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Financial Viability and Profitability in the Texas High Plains After the FAIR Act
Phillip N. Johnson and Kent Durham
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The Federal Agricultural Improvement and Reform (FAIR) Act of 1996 reduces government program payments to farms through 2002, at which time payments will terminate. This change in U.S. agricultural policy potentially exposes cotton producers to increasing levels of risk and uncertainty with regard to prices,which increases the importance of risk management. This study evaluated the ability of two cotton farms in the Texas High Plains region to accommodate increasing levels of risk associated with declining price support payments and potential increases in price variability associated with the enactment of the FAIR Act. The Farm Level Income and Policy Simulation Model was used to project future financial viability of each farm under decreasing levels of government program payments and increasing variability of cotton prices. Results of the simulation indicated that one farm could remain profitable (probability of survival of 100% across all debt structure levels) despite rising levels of debt and uncertainty. The other farm's probability of survival was only 60% at its current debt structure of 38%, and its probability of survival decreased to 49% with a debt structure of 55%. Operating efficiency was a primary factor influencing the difference in the probability of survival between the two producers.