INTERACTION EFFECTS OF PROMOTION, RESEARCH, AND PRICE SUPPORT PROGRAMS FOR U.S. COTTON

6. Summary and Conclusions

Using an econometrically estimated model of the U.S. cotton market, we find that interaction
effects with existing government cotton programs have a large impact on checkoff program returns. Our
simulation results show that the returns to the CRPP are reduced by about 20 percent when only the loan
rate for the LDP is binding and increased by just over 50 percent when only the Step 2 program is in
effect. The net effects of these programs when both are in effect at the same time may be either positive
or negative depending on U.S. cotton prices, world cotton prices, the loan rate, and other variables that
influence government subsidy payments and the cotton market.

One policy implication of these findings is that producers of commodities that receive statutorily
required support (feed grains (corn, grain sorghum, barley, oats); cotton; rice; wheat; peanuts; sugar;
tobacco; soybeans; minor oilseeds (sunflower seed, canola, rapeseed, safflower, mustard seed, flax seed);
and dairy products) may have a reduced incentive to establish generic promotion and research programs if
some of their support is in the form of nonrecourse loans and LDPs. In fact, relatively few of these
commodities have established promotion and research programs. Only soybeans, cotton, peanuts, and
dairy products have national checkoff programs and three of the four have unique features of their support
programs in addition to LDPs that make checkoff programs that increase commodity demand more
attractive (e.g., Step 2 demand subsidies for cotton, quotas on the quantity of peanuts that can be
marketed for domestic edible use, and a system that offers premiums to dairy producers for shifting more
production into Class I (fluid milk)).²⁶ To the extent that checkoff programs are more efficient than
federal commodity support programs, there may be net benefits to altering the support system to
encourage formation of generic promotion and research programs for additional commodities receiving
the majority of Federal commodity support funds.

²⁶In addition, the loan rate for soybeans was very rarely binding prior to 1998, implying that nonrecourse loans and
LDPs have had little effect on soybean producers’ behavior until the last few years.

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