Jeff Johnson and Darren Hudson at Delta Ag Expo
Jeff Johnson, left, research professor and head of the Delta Research and Extension Center, Stoneville, Miss., visit with Darren Hudson, director of the International Center for Agricultural Competitiveness at Texas Tech University.

Paper comparing cotton, corn programs lacks perspective

Economists spar over which commodity program provides the best benefits in battle of the papers.

It used to be said the National Cotton Council wrote the farm bill, and many of the farm laws’ better features – the marketing loan, target prices, the Conservation Reserve Program – in fact, originated with the cotton industry or the Cotton Belt’s members of Congress.

Anyone who followed the 2014 farm bill deliberations knows cotton’s influence is not what it used to be – if it ever was – because of the repercussions from the World Trade Organization case brought by the government of Brazil against the U.S. cotton program.

But that apparently hasn’t stopped some in the Midwest from having “farm bill envy,” judging from a series of papers written by Carl Zulauf, an agricultural economist with Ohio State University, and Gary Schnitkey, Jonathan Coppess and Nick Paulson with the University of Illinois for farmdocDAILY.

The paper claims to put farm safety net support for cotton “in perspective” but their findings seem to depend more on their perspective and less on sound analysis of the cotton program, according to Darren Hudson, professor and Larry Combest Endowed Chair for Agricultural Competitiveness at Texas Tech University.

Dr. Hudson, who also is director of the International Center for Agricultural Competitiveness at Texas Tech, offered some thoughts on “Keeping the farm safety net for cotton in ‘proper’ perspective,” a paper he authored that has been released by the Center.

Perspectives good and bad

“In this time of debate about the future of farm programs, perspective is good, if it is good perspective,” he said. “Unfortunately, this document and their subsequent analysis of generic base acres contain a number of key flaws that need to be corrected lest we develop the wrong ideas about the effectiveness and the future of farm programs, in general, and for cotton especially.”

For starters, Dr. Hudson cites one subtle point embedded in the analysis of the “Perspective” paper” (and all such analyses of farm programs) that should be clarified before delving into the report’s numbers.

“The authors state support levels in terms of the value of production,” he says. “This comparison is fair enough. However, when you consider that corn and cotton have overall gross receipts of roughly $55 billion versus $5 billion a comparison of the raw support dollar values provides nothing to an analysis of the relative effectiveness of the underlying programs.

“Further, stating support in this manner tied to a specific period of time (and, thus, prices and values of production) can be misleading. Consider a simple example. If we were to give $10 to a person making $100 and $10 to a person making $200, the value of support would show to be twice as large for the first person. But, that says nothing about the required level of support.” Stating support levels as percentages of the total value of each crop, he says, does not accurately show the scale of the support provided relative to the level of support required to examine the economics of the two crops on a comparable basis in terms of costs and returns.

Corn understated

In the case of corn and cotton, the farmdocDaily authors suggest corn receives support equal to approximately 8 percent of the value of production from 2014-2016, where cotton will average support of around 12 percent.

“Those figures includes net insurance payments, which is of dubious validity as a measure of support because a net insurance payment only occurs when a significant loss is experienced,” Dr. Hudson said. “But this fails to account for the level of support required to put producers of the two crops on an equal footing.”

Dr. Hudson includes a graph in his analysis that shows the net price (excluding net insurance payments) for cotton and corn for 2014-16. For corn this includes the average farm price, plus the per-bushel equivalent price of ARC/PLC payments based on the total bushels of corn produced. For cotton, the net price is the market price plus the sum of the per pound value of all marketing loan gains and loan deficiency payments across the total pounds produced.

The graph also shows the respective reference prices for PLC or price loss coverage (and the 2008 cotton and corn counter-cyclical reference price for comparison) as well as the respective loan rates.

When viewed on more equal terms, these data paint a much different picture from the percentages of the value of production reported by Zulauf et al, says Dr. Hudson. “Yes, the cotton support from MLGs and LDPs average 5 percent of the value of production, but even with those payments, the average net price received by cotton growers is 4.4 percent below the 2008 reference price for cotton.

Not equivalent for crops

“By contrast, market revenue plus ARC/PLC payments was an average 3.3 percent above the reference price for corn over the same period and represented an average 7 percent of the value of production. So, one wonders how these authors conclude that cotton is somehow receiving an equivalent safety net to corn?”

Dr. Hudson is using the 2008 reference price for cotton. All program crops received an increase in their reference price in the 2014 farm bill. When you compare the corn revenue to the 2008 reference price, the differences are even more stark, he notes.

In addition to just the raw differences in support levels, the use of value of production centers on an assumption that the underlying market prices are un- (or at least equally) distorted. This is simply not the case, according to Dr. Hudson.

“The U.S. Renewable Fuel Standard (along with other global biofuels policies) has served to provide substantial support for corn prices since 2005-8, while global cotton policies serve to suppress cotton price (high production subsidies and import constraints in China, for example). Thus, their comparison is based on market prices that not on an equivalent basis when it comes to the impacts of U.S. and global policies.”

Dr. Hudson also writes about the “Perspective” paper’s attempts to lump “generic acres” payments in with the cotton safety net. “It is true that generic acres are derived from old cotton base acres, and this allowed producers with previous cotton base to plant other program crops and receive ARC/PLC payments on those acres,” he said.

“It follows that because generic base acres must be initially planted to a specific program crop to be eligible for payments, the payments received on generic acres were for crops actually planted on those acres. So, if a former cotton producer decided to plant corn on generic acres and was then eligible for ARC/PLC payments on those crops in that year, then, yes, they received the payments. But, to link the payments to “cotton support” is a logical fallacy and simply does not make sense.”

To read Dr. Hudson’s paper, click on http://www.depts.ttu.edu/aaec/icac/pubs/cotton/other_research_publications/orp_pdfs/SP1702.pdf.

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