Risk Management Issues for New Cotton Producers: A Texas Example

Historically high cotton prices essentially limit or remove the price safety net provided through the Farm Bill.  Through a well-designed synthesis of crop insurance policy selection and pre-harvest marketing strategies, a better safety net can be readily created by traditional cotton producers (in traditional cotton production areas).  However, many of these strategies commit a specified level of production - an issue of uncertainty for dryland producers of a newly adopted enterprise.  In addition, the insured level of production which can safely be marketed is limited by guarantees provided through the various crop insurance products.  Many new cotton producers find themselves operating with a production safety net that is uncertain (if not insufficient).  Without an established average production history (APH), the variable T-yield procedure used for crop insurance provides insufficient coverage to offer substantive price and/or production risk protection to cotton producers in new or intermittent cotton production counties. 

This economic analysis will focus on the situation faced by new cotton producers in several counties in west central Texas.  In order for cotton production to thrive in this area (and others facing a similar predicament), the price and production risk concerns must be addressed.  This economic investigation will examine the relative merits of the crop insurance products and marketing strategies for producers interested in adding cotton as a new productive enterprise, but lacking established cotton APHs.  It will also look at strategies that producers and landowners can use during the transition time needed to establish a viable crop production history.  Finally, the pre-harvest marketing alternatives available to producers will be examined.