Linda Benedict, Paxton, Kenneth W., Fannin, J. Matthew "Matt" | 8/28/2009 9:31:14 PM
J. Matthew Fannin and Kenneth W. Paxton
The cotton industry in Louisiana has seen major structural changes in a short time. Total cotton production was reduced by almost 75 percent between 2005 and 2008 (Table 1). While a portion of this loss was due to nonharvestable cotton acres and reduced yields caused by Hurricane Gustav in 2008, the larger trend is the downward slide in cotton acres planted.
LSU AgCenter economists have been monitoring these changes in the past four years and have conducted multiple economic-impact analyses to understand how the changes have affected the overall cotton supply chain. An economic impact study published last year showed no measurable net negative effects from the change in planted acres that switched from cotton to corn in Louisiana in 2007. A closer inspection of this analysis showed that cotton farmers benefited from a relatively high corn price and an optimum growing and harvest season that year. Other parts of the supply chain, however, saw either negative or reduced positive effects from the switch. One of the components of the supply chain most effected was cotton ginning.
A more in-depth study was performed on the cotton ginning industry in both Louisiana and the larger Midsouth cotton-producing region that includes Arkansas, Mississippi, Missouri and Tennessee. This research looked at the longrun challenge of maintaining available ginning infrastructure for cotton producers in the newer Midsouth environment of reduced cotton acreage. For example, between 1992 and 2007, the National Agricultural Statistics Service reported the total number of cotton gins in Louisiana dropped from 85 to 43. Much of this drop has been because older and less-efficient gins have gone out of business while remaining gins have upgraded equipment, such as gins stands, that increased their operating capacity.
One of the major concerns for the ginning industry is that as gin closings accelerate, the remaining gins may not sufficiently increase their overall or available capacity in all historical cotton-producing regions. This poses a dilemma for cotton producers. When cotton market conditions improve in future years and the commodity becomes more profitable to grow relative to alternative crops such as corn, soybeans and rice, sufficient ginning infrastructure may not be available to capture these earnings. Without the ginning infrastructure, Louisiana farm profits may not reach their potential. In 2007, the cotton ginning industry’s economic impact on the overall economy of Louisiana totaled more than $48 million, which included more than $32 million of direct spending. Cotton gins require significant repair and maintenance in advance of and during the ginning season. Support activities such a sheet metal suppliers and contractors, electricians and retail parts suppliers – as well as their seasonal labor – are measurably affected during the ginning season.
In 2007, cotton ginning added an additional $16 million in indirect or multiplier effects to the Louisiana economy. These included the effects of retail establishments' spending to replenish their inventories and of service contractors' paying the salaries and wages of their employees. Likewise, the $48 million in total spending generated more than $24 million in value-added effects and $14 million in labor income.
Louisiana contributed approximately 11 percent to the almost $439 million in total spending by the cotton ginning industry in the entire five-state Midsouth. See Table 2 for a detailed breakdown of output (spending), value added and labor income effects for Louisiana and the Midsouth.
The economic output multiplier for the cotton ginning industry in the Midsouth in 2007 was 2.39. This means that for every one dollar increase in demand for cotton ginning services, output (spending) across all sectors of the Midsouth economy increased by $2.39. This includes the original dollar for cotton ginning service plus an additional $1.39 across all other industries of the five-state Midsouth economy. Because there are many linkages between Louisiana industries and other industries in the Midsouth, Louisiana’s economy benefits measurably from these multiplier effects. Many of these multiplier effects occur locally within the rural parish where the gin is located because more than 75 percent of each gin’s ownership in Louisiana resides in the same parish as the gin.
LSU AgCenter economists have additional plans for further research to better understand the economics of the cotton supply chain. Future research will focus on understanding the more detailed geographical effects of the cotton ginning contraction by estimating the maximum economically profitable distance cotton can be transported from fields to gins. Knowing this distance will better help stakeholders identify gins that require additional support in order to maintain a network of gins that continues to supply ginning to all cotton-producing regions of Louisiana and the Midsouth.
J. Matthew Fannin, Assistant Professor, and Kenneth W. Paxton, Professor, Department of Agricultural Economics and Agribusiness, LSU AgCenter, Baton Rouge, La.
(This article was published in the summer 2009 issue of Louisiana Agriculture.)