Cotton Market Responses Under Alternative Acreage Reduction and Paid Land Diversion Options

Unlike the major grains and soybeans, cotton was not significantly affected by the 1988 drought. The large cotton production, declines in domestic mill use and export sales have combined to cause a sharp increase in the 1988/89 projected ending stocks to a burdensome level of 9.2 million bales, far beyond the 4 million target specified in the 198S farm bill. A 2S percent ARP (Acreage Reduction Program) set­aside was announced for the 1989 crop in late 1988, but no PLD (Paid Land Diversion) provisions were included. Reflecting the industry's growing concern over the cotton outlook, there are calls for implementation of additional acreage reduction of PLD for the next crop season. This study utilizes the AGGIES/Cotton (AGricultural Globally Integrated Econometric System) model to evaluate the effects of additional acreage reduction. Three alternative acreage assumptions are analyzed: a 12.S percent PLD for 1989/90, a 12.S percent PLD for the year earlier (1988/89), and an increase of the 1988/89 ARP percentage from the 12.S percent to 2S percent. The simulation results indicate some increase in prices but cash receipts and gross income in the year the program is implemented would decline due to policy-induced production cutback. Mill use and exports would also decline. U.S. prices would be less competitive in the world market. However, some program benefits can be expected, including a reduction of excessive stocks and longer-term gains in producer's incomes and savings in government program costs.