Despite its relatively small size compared to many other states, Louisiana produces a wide and diverse array of agricultural products. Agriculture is big business in Louisiana and is a major contributor to the state and many local economies. Sales of agricultural products provide income to thousands of farm families across the state. However, agricultural producers face considerable price and income risk from year to year, as commodity supply and demand factors interact to change market prices in the face of constantly increasing production costs. The current and future economic viability of production agriculture in Louisiana is dependent, to a large measure, on effective research provided by the LSU AgCenter.
According to the 2002 Census of Agriculture, Louisiana had 27,413 farms, ranging in size from fewer than 10 acres to more than 2,000 acres. Total land in farming operations was 7,830,664 acres, representing 28 percent of the total land area in the state. The market value of Louisiana agricultural products sold in 2002 was an estimated $1.8 billion and included sales of row crops and nursery and greenhouse crops, as well as livestock and poultry products. The bulk of these market sales provides income to farm families throughout the state. Approximately 91 percent of the farming operations in Louisiana are individual or family farms.
Agricultural production is a capital-intensive industry. Investment in machinery and equipment required to produce agricultural commodities is generally higher for row crop farms than for livestock farms. Tractors, harvesters and other equipment used in the production of crops such as cotton, rice, soybeans and sugarcane represent a substantial capital investment for an individual farming operation. The 2002 Census of Agriculture indicates that the total value of machinery and equipment on farms in Louisiana was approximately $1.7 billion.
For a farming operation to be economically viable, income from the sale of agricultural products must cover total production costs. Agricultural producers face two types of production costs: fixed costs and variable costs. Fixed costs generally do not vary with changes in farm size or production level and include such expenses as depreciation and interest charges on equipment, taxes and insurance. Variable costs represent production expenses that do change with the level of acreage or production and include such expenses as seed, fertilizer, herbicides, insecticides, labor, fuel and repairs.
Like many other U.S. products, the cost of producing agricultural commodities has increased over time. This increase in production cost is the result of higher prices paid for inputs such as seed, fertilizer, fuel and labor as well as higher purchase prices of farm machinery and equipment. As an example in 1980, the estimated total cost of producing cotton in Louisiana was approximately $310 per acre, and the total cost of producing rice was approximately $390 per acre. In 2006, the projected total cost of producing an acre of cotton or rice in the state is estimated to be more than $500.
However, unlike many other U.S. products, the selling price of a commodity cannot be set by the producers to ensure income to cover total production costs. Agricultural commodity markets in the United States are what economists often refer to as "purely competitive." Agricultural producers are "price takers," meaning that the market price is not set by the seller but rather by the interaction of demand and supply factors in the market. As a result, given the large capital investment and high production costs required, agricultural producers face enormous price and income risks each year. They are never guaranteed that the market will provide them with a price high enough to cover total production costs.
A look at Louisiana cotton and rice market prices over the past 25 years provides a good illustration of the price risk faced by agricultural producers. From 1980 to 2005, the market price for cotton in Louisiana averaged $0.567 per pound, with a high of $0.778 in 1980 and a low of $0.281 in 2001 (Figure 1). Over the same period, the market price for rice in Louisiana averaged $7.57 per hundredweight and ranged from a high of $12.00 in 1980 to a low of $4.03 in 1986 (Figure 2). The challenge that agricultural producers face each and every year is how to remain economically viable over the long term in the face of rising production costs and highly variable market prices.
Since agricultural producers cannot influence the price they receive from the sale of commodities, their only means of maximizing returns from production is to make farm management decisions that influence commodity yields and production costs. Much of the agricultural production research conducted by the LSU AgCenter is directed toward the goal of providing agricultural producers in the state with as many production options and as much information as possible to assist them in making production decisions that will ensure that their farming operations will continue to be economically viable.
One of the most significant ways to reduce crop production costs per unit is to plant a higher yielding crop variety. For this reason, the LSU AgCenter devotes considerable resources to crop variety development and evaluation for the major crops produced in the state. The rice varieties Cypress and Cocodrie and the sugarcane variety LCP 85-384 are examples of LSU AgCenter-developed crop varieties that have been widely adopted by growers in the state and have proven to provide substantial benefits to Louisiana agriculture through increased production and higher net returns to the grower.
Other ways to improve crop production and reduce production costs per unit include reducing or eliminating the detrimental effects of agricultural pests on crop yields. Crop yields per acre can be reduced through competition for plant nutrients from a variety of weeds as well as by infestation and plant damage by a variety of insects and diseases. Research conducted by the LSU AgCenter seeks to identify optimal control methods for each relevant crop pest by evaluating the value of expected crop loss prevention with the cost of control.
Efficient use of production inputs also reduces crop production costs per unit. The recent dramatic increase in petroleum prices has caused agricultural fertilizer and fuel prices to increase substantially. The optimal use of these inputs – specifically the timing and amount of fertilizer applied, the use of irrigation and the use of minimum tillage – will help ensure that the most cost-effective benefit is received from the use of these inputs. The LSU AgCenter conducts ongoing research in the areas of fertilization, conservation tillage and irrigation to evaluate and identify the optimal use of inputs to maximize returns from crop production.
Farming today is an extremely demanding and challenging business. Uncertainty about input prices, equipment costs, weather, yields, market prices and government programs causes agricultural producers to make farm management and production decisions without perfect information. Research to develop new crop varieties, improved weed and insect control measures, optimal timing and application of inputs are examples of research that helps producers substantially reduce production and income risks. This research is an ongoing effort by the LSU AgCenter to strengthen the productivity and profitability of Louisiana farms.
(This article was published in the summer 2006 issue of Louisiana Agriculture.)