Curious to see what impact the shift from cotton to corn has had on Louisiana, several LSU AgCenter economists have been scouring and studying data. Their formal findings are expected soon in a peer-reviewed paper.
“We looked at just under 300,000 acres of cotton that were planted in corn,” says Matthew Fannin, study co-author and assistant professor with the AgCenter.
“We looked at them from planting to value-added processing and checked the inputs used to grow each commodity to processing, particularly the ginning for cotton and the drying and handling of corn by elevators.
“One target included understanding expenses incurred producing those commodities as well as the incomes earned by farmers in their production.” Final numbers between the two commodities weren't far apart.
“There are positive developments represented by increased income from corn,” says Kenneth Paxton, AgCenter professor and study co-author. “And there are negatives because of the reduced expenditures for cotton production and the ginning component of the industry.”
The amount of cotton being grown in the state had been stable for the last few years. But what happened in 2007 was the price relationship changed so dramatically it encouraged farmers — “especially cotton farmers,” says Paxton — to consider growing corn.
“That triggered us to look at this. If cotton acreage in the state remains at the 2007 levels for an extended period of time, we'll begin to lose cotton gins and the associated infrastructure.”
The big thing discovered: the net effect of switching to corn was only a bit over $700,000. But dig deeper and the hit to cotton was more substantial.
“Truth is, the $700,000 figure is very small — less than 1 percent — of what the Louisiana economy would have earned if the acreage had remained in cotton,” says Fannin.
How was the number calculated? “We had $29 million increased output in the economy driven almost entirely by the increased profit margins farmers were making in terms of planting and harvesting corn with the high historical prices per bushel.
“Those margins — the revenues they made per acre planted minus their costs — created farm household income, which after being spent and multiplying in the local economy, created a net effect with corn versus cotton that was almost $30 million.
“The lower cost of drying corn and higher cost of ginning resulted in the state economy losing about $3.5 million. Add everything together — including several smaller factors — and the state lost about $28 million.”
The economists based their assumptions on the corn price being about $3.25 per bushel and a yield average of 150 bushels per acre. Since their analysis went to review, the USDA has updated Louisiana's estimated yield upwards to 170 bushels per acre.
“With this higher yield level, we'd expect the net effects, the $700,000 cited, to be higher.”
The other side of the coin shows there were losses to the state economy due to the corn switch. Mostly those losses were simply due to cotton being a more expensive commodity to grow than corn.
“I believe the numbers we were looking at, cost per acre, were about $290 (per acre) to grow corn in 2007 and just under $400 to grow cotton,” says Paxton. “So, that's about $100 per acre less to grow corn.
“Well, a large amount of those dollars would have impacted local rural economies through inputs bought: herbicides, pesticides, etc. That $100 that isn't being spent has a negative ripple effect in the state economy, especially in rural areas.”
Likewise, it costs more to gin the equivalent of a harvested acre of cotton than it does to handle and dry an acre of corn. That means further losses to local economies.
“So, we have a large positive impact for the farmers,” says Fannin. “But that's counter-balanced by an almost equal negative impact in losses to local input suppliers, gins and reduced labor.”
The shrinking of the cotton industry is a serious concern for the rural South, says Kurt Guidry, another LSU AgCenter economist. “While we don't know exactly how long this shift in agricultural production will last, it's obvious that the longer we move away from cotton production, the bigger the impact it will have on cotton infrastructure. If we do, in fact, see more permanent gin closings, one of the many potential consequences for our remaining cotton producers is increased transportation costs.
“In 2006, there were 44 gins in Louisiana. On average, each of those gins serviced about 14,000 acres. In 2007, those same gins will service, on average, 7,000 acres.”
With average operating capacities reduced by half, many of those gins won't be able to operate. “Once gins begin shutting down, remaining cotton producers may find they'll have to transport their cotton longer distances to find a gin.”
And it's not only cotton gins that could be impacted. Relative to feed grain and soybean production, cotton is considerably more expensive to grow. Cotton producers generally purchase more inputs and services to grow their crop than other producers. “Therefore, when cotton acreage falls, you're reducing the total demand for things like custom applicators, crop consultants, herbicides and insecticides.”
