However, another important influence on their supply decision is the level of government support
payment expected, if that payment varies with output.18 Prior to 1996, eligible cotton production was
guaranteed to receive at least that year’s target price established by the USDA. Thus, the relevant supply
price for eligible cotton was the greater of the target price and the expected market price. Approximately
85 percent of production received payments under this program (USDA, 1995b). Therefore, in years
from 1975 through 1995 when the target price was binding (i.e., target price > market price), the supply
price used in the economic model was calculated as the weighted average of the target price and the
expected market price. In years when the target price was not binding (i.e., target price < market price),
the supply price was simply set equal to the expected market price. The FAIR Act of 1996 eliminated
price supports under the target price program, but kept the LDP program. The availability of LDP
payments also influences the supply decisions, but these payments differ from price supports under the
target price program because they are based on the difference between the loan rate and the AWP and all
cotton production is eligible. Thus, in the economic model, the supply price for each year from 1996
through 2000 was calculated as the expected market price plus the expected LDP payment for that year.
The expected LDP payment was assumed to equal the loan rate minus the average AWP at planting if the
loan rate was above the AWP and zero otherwise. Changes in farm input prices were estimated using the
index of prices paid by farmers for the series production, interest, taxes, and wage rates obtained from
various issues of Agricultural Statistics, an annual USDA publication.
17The available data on cotton futures prices were monthly based on the value at the end of each month. To represent
expectations during the planting season, we averaged the futures prices reported for the end of February, the end of
March, and the end of April.
18A government program paying a lump sum regardless of output, such as the current AMTA program, should not
influence planting decisions because it does not change growers’ incentives.
15