I want to extend my thanks to the Commission members and Dr. Keith Collins, Commission Chairman for their service to US agriculture and for the opportunity to present this statement for the National Cotton Council. Joining me today to discuss cooperative marketing of cotton on behalf of cotton producers is David Stanford, Vice President of Plains Cotton Cooperative Association of Lubbock, Texas.
The National Cotton Council is the central US cotton organization representing cotton producers, ginners, cottonseed crushers, warehouses, merchants, marketing cooperatives and textile manufacturers. The Council has always opposed payment limits and worked in the recent farm bill debate to keep any restrictions on benefit eligibility as reasonable as possible. We think it is not advisable to make changes in legislation governing size of the limits or eligibility rules as provided in the Farm Security and Rural Investment Act of 2002, and we would also advise against any changes in the accompanying regulations.
[SLIDE 1 of 9] Slides are attached below The current payment limits are sufficiently restrictive and burdensome to US agriculture. Also, the new farm legislation added an adjusted gross income test designed to deny program payments to individuals with substantial off-farm income. Any further restrictions would be tremendously destabilizing to a sector that is only in its second year of recovery from the lowest commodity prices observed in 40 years. It should be noted that the current limits are a historical and political benchmark and were not established by any economic analysis.
More arbitrary restrictions on program benefits will negatively affect U.S. cotton producers’ ability to compete globally. This is especially critical now as the U.S. attempts to reduce agricultural support worldwide. More restrictions to commercial-size operators
would, in effect, be unilaterally disarming U.S agriculture relative to our competitors.
We should also recognize that any further legislative or administrative payment limits changes would create additional administrative burdens on an over-worked Farm Service Agency.
It is important that we not focus solely on aggregate payments received by some participants because this distorts the picture of farm program support. With the exception of those producers caught by payment limits, every participant receives the same benefit per unit of production or program yield. In 2002 and 2003, all corn growers participating in the farm program receive 28 cents per bushel of corn in fixed payments. The total resulting payment is then a function of the program yield and number of base acres enrolled in the program. The same applies for the counter-cyclical payment, if available. Marketing loan benefits per unit of production can vary due to timing of the individual producer’s marketing decisions. However, the rules applied to per unit benefit calculation are uniform and nondiscriminatory with respect to program participants.
I also want to speak directly to the question of regional differences and concerns. It has been expressed that southern agriculture, in particular cotton, rice and peanuts, have greater concerns about payment limits because these commodities some how have a "better deal" in terms of program support than applies to other program commodities.
[SLIDE 2] Dividing commodity specific program acres into commodity specific program payments shows substantially different rates of payment. These payments reflect those that would be associated with prices observed during the 1999 through 2001 crops. However, absolute dollars are not informative with respect to relative values.
[SLIDE 3] Further examination of the rate of payment per acre shows that the differences essentially relate to differences in crop value or cost of production per acre associated with the various commodities. The payments in the previous slide are now expressed as a percent of cost of production as reported by USDA. In relative terms, cotton appears to be no different than corn or wheat. This picture of relative coverage and support holds whether we look at payments or policy tools such as loan rates per unit of production or target prices.
[SLIDE 4] The landscape of US agriculture is extremely diverse, and as a result, the differential impacts of payment limits can be enormous. To illustrate this point, the tradeoff between program yields and base acres can be readily established for each crop. Yields for corn, wheat and soybeans are shown in bushels on the left vertical axis of this visual while the cotton yield is shown in pounds on the right vertical axis. Acreage for each crop is shown on the horizontal scale. Assuming maximum counter cyclical payments, the curves show the combination of acres and yields necessary to reach a given dollar amount, in this case the single-entity limit of $65,000.
Producers with yields and acres under the curve have no payment limit problem. A producer with a program yield and base acre combination that sits to the right of the curve will be caught by payment limits. Given its higher value, the cotton curve sits noticeably within those for other commodities.
The node shown on each curve shows the national average program yield. Thus, a cotton producer with the national average program yield reaches the payment limit at 800 acres while a corn producer with the national average corn yield hits the same limit at 1,700 acres and a wheat producer at 3,500 acres. If the $65,000 limit were tightened then all curves would shift in to left, meaning, of course, that it would take fewer acres to exhaust the limit at the same yields.
[SLIDE 5] I was hesitant to initiate this presentation because averages can be so misleading. So, let me say that farm representations can be instructive but also must be carefully described. For example, irrigated corn growers in Nebraska have farm yields of 250 bushels per acre and counties that average 190 bushels while dryland corn growers in southern Illinois might average 70 bushels. Drawing a picture using a corn grower with a 160-bushel average production completely misses both these growers. Dryland cotton producers in Texas average 370 pounds of cotton lint per acre while irrigated growers in Texas and California average 1,400 pounds. Sketching the average cotton grower with yields of 800 pounds can be helpful but should be recognized as overly simplistic.
Current limits as applied to cotton production cause many producers to reach their payment limit well before the acres that would be consistent with equipment components, especially high yield producers. I want to point out that using this example brings out the very point I made earlier about diverse agriculture. In the Midsouth and Southeast cotton regions, equipment manufacturers and lenders expect basic 4-row cotton picker to cover about 1,200 acres of cotton to cash flow. In other regions these relationships could likely be quite different. A cotton farm of 1,200 acres planted to cotton is a medium sized operation in today’s size mix. Many family farmers in the Mid-South and Southeast farm considerably more than 1,200 acres with 3 or 4 families (fathers and grown sons, or brothers) in the operation. A farm of 1,200 cotton acres with the national average program yield is caught by payment limits.
