Price-quality incentives in U.S. cotton

The general issue of assessing and improving vertical coordination related to cotton price and quality is the focus of this study. Key issues addressed include: What are the price incentive signals sent from the end-users in the cotton marketing system? How well does the U.S. cotton marketing system identify cotton price-quality differentials and then transmit appropriate information throughout the marketing chain? How can a region of U.S. cotton growth (e.g., West Texas) successfully position itself in the changing market demand? The following three components of the study provide answers to these questions.

First, the mill-level prices for cotton quality are examined to develop information about price-quality relationships of U.S. cotton. By using data from daily cotton contracts along with spot market price information, the premiums and discounts attributed to quality characteristics are estimated for several marketing years by major production regions. One result shows prices for quality characteristics varying substantially between marketing years. In addition, regional quality reputations are found to have important effects, controlling for measured quality differences.

Second, quality incentives in the U.S. cotton marketing system are analyzed to evaluate the effectiveness of information provided by the government relative to end-user demand. Mill-level premiums and discounts, obtained from a hedonic model estimation with daily cotton contracts data, are compared statistically with government loan rates and daily spot market quotations. The results show that a substantial disconnect exists between actual market prices and public price information for quality incentives. This provides an indication that inefficiencies in the system of producer quality are limiting the overall effectiveness of the U.S. cotton marketing system.

Third, major cotton market demand segments are determined with quality threshold levels for a region of cotton growth, West Texas. Given the present quality performance, strong potential market segments for West Texas are from higher-end international segments with significant value-added potential. Moreover, the potential to serve these market segments is growing with improvements in production technology such as variety selection and harvesting method. This study provides guidance for marketing efforts through determining user-defined quality and potential returns.