Facing price surge, USDA mulls conservation shift

WASHINGTON, Sept 11 (Reuters) - The government will decide in coming months whether to release land from a long-term reserve to expand U.S. crop production and keep grocery prices in check, Agriculture Secretary Mike Johanns said on Tuesday.

"It's always been an option on the table; it's back on the table for (2008)," Johanns told reporters.

"It's something we would consider ... we're certainly not near a decision point," he said. Johanns said he expected a decision for 2008 in the next 60 to 90 days.

Some 36.8 million acres, or roughly 10 percent of U.S. cropland, is in the Conservation Reserve, which pays owners to idle fragile land.

But reseve lands are under scrutiny as robust demand for corn-based fuel ethanol has pushed corn, wheat and soybean prices to record-high levels this year. U.S. and European wheat futures hit all all-time highs this month.

The price boom is good news for many farmers, but others have been hurt, like livestock farmers who must pay more for feed, or food producers facing more expensive inputs.

The extent to which supermarket shelves will reflect higher crop prices remains unclear, but U.S. food prices are expected to jump up to 4.5 percent this year, well above a typical annual increase of around 2.5 percent.

The National Grain and Feed Association says an additional 4 million to 5 million acres of wheat, corn and soybeans will be needed in 2008 to prevent crop shortages. It urged Johanns two weeks ago to act "relatively soon" to release land.

Grain processors and livestock groups want farmers to be able to return the land to crop production without penalty. Now, landowners must repay all Conservation Reserve payments when they break a contract.

Johanns said commodity prices are only part of the story behind higher food prices, pointing also to things like rising fuel costs and labor.

Rising prices have a particularly sharp effect on USDA itself, Johanns said, since 59 percent of the department's budgets go to nutrition programs such as food stamps and school lunches.

Earlier this year, USDA said it did not plan to admit land into the Conservation Reserve in 2008 or 2009, except for filter strips along waterways and similar high-priority land.

An estimated 4.6 million acres will leave the reserve from 2007-10 as contracts expire, USDA said on March 9. Some 1.8 million acres were in contracts that expire on Sept. 30, USDA figures indicated.

(Additional reporting by Charles Abbott)