The authors are associated with the following universities: Knuton, Smith, Gray, Waller and Anderson, Texas A&M University; Salassi and Musick, Louisiana State University; Fletcher and Shurley, University of Georgia; Schmitz, University of Florida; and Robinson, Mississippi State University.
Historically, the South exercised substantial control over the agriculture policy agenda (Knutson, Penn and Boehm). Consistently reelected Southern Democrats repeatedly rose to the position of Chair of the House Agriculture Committee. Reapportionment and retirements, however, have substantially reduced the number of seats having large agricultural constituencies. Moreover, when combined with generally reduced congressional support for farm subsidies, it appears that production agriculture's control over the farm policy agenda has significantly diminished.
In the past, Southern farmers have been major beneficiaries of farm programs in terms of both the level of support and risk reduction. The transition payments provided for in the Freedom-to-Farm provisions of the Federal Agriculture Improvement and Reform Act of 1996 (hereinafter referred to as the 1996 Farm Bill) suggest that commodity program subsidies are nearing an end. During the transition period, farmers will have full flexibility to produce any other program commodity. In many areas of the South, there exists the ability to produce several alternative crops (such as wheat, corn, sorghum and soybeans) in addition to the traditional southern commodities -- cotton, rice and peanuts. It stands to reason, therefore, that the greatest adjustment occurring within agriculture as a result of the 1996 Farm Bill could be in the South.
Table 1 indicates the share of southern production by region and by state. The regions are designed to approximate those used by ERS/USDA in their cost of production analyses. The South produces over 75 percent of the rice, cotton and peanuts. Most of the remainder of the rice is produced in California while the remaining cotton is produced primarily in California and Arizona. The South produces about 16 percent of the wheat, 14 percent of the soybeans, 9 percent of the corn and 45 percent of the sorghum.
The purpose of this paper is to analyze the potential impacts of reduced price and income support for agriculture on program crop production in the South.
Anticipated adjustments in cropping patterns are analyzed by utilizing ERS/USDA costs of production by region combined with FAPRI/AFPC estimates of the impacts of the Freedom-to-Farm provisions of the 1996 Farm Bill on revenues and costs over the period 1996-2002. These basic data sources are supplemented by the results of AFPC representative farm analyses. In peanuts, where FAPRI projections are not available, reliance is placed on historical ERS costs and returns data combined with expert opinions of authors Fletcher and Shurley.
Appendix Table A1 indicates the per acre receipt and variable cash cost data utilized in the analysis. From these data, net returns over variable cost (net receipts minus variable cost -- NR-VC) and net returns relative to variable cost (NR/VC) were calculated for each crop in the major southern production areas. Net returns over variable expense (NR-VE) indicate which crop/region will generate the most renumeration to fixed inputs, management and risk. In the absence of risk, the crop with the largest net returns over variable cost will tend to dominate a production area, given cultural constraints. However, crops vary widely in the level of variable cash expenses that must be put at risk in the production process. The ratio of net returns relative to variable cost (NR/VC) measures the costs of production that must be put at risk to achieve the indicated level of returns.
Comparisons are made across program crops for each of the major production regions in the South where reliable data is considered to be available. The limited growing areas for peanuts, combined with the absence of cost and price projections, make these analyses more restricted and, perhaps, tentative.
This region includes the main crop production areas of Western Texas and Oklahoma. This region produces about one-fourth of the nation's cotton (irrigated and dryland), 17 percent of the peanuts, 10 percent of the rice (Upper Gulf Coast), 8 percent of the wheat (mostly dryland) and 31 percent of the sorghum. The Southern Plains produces only 3 percent of the corn and less than 1 percent of the nation's soybeans.
Figures 1 and 2 provide a side-by-side comparison of returns over variable costs for wheat, cotton, corn, sorghum and peanuts in the Southern Plains region. (Rice is not included in this comparison because of data limitations and because the possibilities for flexing in and out of rice are very limited). Figure 1 indicates that under the 1985 and 1990 Farm Bills, peanuts, cotton and corn (primarily irrigated) generated the highest net returns over variable costs. Returns over variable cost for cotton and corn were close to being the same during the period 1987-93. With stronger world demand for feed grains, beginning in 1994, net returns began to favor corn, which is projected by FAPRI/AFPC to continue due to favorable world demand conditions for meat and poultry. Throughout the period, returns over variable cost to wheat and sorghum track each other very closely, but at a lower level than peanuts, cotton and corn.
Figure 2, which provided an indication of returns relative to variable costs as an indicator of risk, suggests a very different comparative situation. While corn still indicates favorable relative returns, wheat now also shows a high level of returns relative to variable costs. Cotton, on the other hand, indicates low net returns relative to variable costs. The average projected $214 per acre cost of growing cotton over the 7 year 1996 Farm Bill compared with $165, $56, $99, respectively, for corn, wheat and sorghum, results in the lower relative net returns to cotton. Also note that under the 1996 Farm Bill, the relative returns to cotton decline from an average level of 86 percent of variable cost from 1987-95 to only 72 percent from 1996-2002. Throughout the period, returns to sorghum relative to costs remain low relative to wheat and corn.
