Texas Tech University

Professor, Research Scientist Analyze Cotton's Re-entry Into Farm Bill

George Watson

May 22, 2018

The analysis was done after cotton was put back on the table through the 2018 Budget Act and shows the effects the return will have for area farmers.

When it was announced that the work of area legislators and the United States Department of Agriculture (UDSA) had succeeded in getting cotton back into the 2018 Farm Bill, a four-year legislative act that sets agricultural and food policy for the federal government, the area's farmers breathed a huge sigh of relief.

It was a big victory. Not only was cotton been reinstated as a Title I commodity, making it eligible for payments under a pair of programs designed to cover losses, but those programs also help provide a significant measure of insurance for the area farmers who are at the whims of an ever-changing and challenging climate to grow one of the most necessary crops in the nation.

That level of protection, according to an analysis co-authored by Darren Hudson, a Texas Tech University professor and Larry Combest chairman in the Department of Agricultural and Applied Economics in the College of Agricultural Sciences & Natural Resources, is, as much as anything, the key component to the Bi-Partisan Budget Act of 2018. The act essentially provides the basis for the federal funding that is rolled into the 2018 Farm Bill.

Darren Hudson
Darren Hudson

An analysis by Hudson and agricultural and applied economics research scientist Bing Liu examined not only the economic components of the Budget Act, but also how the parameters set by the act will help or hurt cotton farmers based on where the market currently stands and how it is projected to evolve in the future.

“What we're demonstrating here is the value to the producer in terms of payments based on our projected value of the production of cottonseed and cotton lint prices,” Hudson said.

Becoming Title I again

Congress passed the first legislative farm bill, known as the Agriculture Adjustment Act of 1933, in response to the Great Depression to give financial assistance to farmers who had an excess crop supply that created low prices. That initial piece of legislation defined a set of commodities that would be covered by the act, and those defined commodities were based on the fact that almost every farm in the U.S. grew at least one of those crops.

A few crops, like soybeans, have been added over the years. Fruits and vegetables were not covered by choice because those crops operate on a very thin market where even small changes in output have a dramatic effect on price.

In the 2014 Farm Bill, however, cotton was declassified from a Title I commodity, making it ineligible for program payments from loss. Even though farmers had a small measure of protection under the Stacked Income Protection (STAX) insurance program, it wasn't enough, and farmers and area legislators worked from that point on to get the crop reclassified as Title I and, therefore, eligible for the payment programs.

“This is a program that is now guaranteed where the STAX insurance program was insurance-based and payments on average were figured to be about 6 cents per pound. So payments occurred only when a loss occurred,” Hudson said. “With this, farmers will at least get that 6 cents per pound or they will make it up in market price. And now, bankers can write that down legally and use it as a basis to cash flow loans, so it will help with some of the financing issues we've had over the last few years when we had a little less guarantee to work with.”

Between 2014 and 2018, though, cotton was eligible for the STAX program. But because it was insurance-based and not market value-based, farmers had to experience a loss in order to be eligible for payments. And, banks could not make loans to farmers based on receiving reimbursement from farmers who were dependent on an insurance program to cover losses.

Now, however, cotton farmers have more stability because cotton is back to a Title I commodity.

“These producers might get smaller payments than they would under STAX if they experienced a loss, but on average, they will probably be more stable payments,” Hudson said. “It will help producers plan and think about cash flow going forward.”

To be a Title I commodity, however, there are a few requirements. One, farmers who enroll in a Title I program payment plan have to submit a conservation compliance plan. Two, farmers have to agree to have their cotton rated by the USDA, something which Hudson said 99 percent of farmers already do.

By agreeing to do so, farmers then are eligible to enroll in one of two payment programs –Average Revenue Coverage (ARC) or Price Loss Coverage (PLC).

ARC examines the average revenue of a producer over an extended period of time, such as a five-year span, and the level of coverage is determined by the market value of the crop. PLC, meanwhile, is based on a fixed legislative price, and if the market average yearly price of a crop determined by the USDA falls below that level, then those enrolled in the program are eligible for payment of the difference.

