Southern Ag Today

Author: Yangxuan Liu

  • The Long Term Economic Struggles of Southern Cotton Farmers

    The Long Term Economic Struggles of Southern Cotton Farmers

    Southern agriculture faces unique challenges, with limited crops that are both suitable and competitive in the region. Cotton, one of the major row crops in the Southern United States, has historically been favored for its drought resistance, making it well-suited to the region’s soil and weather conditions. Cotton is grown from Virginia to California across the southern U.S. In 2024, the U.S. is projected to produce 14.5 million bales of cotton.  While market prices are expected to be around $0.66 per pound (USDA WASDE), the value of cotton production is approximately $4.6 billion nationwide, underscoring its essential role in the Southern region.

    Recent data from the USDA’s Economic Research Service highlights the complexities of cotton farming, showing that growers have faced financial challenges over the years. The data in Figure 1, covering the period from 1997 to 2023, highlight the ongoing profitability challenges Southern cotton farmers face. This data accounts for all costs incurred by participants in the production process, including farm operators, landlords, and contractors. The data reflects the actual production costs incurred by cotton farmers, including expenses for labor, equipment, and other inputs, as well as the revenue generated from cotton sales. However, these figures do not include government payments and crop insurance indemnities received by producers during this period. The government payments include traditional farm bill programs for farmers with base acres, as well as ad-hoc disaster relief programs. 

    In competitive commodity markets, where agricultural goods compete under perfect competition, economic theory suggests that profits attract more producers. This increase in supply drives prices down, eventually reducing profitability. Over time, long-term economic profitability tends to stabilize around zero, which becomes the level needed for economic sustainability for the industry. Producers are compelled to become more efficient in their operations to achieve profitability above this threshold. However, over the 27-year period, cotton only managed to exceed total production costs in four years. On average, cotton growers faced annual losses of $94 per acre, highlighting the crop’s ongoing struggle to cover production costs. 

    This consistent lack of profitability is unsustainable for cotton producers. Farmers’ inability to cover total costs, including fixed expenses like long-term asset depreciation for buildings and equipment, presents a serious risk to the agricultural future. Many farmers are increasingly relying on personal equity to keep their operations running, a practice that is financially unsustainable in the long term. As a result, many are turning to government support, including farm bill programs and disaster relief initiatives, which can provide a safety net during challenging times. 

    With long-term economic loss for cotton production, the economic health of Southern agriculture and the livelihoods of its farmers are at risk. If this issue is not addressed, it could result in a prolonged decline in agricultural production, eroding the economic foundation of farming communities across the Southern region.

    Figure 1. Cotton Production Total Costs, Revenue, and Returns for Producers in the United States (1997 – 2023).

    Data Source: U.S. Department of Agriculture (USDA) Economic Research Service (ERS), Commodity Costs and Returns for Cotton.

    References: 

    U.S. Department of Agriculture (USDA) Economic Research Service (ERS), Commodity Costs and Returns for Cotton, Updated on 10/1/2024.

    U.S. Department of Agriculture (USDA), World Agricultural Supply and Demand Estimates (WASDE), WASDE – 652, September 12, 2024. 

    Liu, Yangxuan. “The Long Term Economic Struggles of Southern Cotton Farmers.” Southern Ag Today 4(44.1). October 28, 2024. Permalink

  • Timeline of the ARC and PLC Programs: Why Are Payments Received a Year Later?

    Timeline of the ARC and PLC Programs: Why Are Payments Received a Year Later?

    The Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) programs are vital components of the farm safety net for many producers, helping them manage the considerable risks they face. Eligible commodities for these programs include wheat, corn, sorghum, barley, oats, seed cotton, long- and medium-grain rice, certain pulses, soybeans/other oilseeds, and peanuts. Given the importance of these programs, we are often asked why the payments are made so late, generally well over a year after harvest. This article illustrates the timeline for the ARC and PLC programs, explains the reasons behind the one-year delay in payments, and examines the impact on current farm bill discussions.

