails to meet other contract provisions outlined in the contract appendix. For example, if a farmer is enrolled in CRP to install and maintain a grass buffer, the farmer has an obligation to use approved measures to prevent other types of vegetation from growing in the buffer area and failure to maintain the conservation practice as outlined in the contract may be considered noncompliance.
NRCS may provide a reasonable time not to exceed 12 months (as determined by the NRCS State Conservationist) for the participant to correct the violation or face contract termination. If the nature of the violation does not allow for a reasonable time to regain compliance, NRCS may immediately terminate the contract. Participants should work with their local NRCS office to modify their contract (when applicable) before a violation occurs.
Early termination of a program contract typically triggers breach, which means the original participant will forfeit all rights to any future payments; be required to refund all or part of the payments made with respect to such contract plus interest thereon; and pay liquidated damages (25% rental payment/acre x total number of acres involved in the breach).
A participant who is considering selling a farm should be careful to inform potential buyers of all program contracts. Conservation program contracts are personal to the applicants, are not recorded or referenced in the land records, and do not run with the land. At the time of land transfer, program participants will need to either terminate the contract or get the purchaser to agree to assume the contract. If the new owner or operator does not become a successor to an existing conservation contract within 60 days, the contract will be considered terminated with respect to the affected portion of the land and the original participant will be responsible for refunding payments and liquidated damages to the federal government.
Although federal conservation programs are broad in scope, farmers/landowners have many options for conservation-related technical and financial support, including environmental non-profits, environmental engineering companies and the State. It is the applicant’s responsibility to compare and contrast the available options and choose the conservation program support that will be the best fit.
MARYLAND AGRICULTURAL COST-SHARE PROGRAM
Since the early 1980’s the State of Maryland has administered its own cost-share program for agricultural best management practices, the Maryland Agricultural Cost Share (MACS) Program. The General Assembly created the MACS Program to reduce the impacts of non-point source pollution from farmers on water quality. The MACS program is currently managed by the Maryland Department of Agriculture (MDA) and administered by local SCDs.
Through the MACS Program, Maryland farmers are able to receive financial reimbursement for on-farm conservation practices which prevent soil erosion, manage nutrients and safeguard water quality in streams, rivers, and the Chesapeake Bay. Common examples of the more than 30 practices funded through the MACS program include grassed waterways planted to prevent erosion, streamside buffers of grasses or trees planted to filter sediment and farm runoff, and animal manure management systems.
A farmer leasing farmland may initiate a MACS Program application, however, the farm owner(s) must also sign the application prior to submission. The MACS Program applications are reviewed by SCDs and judged on whether there is a high potential on the farm for the movement of nutrients, sediment, animal wastes, or agricultural chemicals impacting the waters of the State. The farmer and the SCD staff work together to choose the appropriate best management practices to address farm management goals and water quality problems. At the time of application, a MACS Program applicant will also be asked to enter into a MACS Agreement (a copy of which is available on the MDA website) in which the farmer will agree to comply with all nutrient management laws and to construct and maintain the practice for the life of the practice, in other words, the period of time in which the MDA has decided the practice will effectively serve its purpose. An applicant also agrees to allow the SCD staff to, upon reasonable notice, inspect the practice to ensure it is being maintained and utilized properly. Applicants also agree to inform the MDA of any change of possession or ownership of the farm where the project is located.
Once the project has been completed, a farmer submits a claim for payment. To be eligible for payment, the SCD certifies that the project meets all applicable standards and specifications. The MDA distributes cost-sharing funds only after it has received this confirmation from the SCD. If a MACS Program participant fails to adhere to the terms of the MACS Agreement, the applicant is required to pay back the MDA the full amount of all reimbursed cost-share funds. Unlike federal cost-share payments, the MACS Program payments and the terms of the Agreement are secured, (all program payments in excess of $5,000) by a lien that runs with the land on which the practice is installed.
The total amount of cost-share funding available from the MACS Program has been, for many years, at the same level of 87.5 % of the cost to install the conservation practice, however, this legislative session, a Bill was passed (SB0344) and is currently awaiting the Governor’s signature which will increase the amount of available MACS reimbursement to 100% of the costs of installation of practices that, in the discretion of MDA, will help Maryland meet Chesapeake Bay clean-up goals. The total amount of cost-sharing a farmer can receive is limited to (1) $50,000 per project and $150,000 per farm, for projects other than animal waste treatment and containment projects and (2) $200,000 per project and $300,000 per farm for animal waste treatment and containment projects.
HOW CONSERVATION PROGRAMS FACTOR INTO THE CHESAPEAKE BAY CLEAN-UP
The MACS Program is credited as one of the reasons Maryland, at the 2017 Chesapeake Bay clean-up mid-point assessment, had met its reduction goals for both phosphorus and sediment. Between fiscal years 2009 and 2017, the MACS Program provided $54.6 million in grant funding toward the installation of 4,435 conservation practices on Maryland farms. Maryland, along with the five other Bay states and the District of Columbia have committed to achieve their Chesapeake Bay water quality clean-up goals by 2025 and the continued implementation of agricultural conservation practices are a critical component of the agriculture sector reaching those goals. Between now and 2025, Maryland plans to reduce nitrogen from agriculture by almost 5 million pounds, and according to the Phase III Watershed Implementation Plan, the nitrogen reduction in the agricultural sector will be achieved, in large part, through high rates of best management practice implementation.
Understanding agricultural conservation programs will enable attorneys to provide insightful counsel to their farmer/landowner clients. The practices promoted through state, federal and private programs create tangible environmental benefits at a critical time in the Chesapeake Bay clean-up process. A solid grasp of the programmatic intricacies of conservation practices will also better equip attorneys to assist clients with participating in carbon banking.