Georgia Cotton E-Note

Summary and Analysis of Cotton Provisions in HR 2646

Don Shurley
Professor/Economist- Cotton
University of Georgia

The first step toward a new farm bill has been completed. On July 27^th, the US House Agriculture Committee passed it's version of the legislation. While we are a long way from arriving at a new farm bill, the House ag committee's version has some interesting provisions that appear favorable and beneficial to US farmers.

Next in the process, the full House must act on the committee's proposal. Then the House version must go to the Senate where it also must be acted upon. The Senate may vote on the House version or take on the task of formulating and approving it's own version. Both bills would then end up in compromise. Once final legislation is approved, it must then be signed by the President. So, the final provisions are a long way from being settled. Timing may be crucial, however, because the House committee's version would begin with the 2002 crop and actually over-ride the last year of the current legislation (the present farm bill runs from 1996-2002).

Cotton and peanuts are the state's top 2 row crop enterprises. One or both crops are produced on many of the state's farms. Producers and the state's agriculture future, therefore, have much at stake in the next farm bill. Farmers have suffered through 3-4 years of low yields and/or prices. Arguably, without LDP's, AMTA payments, and special financial assistance legislation many producers would not still be in business.

The table below summarizes and compares the House Agriculture Committee proposal (H.R. 2646) with current farm bill provisions as they relate to cotton. There are several important differences.

"Fixed Payments" Would Replace AMTA. Acreage set-aside requirements and deficiency payments were eliminated with the "Freedom To Farm" 1996 bill. AMTA payments (not tied to market prices) were introduced to "wean" farmers off payments. These AMTA payments decline over the 7-year bill. HR 2646 proposes to replace and extend AMTA payments (scheduled to expire after 2002) with "fixed decoupled payments" of 6.67 cents per pound.

Proposes New "Counter Cyclical" Payments. Prior to '96, producers agreeing to participate in acreage set-aside restrictions would qualify for "deficiency payments" if the US average cash market price was less than the target price. The payment was the target price minus the higher of the loan rate or the average cash price. Prior to '96, the Target Price was 72.9 cents per pound. HR 2646 proposes to reinstate the Target Price at 73.6 cents per pound and institute a new "counter-cyclical payment". This payment would be the Target Price minus the higher of the loan rate or US average cash price minus the Fixed Payment.

Would Allow Producers To Update Base Acres. The House version proposes to allow producers the option of updating their "base" (historical plantings). Under current legislation, base is the average acres planted in 1993, '94, and '95 including any zeros. HR 2646 would allow producers the choice of staying with their current base or changing it to the 4-year average of acres planted in 1998-2001.

Payment Acres and Yields Would Be Unchanged. Fixed Payments and Counter Cyclical Payments would be received on 85% of the farm's base acres and at the already established FSA program yield. This is unchanged from the current farm bill. It had been hoped that producers would be allowed to update the farm's program payment yield. Nevertheless, updated base acreage alone will help bring benefits in line with actual production.

Payment Limits Would Be Increased. Under the 1996 farm bill, payment limits are $40,000 per "entity" on AMTA payments and $75,000 per "entity" on Loan Deficiency Payments (LDP's) and Marketing Loan Gains. The limit on LDP's and loan gains was increased to $150,000 for the 2000 and 2001 crops as part of the financial assistance legislation. HR 2646 proposes to increase the limit on AMTA (to be re-named "Fixed Payments") to $50,000 and increase the limit on LDP's and Marketing Loan Gains to $150,000. The payment limit on Counter-Cyclical Payments would be $75,000.

The table below compares the proposed House ag committee cotton payments (Fixed Payment and Counter-Cyclical Payment) for 3 example market price scenarios. Like the AMTA, Fixed Payments are not tied to the market price. If the US average market price is less than the loan rate, the maximum total payment would be 21.68 cents per pound. At any market price between the loan rate and the target price, the CCP and total payments decline as the market price increases. The CCP would become zero if the average market price is 66.93 cents or higher.

The provisions contained in the HR 2646 proposal appear to offer increased income protection for cotton producers. These provisions would improve the safety net and underpin farm income. Specifically, 3 provisions - continuation of AMTA in the form of "Fixed Payments", allowing producers the option of updating base acres, and the addition of new "Counter-Cyclical" payments should provide increased price and income protection. This should be welcomed news for Georgia producers because Georgia farmers have planted as much as 1.5 million acres or more in recent years compared to estimated 900,000 acres or so of "base" in the state.

The table below presents a hypothetical but probably not completely unrealistic scenario of how payment provisions of the current program and HR 2646 would compare for a farm also able to increase it's base acres. The situation is a producer growing 500 acres of cotton but with only 300 acres of base and actual farm yield of 700 pounds per acre but a program yield of only 600 pounds per acre.

Assuming very low cotton prices (say, 40-cent cotton like we have at present), total income (crop plus payments) would be $437 per acre under the current farm bill and $529 per acre under HR 2646. Total payments excluding LDP would be $18.33 per acre planted or 2.6 cents per pound of actual yield under the current farm bill compared to $110.57 per acre or 15.8 cents per pound under HR 2646. The major differences are due to increase in base acreage and addition of new Counter-Cyclical payments. The benefits or differences between the House ag committee proposal and the current farm bill would be significantly less at higher prices and for producers whose current base is closer to their 1998-2001 acreage.

	1996 Farm Bill	HR 2646 Proposal
Acres Planted	500	500
Base Acres	300	500
Actual Farm Yield	700	700
FSA Program Yield	600	600
Average Cash Price	40.00	40.00
Loan Rate	51.92	51.92
AMTA or Fixed Payment	5.99 *	6.67
Crop Income	$140,000	$140,000
AMTA or Fixed Payment	$9,165	$17,008
Counter-Cyclical Payment		$38,276
LDP or Marketing Loan Gain *	$69,300	$69,300
TOTAL	$218,465	$264,584
TOTAL PER ACRE PLANTED	$437	$529
TOTAL (CENTS) PER POUND	62.4	75.6

* AMTA is at the 2001 crop level. 2002 level unknown. LDP or Marketing Loan Gain based on A-Index of 46cents, AWP of 32.12 cents, loan rate 51.92 cents, and LDP 19.8 cents.

There are issues that remain to be resolved. Whether or not these will be addressed as the farm bill negotiations go forward is unknown.

• It has been questioned if the cost of the bill as proposed in HR 2646 is above acceptable limits established in trade (WTO) talks. So payments could be lowered or reorganized.
• In the above analysis, it is assumed that the present nature of LDP and Market Loan Gain provisions will remain unchanged. It has been rumored that LDP's, if in effect, could be lowered if the sum of cash price, Fixed Payments, Counter-Cyclical Payments, and LDP would be above the loan rate.
• Higher benefits (more safety net) which is the legislative intent could still be hampered by payment limits especially for larger producers.
• Bottom line, the benefits of payment will still accrue to landowners. No method has yet been devised that is going to prevent it. For tenants, higher government payments will still likely be assigned or given over to the landowner or otherwise siphoned off in the form of higher cash rents.
• Not allowing program yields to be updated to more recent averages will lower potential benefits. Given Georgia's drought reduced yields in recent years, however, perhaps it would not have made much difference. Having an option to update or not would be beneficial.

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