Econometric analysis of the structural relationships of the U.S. cotton economy

The federal government has intervened extensively in the cotton economy of the U.S. since 1933. After five decades, governmental policies and economic and technological developments have produced a downward long-term trend in planted acreage. Goals of price and income stability at the farm level have not been fully realized because of an imperfect knowledge of the relationships in the sector.

The objectives of this study were to Cl) identify and estimate the structural relations of the U.S. cotton economy with alternative single equation and multiequation methodologies and (2) simulate policies involving supply controls. Commodity Credit Corporation loan rates, and U.S. export financing.

The alternative estimators of the structural relationships were validated with the use of Theil's inequality coefficients, the RMSE's, and the turning points. The I3SLS model provided better estimates of the endogenous variables than the 2SLS, 3SLS, and SUR models.

Results indicated that the price competition between cotton and polyester have diminished from the 1960's to the 1970's. Cotton price elasticities of mill demand and export demand obtained from the I3SLS were -0.47 and -5.64, respectively. In the world market, the main criterion of competition between Upland cotton originating from various exporting countries is the world price. The elasticity of price transmission between U,S. domestic prices and world prices is 0.57, The Almon lag model revealed that the full impact of changing fiber prices is realized in five years. The main policy implications of the ex ante simulation scenarios are:

• The Commodity Credit Corporation loan policies, if discontinued in combination with reasonably restrictive supply controls, would create the most distortion the first year. Subsequent adjustments would take place in the domestic fiber economy, and gross farm income loss would be minimized or reduced to zero after six to seven years following the initial shock.
• Highly stringent supply control policies would result in higher farm prices. However, they would also cause gross farm income to fall due to the severe decline in quantities of disappearance.
• Export financing increases export volumes. However, it tends to also put upward pressure on domestic and world prices, causing U.S. cotton to be less competitive.