Economic Outlook for Representative Cotton Farms Given the August 2006 FAPRI/AFPC Baseline

The majority of the cotton farms are in poor overall financial condition under the August 2006 Baseline. Drought conditions this year will deplete cash built from more favorable yields in 2004 and 2005 in many cases. In addition, the poor financial performance of the farms is attributed in part to the large increase in input prices. Fuel costs, previously projected to decrease modestly in 2005 and 2006, are now more accurately depicted as significant increases, building further on the large increases experienced in 2003 and 2004. The increase in cost is not limited to fuel expense for trucks, equipment, and irrigation motors, but includes the cost of nitrogen fertilizer and ag-related services which are closely linked to energy prices. Many cotton producers have adopted genetically modified seed and more expensive conventional varieties in order to enhance efficiencies and achieve higher yields; however, the tradeoff for these gains is increased cost of seed and technology fees. Steel prices have skyrocketed, thus increasing the cost of machinery along with the cost of repairing existing machinery. To keep quality employees on the farm, producers are faced with rising wage pressure from competing industries. The bottom line is producers are threatened by the rising cost of doing business while modest projected increases in cotton and other commodity prices fail to outpace these inflationary pressures.