Payment limits are also confounding to the very principles of the latest farm legislation. The FSRIA 2002 contains counter-cyclical payments that are made only when prices are low and the payments increase, up to a fixed maximum per unit value, as farm prices continue to decline. Limiting these payments counters the very essence of the counter-cyclical payment concept. When growers need the most protection in times of low prices, the limits deny them the very benefits aimed at precluding damage to the sector.
[SLIDE 6] This same line of reasoning applies to limits on loan benefits. This chart shows the tradeoffs in actual yields and acres harvested at the highest observed marketing loan gains for each commodity in the 1999 through 2001 crops. Recall, that loan gains are paid on actual production, and for many producers actual yields can be considerably higher than program yields. Marketing loan gains only exist if prices fall below loan rates. The nodes on the tradeoff curves here represent the actual 5-year average yield.
Limits on loan benefits would only be effective when prices are already well below the average cash cost of production and producers are suffering. It certainly seems to be a strange design for farm program safety nets to increase the pain to the producer when prices are at their lowest.
The point of these charts is not to focus on the specific dollar limits, but rather illustrate the differential affects of payment limits.
[SLIDE 7] Associated with payments and size is the oft quoted mantra that farm programs have brought about increases in farm size. Over the past two decades, there have been numerous studies addressing this issue, and there is no conclusive evidence that program payments have led to larger farms. A recent study by ERS of agricultural census panel data from 1987 to 1997 finds virtually no evidence of government payments contributing to increased farm size, especially in corn, soybeans, and cash grains. This study could find no evidence of operators using program payments to acquire land at the expense of small growers.
Denial of additional benefits as acres farmed increases flies in the face of the economic forces at work. The history of US agriculture has been one of larger and fewer farms. Structural changes have been dictated by productivity growth and technology adoption. There has been significant substitution of capital and energy for labor. Reducing the labor component per unit of production shows up in every study of factor productivity related to US agriculture. While farm size, in terms of acres, has been growing, yields have also risen. The increase in yields and acres farmed dramatically increases the likelihood of damage from payment limits.
Another misconception should also be addressed. Farm size in terms of acres has no corresponding relationship to average cash cost of production. That is, it is perfectly likely for 2 radically different sized farms to have the same average cash costs per unit of production. Fixed costs could decline as acres operated are increased, but there also comes a considerable shift in fixed costs as operators consider the possible change from 6 to 8 row and larger equipment.
[SLIDE 8] Unintended consequences always follow policy actions. In some circles the phrase "collateral damage" is used, but the impact of tightening payment eligibility would likely be substantial.
Small landholders whose farms have been rented to efficient commercial operations would suddenly find themselves harmed. Larger acre operations generally rent-in about 2/3rds of the program acres they farm. The bulk of farm rental land is held by retired farmers, farm widows and the heirs and estates of farm families. Of the land rented each year to farm operators, USDA estimates that 63% of the land is owned by landlords aged 65 years and older. Reductions in benefit eligibility will arbitrarily affect a wide range of landholders.
Tenant farmers would have to suddenly absorb tremendous increases in risk as they are forced to cash rent, and they may also face the loss of financing. Many very large landholders have numerous tenant farmers. If the landlord is no longer eligible for share rent benefits due to more restrictive limits, there will be a substantial shift to cash rents. The literature in agricultural economics is unequivocal -- cash rent shifts the production risk to the producer.
The additional uncertainty and risk brought about by tighter payment limits would lead to shifts in cropping patterns. Producers of fruits and vegetables in some areas would likely see huge increases in price risk from potential competitive supply expansions and several million acres could be quickly added to grain and oilseed production. Western irrigated agriculture has extremely high yields compared to other parts of the cottonbelt. Very high yielding cotton can reach reduced limits at acre levels that cannot sustain basic equipment configurations. The sudden availability of thousands of acres of highly productive land in the San Joaquin Valley could bring a disruption of unparalleled magnitude to the planting of high value fruits, vegetables and permanent crops. The devastation to infrastructure values in the San Joaquin Valley would be absolutely incredible. Cotton gins have no known alternative use.
In the Mid-South and Southeast regions, shifts of 2 to 3 million acres would not be unreasonable, depending on relative crop prices.
Effective reductions in the eligibility for farm program benefits should be expected to impact farmland values, for all holders of farmland. Markets work such that reductions in bidding reduce the value of all market assets not just to those whose bids are now reduced. Smaller farmers hold a much larger portion of the enterprise’s total assets in land than do larger operations. Thus, any reduction in farmland values will fall disproportionately on smaller operations as collateral for financing disappears.
My earlier discussion focused exclusively on payment limits. Before closing I want to emphasize the importance of marketing certificate availability. I want to commend USDA for the thoughtful process that they laid out for redemption of loan collateral with certificates. It avoids the possibility of an unnecessary market in certificates and while speeding loan redemption. The use of certificates permits producers to enjoy loan eligibility on all production and avoids CCC loan forfeitures. Due to the process established by USDA many redeemers now routinely use certificates for all loan redemptions. Thus, certificate usage may appear disproportionately high in loan redemptions, but the use reflects the ease of the process, not necessarily a payment-related need for certificate redemption.
[SLIDE 9] The National Cotton Council urges the Commission to recommend to that Congress make no legislative changes in payment limit provisions and that USDA not make any administrative changes in eligibility rules.