    Typically, prior to planting a crop, producers must make a decision (i.e., an election) between ARC and PLC on a crop-by-crop and farm-by-farm basis. They generally have until March 15 to notify USDA’s Farm Service Agency (FSA) of their election decision and to enroll in an annual ARC/PLC contract for the covered commodities for which they have base acres. Because ARC and PLC are decoupled from production, a producer’s individual production, harvesting, and marketing decisions have no bearing on ARC and PLC payments. In fact, the marketing year is standardized and does not depend on when a farmer harvests their crops on individual farms. Instead, it is based on a fixed start date specific to each commodity, which generally aligns with the typical harvest period for that crop and lasts for 12 months from this standardized start date. For example, the marketing year for cotton and peanuts starts on August 1st and lasts until the following July 31st. The national average price over this “marketing year” is then used to calculate any required ARC or PLC payments. Farmers can then expect the processing of ARC and PLC payments to occur after October 1 following the end of the marketing year, in accordance with the farm bill. 

    Figure 1 illustrates the timeline of the ARC and PLC programs using cotton and peanuts as examples. For the 2024 crop year, producers signed up for ARC/PLC and planted the crop this past spring. The marketing year started on August 1, 2024. Some producers (e.g., South Texas) have already harvested, and the remainder will be harvested this fall. The marketing year will continue into next year, concluding on July 31, 2025. USDA will then calculate marketing year average prices and county yields, and they will make any ARC/PLC payments after October 1, 2025. In other words, more than 18 months will have transpired between the time a producer enrolled in ARC/PLC and the time when assistance was eventually paid.

    Interestingly, it hasn’t always been this way. Using the Counter-Cyclical Payments (CCP) program – the predecessor to PLC – from the 2002 Farm Bill as an illustration: the 2002 Farm Bill required USDA to make payments “as soon as practicable after the end of the 12-month marketing year for the covered commodity.” To help lessen the impact of the lagged payment timing, if the Secretary estimated that a CCP payment would be required, the 2002 Farm Bill required the Secretary to “give producers on a farm the option to receive partial payments of the [CCP] projected to be made for that crop of the covered commodity.” This all changed in the 2008 Farm Bill. The 2008 Farm Bill required any CCP payments to be made “beginning October 1, or as soon as practicable thereafter, after the end of the marketing year for the covered commodity.” In other words, payments were further delayed – until after October 1 following the end of the marketing year – and no partial/advance payments were allowed. The payment timing introduced in the 2008 Farm Bill was maintained with the creation of ARC and PLC in the 2014 Farm Bill, and it is still in place today. This all naturally leads to the question: why? 

    First, both ARC and PLC use the marketing year average price to determine if assistance is warranted. That necessarily means waiting until the end of the marketing year before final ARC and PLC payments can be made. While some attempts have been made to reduce the wait time – such as utilizing prices based on the first few months of the marketing year – those haven’t taken hold. Regardless, that doesn’t explain the further delay introduced in 2008. When the drafters of the 2008 Farm Bill delayed payments until after October 1, they effectively pushed payments into a subsequent fiscal year, as the federal fiscal year starts on October 1 each year. In so doing, this “timing shift” resulted in one less year of assistance that had to be funded by the 2008 Farm Bill, freeing up those resources to be used on other priorities. The problem: reversing this would result in another fiscal year of ARC/PLC assistance having to be provided by the existing farm bill budget. While complicated, it is simply a matter of policymakers deciding if it is better to use scarce resources to (1) accelerate the timing of payments or (2) make programmatic improvements like increasing reference prices. Over the last two farm bill cycles, policymakers have opted for leaving the timing alone and making programmatic improvements instead.

    The more acute concern is this: even if Congress passes a new farm bill this fall (in time for the 2025 crop year), under current ARC and PLC payment timelines, producers will not see any assistance until after October 1, 2026 (the first month of fiscal year 2027). Given growing concerns about the state of the farm economy, even with a new farm bill in place, there undoubtedly will be tremendous pressure on Congress to provide ad hoc assistance for the 2024 crop year this fall, as was highlighted in a recent Southern Ag Today article, to help fill in the gap.

    Figure 1. Two-Year Timeline for Key Dates of ARC and PLC Payments Using Cotton and Peanuts as an Example

    Li, Yangxuan, Bart L. Fischer, and John Lai. “Timeline of the ARC and PLC Programs: Why Are Payments Received a Year Later?” Southern Ag Today 4(35.4). August 29, 2024. Permalink

  • U.S. Cotton Export and Global Market Share Declined in 2023

    U.S. Cotton Export and Global Market Share Declined in 2023

    Most of the milling, spinning, and textile manufacturing supply chain has moved from the Western world to developing countries, primarily Southeast Asia. U.S. textile manufacturing peaked in the 1994/95 marketing year with domestic use of cotton estimated at 11.198 million 480-pound bales. Since the 1994/95 marketing year, U.S. domestic cotton use has steadily declined to a projected record low of 1.75 million bales in the 2023/24 marketing year. As a result, exports are a significant source of demand for U.S. cotton. Since the early 2000s, exports, as a proportion of U.S. cotton production, have been on an upward trend, increasing from 39% in 2000 to a high of 112% in 2020. For the past decade, the U.S. exported, on average, 85% of the cotton produced domestically. The export market has been the driving force for U.S. cotton demand. 

