Weighing the financial impact of 2007 Farm Bill

Written by Cory Chandler

As work in Washington continues on the 2007 Farm Bill, a new analysis on the effects of the proposed legislation reveals that cotton farmers will take a significant whack to the wallet if the law were to go forward as written.

Researchers with Texas Tech University’s Cotton Economics Research Institute said today that net farm income for cotton would fall a stunning 15 percent during the first year under the new law, and continue to dip the next four, averaging an 11 percent decline over the five years.

According to their model, some of the major effects of the proposed 2007 Farm Bill would be:

• Direct payments, which is the amount cotton farmers get whether they plant cotton or not, would go up.
• The loan rate, or more simply put the cotton market’s economic floor, would go down.
• Changes to the counter-cyclical program will result in lower payments.
• And, finally, the overall market price for cotton would go up.

The market price for U.S. cotton is expected to rise because of a reduction in overall acreage planted due to a loss of government support. In addition, the returns of other competing crops are predicted to be relatively high.

"Acreage declines are marginal, about 2.5 percent over a five year period," said Samarendu Mohanty, an agricultural economist and associate director of the institute. "There’s a big shift initially, and then smaller as farmers adapt."

The question is whether market prices will go up enough to compensate for the losses in government support for cotton, and the answer is no.

"We lose more in government support than we gain in increased market returns, and so cotton farmers are worse off by 11 percent over a five year period," said Mark Welch, a research scientist with the Cotton Economics Research Institute.

The Texas Tech World Fiber Model baseline projections are based on assumptions of normal weather patterns and current farm policies, along with estimated economic fundamentals such as population and income growth, and prices for crops that would compete with cotton.

Among the factors not included in the researchers’ model were unknown variables such as payment limitations and extra assistance to individuals just starting out in farming.

The Tech researchers said the world price for cotton during this five-year period will rise slightly, in part due to the small drop in U.S. production. If U.S. production acreage falls – even slightly – it will have ripple effect on the world market. Today, the U.S. is the second largest producer of cotton at 19 percent.

The Cotton Economics Research Institute provides cotton economic analysis for policy makers and other interested in agricultural economy. The group conducts economic research on all aspects of cotton production, marketing, trade and processing.

CONTACT: Samarendu Mohanty, associate director of the Cotton Economics Research Institute, Texas Tech University, (806) 742-2023 ext. 240 or sam.mohanty@ttu.edu.