The combined implications of Figures 1 and 2 suggest that farmers may be less inclined to bear the extra cost or risk of growing cotton under the 1996 Farm Bill than they were under the 1985 and 1990 Farm Bills. That is, while cotton producers and their bankers were willing to risk $188 in cash outlays for a chance of earning $162 net returns, they may be less willing to lay an average $214 expenses per acre on the line for a potential return over variable cost of only $133 per acre. Growers who are strapped for cash are more likely to grow wheat or even sorghum, while those who have greater liquidity and irrigation might opt to produce corn -- particularly in light of the more stable market outlook. This analysis, therefore, suggests farmers will have increased incentive to flex acreage from cotton into sorghum, wheat and possibly corn, if irrigation is available.
Farms in the Delta region (stretching along the Mississippi River from Southern Missouri to the Gulf) tend to be characterized by more program cropping options than is characteristic of the Southern Plains, perhaps more than any other area of the United States. This region produces two-thirds of the U.S. rice crop, 7 percent of its soybeans, 33 percent of its cotton, 1 percent of its corn and 3 percent of its wheat. While rice and cotton have been the preferred cropping option for the Delta, significant production potential exists for soybeans, corn and wheat.
Under the 1985 and 1990 Farm Bills over the period 1987-95, returns over variable cost for cotton and rice are higher than for soybeans and wheat (Figure 3). Rice returns over variable costs average $234 per acre over the period 1987-95, and are more stable than the average $247 return to cotton due to less yield variability. Under the 1996 Farm Bill (1996-2002), cotton and rice returns are anticipated to drop sharply with cotton averaging a $188 return per acre and rice only $121 per acre. Soybean and wheat returns continue to lag cotton and rice for most of the period although rice and soybeans converge during the last two years of the analysis. ERS does not provide corn cost of production for the Delta.
The returns relative to variable costs are even more revealing of potential shifts in cropping patterns for the Delta (Figure 4). Here, soybeans and wheat indicate substantially higher relative returns than either cotton or rice even from an historical perspective. This helps explain why there is substantial soybean production in the Delta and the potential for increased double cropping of wheat. That is, while the return on cotton is projected higher in absolute terms ($188 per acre for cotton versus $108 for soybeans), relative returns are higher for soybeans because the variable costs are considerably less. Where double cropping is possible, total returns to soybeans and wheat may actually be higher than for cotton in absolute terms. Rice returns are projected to be lower than soybeans in both absolute and relative terms where this option exists under the new farm bill. This suggests shifts in Delta cropping patterns from cotton and rice to soybeans and wheat. Due to the marked decline in expected returns, the shift out of rice could be particularly severe.
In the 1996 Farm Bill debate, the rice millers took the position to include a requirement that rice producers plant at least half of their acreage to rice in order to be eligible for transition payments -- a provision that failed in the Congress. Rice millers correctly perceived that without this requirement reduced returns to rice could severely curb its production and reduce utilization of plant capacity and sales.
In recent years, cotton production in the Southeast has experienced a resurgence at the expense of corn and soybean acreage. With the peanut support price for quota production being fixed, its acreage has remained relatively stable. These higher returns to peanuts are reflected in Figure 5. Likewise, cotton returns over variable costs ($220 per acre for 1987-1995) have exceeded those for corn ($112) and soybeans($95), although cotton returns have been highly variable. Under the 1996 Farm Bill soybean net returns in the Southeast hold fairly steady at $91 (1996-2002) per acre while cotton returns drop by nearly 31 percent -- from $200 to $153. Corn returns decline from $112 to $85 per acre. As a consequence, relative returns to soybeans rise substantially above either cotton or corn (Figure 6). If peanut projections were available, one could anticipate relative soybean returns would be higher than for peanuts as well. These results suggest that in the absence of target price protection, soybeans and corn could regain acreage recently captured by cotton. This is particularly the case in areas where double cropping with wheat is possible.
These results suggest that the South could undergo major changes in cropping patterns during the 1996-2002 period covered by the 1996 Farm Bill. Producers of traditional southern crops (cotton, rice and peanuts) have enjoyed substantial protection under farm programs. Since the 1985 Farm Bill, export programs, including the marketing loan for cotton and rice and a two price plan for peanuts, have assured that excess production could be sold competitively in the world market.
In the new market environment with decoupled payments, the returns from crops such as cotton, rice and peanuts may be judged by a larger number of farmers to be insufficient to offset the high costs involved in producing these crops.
FAPRI, "Summary of the 1996 Baseline," University of Missouri, Food and Agriculture Policy Research Institute.
Knutson, Ronald D., J. B. Penn and William T. Boehm. Agricultural and Food Policy, 3rd ed. Prentice Hall, Inc. Englewood Cliffs, NJ. 1995.
USDA, Economic Research Service, "Costs of Production -- Major Field Crops and Livestock and Dairy," Various Issues.