    The highest quantity of U.S. cotton exports was achieved in 2005, with 17.7 million bales, and the second highest total U.S. cotton exports were achieved in 2020, with 16.4 million bales exported. Since 2020, U.S. cotton exports have been declining. For the 2023/24 marketing year, U.S. cotton exports are projected to be 12.3 million bales, the second-lowest quantity in the past decade. 

    The quantity of U.S. cotton exports is impacted largely by total U.S. cotton production. When production is large, exports typically rise, and with lower production, U.S. cotton exports decline. In 2023, the United States planted 10.2 million acres of upland cotton, the lowest since 2016. The harvested area for upland cotton in 2023 was estimated at 7.06 million acres, down from 7.29 million acres the previous year, the second lowest harvested acres on record since 1866. U.S. cotton production is projected at 12.4 million bales for the 2023 crop, nearly 2 million bales below the 2022 crop and the lowest since 2009. In 2023, due to lower production, U.S. ending stocks were projected at 2.8 million bales. The U.S. stocks-to-use ratio is forecast at 19.9 percent for the 2023/24 marketing year. 

    As a result of lower production and increased competition, the United States is losing global market share, declining from a peak of 39% in both 2016 and 2017 to 29% in 2023. The last time the U.S. market share was below 30% was in 2015, when the Unites States planted the second-fewest annual cotton acres in more than 100 years. After that, the U.S. market share recovered quickly with a rebound in production. However, it could be different for 2023, with more competition in the global cotton export market. Brazil has become a significant global cotton producer and exporter. In 2023, Brazil surpassed the United States and became the third-largest cotton-producing country after China and India. Brazil has become the second largest cotton exporting country and is projected to export 11.2 million bales of cotton in 2023, only 1.1 million bales lower than the United States. Increased competition will make it difficult for the United States to recover global market share. Supply and demand for U.S. cotton determines the prices for U.S. cotton producers. Even though there is a smaller global market share, U.S. production was low in the 2023/24 marketing year, leading to a high percentage of U.S. production being exported and cotton prices staying stable in the low 80s.  This was prior to the bump in the last month in cash prices into the 90-cent range. However, with the increase in global production, a lot will depend on whether U.S. production rebounds, resulting in lower cotton prices.  Lower cotton prices might then result in a decline in future cotton acreage in the United States.

    Figure 1. U.S. cotton exports, market share in the global market, and export as a proportion of U.S. production. 

    References and Resources:

    USDA Foreign Agricultural Service. Production Supply and Distribution. Exports, Production, and Domestic Use.  Available at: https://apps.fas.usda.gov/psdonline/app/index.html#/app/advQuery.

  • Cotton Crop Insurance: Unveiling Regional Differences in Projected and Harvest Prices

    Cotton Crop Insurance: Unveiling Regional Differences in Projected and Harvest Prices

    Updated February 8, 2024

    Crop insurance is a tool that helps farmers manage the risks linked to lower yields or revenue in agriculture. The prices used in determining crop insurance indemnities are established in the projected and/or harvest price discovery periods each year. The projected price is determined for each crop by taking an average of the daily closing futures prices across a 30-day window in early spring, when crop planting would normally occur, for a given crop’s harvest month contract. Similarly, the harvest price is determined for each crop by taking an average of the daily closing futures prices across a 30-day window in the fall, when harvest would normally occur for a given crop’s harvest month contract.

    These price discovery periods vary across states and locations due to the timing of planting for each location. Projected and harvest prices for upland cotton hinge on the average daily settlement price of the Inter Continental Exchange (ICE) December futures contract for cotton during the price discovery periods. Commodity Exchange Price Provisions (CEPP) list the variance in price discovery periods across states and locations, aligned with distinct sales closing dates for each specific area, as Table 1 illustrates. Our recent article on Southern Ag Today delved into the regional variations surrounding the Sales Closing Date. Texas, being a sizable state, notably features three distinct Sales Closing Dates. The projected and harvest prices are published by the U.S. Department of Agriculture Risk Management Agency no later than three business days following the end of the price discovery period.