Hudson said most of the area farmers on the South Plains who sign up for a payment program will most likely enter PLC.

“Average revenue just doesn't work very well here, which is why few farmers bought into STAX, because that also is an average revenue product plan at the county level,” Hudson said.

Payment Formula

Unlike past farm bills that included cotton, the 2018 Budget Act created a new formula that combined the price and revenue from both traditional cotton lint, the main product from cotton, and cottonseed, calling it the “seed cotton program.”

Cottonseed has become a significant revenue source from the cotton production process but has never previously been a part of program payment formulas. Revenue from cottonseed essentially pays for the cost of ginning, so protecting that seed revenue and the value of the seed is vitally important.

But as ginning costs have increased, it has chipped away at the farmer's bottom line. Therefore, the thinking became to combine cotton lint, the primary source of revenue from cotton, and cottonseed, produced at the same time, in order to balance them against each other in case the market value of the lint or seed drops.

The new market-year average (MYA) price established by the USDA combines seed and lint. The total pounds of cotton lint produced is added to the total pounds of cottonseed produced to determine the total pounds of seed cotton.

That means that, in a year when the seed cotton MYA falls below the PLC price, producers would receive a payment, and the MYA price for seed cotton will depend on both lint and seed, and an adverse price drop for either can trigger the payment plan.

“There is a bit of retraining you have to do because farmers have spent their whole lives thinking of lint and seed as separate,” Hudson said. “In the rest of the world, they trade seed cotton, so when you see the prices, for example the price in India is about 40 cents a pound, that's seed cotton. The equivalent for lint price would be about 80 cents a pound, but you take out the seed and divide by the value of a pound of seed.

“What Congress tried to do is figure out a program that is workable, both from a budgetary standpoint and one that would actually protect some of the value in the crop that producers are struggling with.”

The Budget Act also enacts a provision that determines just how many acres of a certain crop a farmer can plant and be eligible for the payment programs.

To be eligible, farmers are required to reallocate what are called generic-base acres based on what was planted on those acres from 2009 to 2012. If a farmer has, for example, 1,000 acres and planted all cotton on that land during that four-year period, then all 1,000 acres could be placed in cotton base and be eligible for the program payments.

However, if a farmer planted corn on those 1,000 acres and wants to convert back to cotton to enroll in the cotton payment program, they can allocate only 85 percent of those acres to cotton base eligible for cotton program payments. The other 15 percent of the acres would no longer be available for program participation in any crop.  Finally, farmers could allocate all of their acres proportionally to crops grown on those acres over that period.  So, if they grew 1,000 acres of corn, they could enroll those acres into the corn program, but would not be eligible to participate in the cotton program.  For any acres enrolled in the cotton program, those acres then become ineligible for participation in the STAX insurance program after 2018.

Hudson estimates that will take the total cotton acreage from 18.8 million acres to somewhere around 14 million.

“Most producers who grew cotton will stay in cotton,” Hudson said. “Most of the farmers here are largely cotton producers anyway. When the price was higher, some of them dabbled in corn and things like that, if they had the water. So there will be a few farms up on the northern Panhandle that might, if they had a generic base, roll into corn or something else.”

All in all, through Hudson's analysis, the measures enacted by the Budget Act and, eventually, the Farm Bill, will be a boost to cotton farmers, not only from a payment standpoint, but also from a stability standpoint, making it easier for farmers to take advantage of the financial incentives both in the market price of cotton and acquiring the necessary cash flow to be successful.

The analysis indicates that the cotton program would cost approximately $3.8 billion over 10 years, but the cost of the program is anticipated to decline as forecasted prices rise.

“There is a declining value to the payment programs, but at the same time, we're having an increase in the value of the products themselves,” Hudson said. “Our forecast is for the prices to rise over time and, as they rise, it's coming back up against the payment programs, and eventually there won't be any more payments. And that would be OK because at that point the lint price and farm price of cotton would be somewhere around 72-73 cents per pound.

“Now, we don't have a Farm Bill yet and it still has to get through the process. But if there are no major changes in the Farm Bill going forward, we are essentially rolling out what is in the Budget Act into the Farm Bill.”