Guidry says everyone needs to consider what losing cotton could mean for the agricultural sector a few years down the road. If this shift in acres is permanent, “we need to approach the resulting issues with solid information. Obviously, much of this will rely on how long this shift to corn will last. Already, people are saying corn acres will drop in the state in 2008 — some say substantially at 35 percent, or so.
“One reason we're losing corn acres next year is wheat — particularly when it's in a double-crop system with soybeans. The projections of profitability show that's something that farmers should consider. And obviously, they are.”
Another factor is the comparison of corn and soybean prices. “Last January, the soybean-to-corn price ratio was running around 1.9, which simply means soybean prices were 1.9 times higher than corn prices. Now, that ratio is running closer to 2.6, which is much more favorable for soybean production.
“Producers are surely saying, ‘OK, I can protect some of these prices and make solid decisions right now.’”
Guidry has spoken with farmers who were surprised at the cost of producing a corn crop last season.
“Thankfully, Louisiana corn yields have been very strong. We should shatter the state average record by 10 to 15 bushels per acre. That certainly helps offset input costs and producers should make money. But when soybean prices are so good and fuel and fertilizer prices are still rising, it's hard to stay on board with corn.
“That's especially true when farmers consider how much they have to borrow to grow a corn crop. If a producer can project soybean profits at, or above, corn levels and he only has to assume the risk of borrowing $130 to $150 per acre versus borrowing $325 to $350, soybeans are more attractive.
“One producer told me, ‘I just don't want to have to borrow as much money next year.’”
The scuttlebutt is Louisiana's soybean acres will be up around 1 million in 2008. “I'm also hearing we could lose a few more cotton acres next year. I don't fully buy into that. I think we'll maintain cotton acres from this year.”
The 2008 futures prices on cotton are above 70 cents. And the cotton acres left in the state are on ground that can “produce nice yields. So I don't think those will shift and we'll hold steady on cotton acreage,” says Guidry.
Subsidies and biofuel
Subsidy payments were not considered in the Fannin/Paxton economic analysis. “Because of the way the farm bill is structured, farmers will receive the payments whether they plant cotton or corn,” says Fannin. “The reality is we put that money as a positive for the corn acreage and we put the same amount as a negative because of the cotton acres. So it's a washout and has no impact on our numbers.”
The impact of biofuels was also not figured in although that will be included in future studies. “If we did have ethanol plants — one is going in around Lake Providence, La., and more around Mississippi and Arkansas — the corn that would typically leave might stay in the state. The additional value would be added on top of the corn's positive impact.”
Fannin says he's always careful when speaking about ethanol. “I see many estimates about ethanol on local and state economies. What they typically end up with is a number that's bigger than the truth. They'll add up the impact by estimating the bushels of corn needed by the ethanol plant and count that as an impact on the regional economy. But if corn is already planted there, the reality is the benefit to the farmer is only the difference between what the ethanol plant will pay versus what he's forward contracted or the cash price at the elevator. The premium would be what the ethanol plant pays the farmers.”
Louisiana corn has brought about a dichotomy. “There are farmers who will do well in this environment,” says Fannin. “On the other hand there are those operating gins, those working there and those selling cotton inputs who are hurting. That's especially true of those strictly tailored to the cotton industry.”
For the rural development economist, “How and where that additional farm household income going to be spent? Will it be spent with merchants in the rural communities? Or will it go to urban areas like Monroe?”
One thing not addressed in the study is longer-term implications of the cotton-to-corn switch. “I know this year some farmers and gins are waiting to see what will happen,” says Paxton. “If the corn acreage remains high with low cotton acreage, farmers and gins will have to make some adjustments. Gins will simply cease to exist — they'll just go out of business. That will put a restriction on farmers who might want to return to cotton.”
And it doesn't have to be cotton going to corn. “We've also seen higher soybean and wheat prices,” says Fannin. “It doesn't matter what the crop is — if it's keeping cotton acreage low, it reduces the bales available for gins.”