    Projected prices are used when determining the indemnity for yield policies for upland cotton, while both projected and harvest prices are used in determining indemnity for revenue policies. For a comprehensive breakdown of yield protection versus revenue protection policies for upland cotton, refer to Table 1 in Chong, Liu, and Biram (2023). Producers opting for revenue protection policies can choose between the default plan or the harvest price exclusion (HPE) option (Chong and Liu, 2023). Both the default plan and HPE use the projected price to calculate the value of the production guarantee at the beginning of the season. Similarly, both the default plan and HPE use the harvest price to determine the value of the crop actually produced at the end of the season. The difference between the two plans is that the default plan recalculates the value of the production guarantee at the end of the season if the harvest price is higher than the projected price (but no additional premium is owed), while HPE does not recalculate the guarantee.

    In insurance plans featuring HPE, since indemnity calculations rely solely on the projected price, these policies typically come with lower premium costs for producers. One frequent query from producers revolves around choosing between the options—with or without HPE. Figure 1 illustrates the ratio between the harvest price and projected price for upland cotton, from 2011 to 2023, across various projected price and harvest price discovery periods. When the ratio is higher than one, it signifies that the harvest price exceeds the projected price. For example, according to Figure 1.A, cotton harvest prices exceeded projected prices in 6 years out of 13 years. These graphs serve as a tool for producers to make informed decisions regarding their insurance, helping them weigh between the default option and the HPE option.

    Table 1. Projected Price and Harvest Price Discovery Periods for Upland Cotton among Different Regions Based on the Sales Closing Date

       
     Projected Price Discovery PeriodHarvest Price Discovery Period
    StateBeginning DateEnding DateBeginning DateEnding Date
         
    January 31 Sales Closing Date
    TexasDec 15Jan 14Sep 1Sep 30
         
    February 28 Sales Closing Date
    AlabamaJan 15Feb 14Oct 1Oct 31
    ArizonaJan 15Feb 14Oct 1Oct 31
    ArkansasJan 15Feb 14Oct 1Oct 31
    CaliforniaJan 15Feb 14Oct 1Oct 31
    FloridaJan 15Feb 14Oct 1Oct 31
    GeorgiaJan 15Feb 14Oct 1Oct 31
    LouisianaJan 15Feb 14Oct 1Oct 31
    MississippiJan 15Feb 14Oct 1Oct 31
    North CarolinaJan 15Feb 14Oct 1Oct 31
    South CarolinaJan 15Feb 14Oct 1Oct 31
    TexasJan 15Feb 14Oct 1Oct 31
         
    March 15 Sales Closing Date
    KansasFeb 1Feb 28Nov 1Nov 30
    MissouriFeb 1Feb 28Oct 1Oct 31
    New MexicoFeb 1Feb 28Nov 1Nov 30
    OklahomaFeb 1Feb 28Nov 1Nov 30
    TennesseeFeb 1Feb 28Oct 1Oct 31
    TexasFeb 1Feb 28Oct 1Oct 31
    VirginiaFeb 1Feb 28Oct 1Oct 31
    *February 28 Ending Date is extended to February 29 in leap years. 

    Figure 1. The ratio of harvest price (HP) to projected price (PP) for cotton insurance policies across various price discovery periods from 2011 to 2023.

    Data Source: U.S. Department of Agriculture. Price Discovery Reporting Tool. https://prodwebnlb.rma.usda.gov/apps/PriceDiscovery

    Reference:
    Chong, Fayu, and Yangxuan Liu. “Cotton Crop Insurance to Protect Against Revenue Losses: Select Harvest Price Exclusion or Not?” Southern Ag Today 3(3.3). January 18, 2023. 

    Chong, Fayu, Yangxuan Liu, and Hunter Biram. “Exploring Diverse Crop Insurance Options for Cotton Producers.” Southern Ag Today 3(51.3). December 20, 2023. Permalink

    Liu, Yangxuan, Hunter Biram, and Fayu Chong. “Cotton Crop Insurance: Regional Differences in Sales Closing Dates and Cancellation Dates.” Southern Ag Today 4(3.3). January 17, 2024. Permalink

    USDA Federal Crop Insurance Corporation, Commodity Exchange Price Provisions, Section II – Cotton. 24-CEPP-0021, Released June 2023. 

    https://rma.usda.gov/-/media/RMA/Policies/CEPP/2024/Commodity-Exchange-Price-Provisions—Cotton-24-CEPP.ashx

    U.S. Department of Agriculture. Price Discovery Reporting Tool. https://prodwebnlb.rma.usda.gov/apps/PriceDiscovery

    Liu, Yangxuan, Fayu Chong, and Hunter Biram. “Cotton Crop Insurance: Unveiling Regional Differences in Projected and Harvest Prices.” Southern Ag Today 4(4.3). January 24, 2024. Permalink

  • Cotton Crop Insurance: Regional Differences in Sales Closing Dates and Cancellation Dates

    Cotton Crop Insurance: Regional Differences in Sales Closing Dates and Cancellation Dates

    Updated February 8, 2024

    Navigating crop insurance for upland cotton can be complex, with various options and critical timelines. Our previous Southern Ag Today article discusses crop insurance policies available for upland cotton (Chong, Liu, and Biram, 2023). This article highlights essential dates for upland cotton producers to track to ensure effective management and protection of their investments.

    Securing federal crop insurance coverage relies on adhering to critical timelines and dates associated with these policies. Keeping track of these important dates can be challenging for producers since different crops have different decision deadlines. Among the crucial dates, producers must carefully track the sales closing date and the cancellation date for effective management. The Sales Closing Date is the last date to apply for or change crop insurance coverage from the previous year. Producers are expected to decide by this date on the type of policy and the level of protection. The Cancellation Date is the last date for producers to inform the insurance company if they do not want to renew their crop insurance for next year. Otherwise, their insurance policy will automatically renew for another year. 

    For upland cotton, the U.S. Department of Agriculture Risk Management Agency (USDA RMA) has released important dates regarding the sales closing and cancellation dates for crop insurance. The sales closing date and cancelation and termination date are the same date for all counties for cotton, and they are also the same date among the different crop insurance policies available for upland cotton (see our previous Southern Ag Today article for a detailed discussion of the insurance policies available for upland cotton). Notably, these dates remain consistent annually but vary according to state and location, as detailed in Figure 1 and Table 1. Texas has been separated into three regions, each with a different date for sales closing dates and cancellation dates. For all the other states, the same dates apply to different counties in the state. 

    Producers can find these specific dates in their county through the USDA RMA Actuarial Information Browser and contact a crop insurance agent (see Agent Locator Tool offered by the U.S. Department of Agriculture Risk Management Agency) for more information regarding specific questions. 

    Figure 1. Regional Differences in Cotton Crop Insurance Policies’ Sales Closing Dates and Cancelation and Termination Dates 

    Table 1. Cotton Crop Insurance Policies’ Sales Closing Dates and Cancellation and Termination Dates by State and County

    State and CountyDates
    Val Verde, Edwards, Kerr, Kendall, Bexar, Wilson, Karnes, Goliad, Victoria, and Jackson Counties, Texas, and all Texas counties lying south thereof.Jan 31
    Alabama; Arizona; Arkansas; California; Florida; Georgia; Louisiana; Mississippi; Nevada; North Carolina; South Carolina; El Paso, Hudspeth, Culberson, Reeves, Loving, Winkler, Ector, Upton, Reagan, Sterling, Coke, Tom Green, Concho, McCulloch, San Saba, Mills, Hamilton, Bosque, Johnson, Tarrant, Wise, and Cooke Counties, Texas, and all Texas counties lying south and east thereof to and including Terrell, Crocket, Sutton, Kimble, Gillespie, Blanco, Comal, Guadalupe, Gonzales, De Witt, Lavaca, Colorado, Wharton, and Matagorda Counties, Texas.Feb 28
    All other Texas counties and all other states.Mar 15

    Source: Summary of Changes for the Cotton Crop Provisions (17-0021), U.S. Department of Agriculture

    References: 

    Chong, Fayu, Yangxuan Liu, and Hunter Biram. “Exploring Diverse Crop Insurance Options for Cotton Producers.” Southern Ag Today 3(51.3). December 20, 2023. Permalink

    U.S. Department of Agriculture, Summary of Changes for the Cotton Crop Provisions (17-0021), November 2016. https://legacy.rma.usda.gov/policies/2017/17-0021.pdf

    Liu, Yangxuan, Hunter Biram, and Fayu Chong. “Cotton Crop Insurance: Regional Differences in Sales Closing Dates and Cancellation Dates.” Southern Ag Today 4(3.3). January 17, 2024. Permalink