The Louisiana Delta is a fairly diversified agricultural production region located in the northeastern part of the state. It

contains alluvial soils of the Mississippi River Delta and is encompassed within the seven parishes of Morehouse, East

Carroll, West Carroll, Richland, Franklin, Madison and Tensas. Cotton, corn, rice, and soybeans are the major crops

produced in the region, as well as sorghum and wheat. In 2005, this region accounted for 65.7 percent of Louisiana’s total

cotton acreage and 66.1 percent of the state’s total corn acreage. The region accounted for 42.5 percent of the total state

soybean acreage and 16.7 percent of the total state rice acreage in 2005. Acreage of the four major row crops grown in the

region over the 1996-2005 period is shown in Table 1. Approximately one million acres are planted each year to cotton,

corn, rice and soybeans. These crops are usually grown in rotation. Corn and soybeans are usually grown in rotation with

cotton (Guidry, et al.). Soybeans are the primary rotational crop with rice. Over the past ten years, cotton has accounted for

an average of 39 percent of the region’s acreage, corn 24 percent, rice 7.3 percent and soybeans 29.6

percent.

Fuel and fertilizer price increases in 2006 have had a significant impact on crop production costs and net returns. Analysis of

crop returns and enterprise selection for the Louisiana Delta, a mixed cropping area in the northeastern part of the state,

indicates that increased diesel and nitrogen fertilizer prices would be expected to shift acreage away from crops with

relatively high diesel and nitrogen requirements as well as increase the risk or variability of net returns above variable costs

for crop enterprise combinations.

Michael A. Deliberto is a Research Associate in the Department of Agricultural Economics and Agribusiness, Louisiana

State University. Michael E. Salassi is a Professor in the Department of Agricultural Economics and Agribusiness, Louisiana

State University. Kenneth W. Paxton is a Professor in the Department of Agricultural Economics and

Agribusiness, Louisiana State University. In late 2005, fuel and fertilizer prices rose dramatically in response to the

significant rise in the price of oil. From 1996 to 2005, budgeted diesel prices in the LSU Agricultural Center’s

Projected Enterprise Costs and Returns Budgets for Northeast Louisiana increased by $0.78 per gallon, from $0.67 in 1996

to $1.45 in 2005 (Britt and Paxton, 1996; Paxton, 2005). Budgeted diesel prices for 2006 rose by $0.75 over the previous

year to $2.20 per gallon (Figure 1).

Budgeted nitrogen prices according to the LSU Agricultural Center’s Projected Enterprise Costs and Returns Budgets for

Northeast Louisiana were $0.26 per pound of nitrogen in 1996 and rose to $0.30 per pound of nitrogen in 2005, an increase of

$0.04 per pound over ten years (Figure 1). For 2006, the budgeted nitrogen price was $0.40 per pound, an increase of

$0.10 per pound, or 25 percent, in one year. Changes in diesel and nitrogen costs per acre for the four crops

were estimated using 2005 and 2006 budgeted input prices. Input requirements as well as estimated costs per acre for the

two years are shown in Table 2. Rice requires the largest quantity of diesel per acre since it is an irrigated crop. An

estimated 27.1 gallons of diesel are required for each acre of rice to cover fuel use by tractors, harvesters, and irrigation

power units. The other three crops required much less diesel per acre. Corn and rice are the heaviest users of nitrogen at

160 and 170 pounds per acre. Cotton requires approximately 90 pounds of nitrogen per acre and none for soybeans. Using

2005 projected prices of $1.45 per gallon of diesel and $0.30 per pound of nitrogen and 2006 projected prices of $2.20 per

gallon and $0.40 per pound, input costs for these two items were estimated for each crop. For the 2006 crop year, budgeted

fuel and nitrogen costs were projected to increase by 4.1 percent for cotton, 8.5 percent for corn, 7.9 percent for rice, and

2.3 percent for soybeans.

Since the relative importance of fuel and fertilizer costs vary across the four major crops in the region, the question arose as

to what would be the impact on cropping patterns in the region from increased fuel and fertilizer costs. A research study was

conducted to evaluate the impact of increased fuel and fertilizer costs on enterprise selection and net returns of cotton, corn,

rice and soybeans in this region of the state.

Methodology

A Target MOTAD modeling approach was selected to evaluate the impact of input price changes on enterprise selection.

This approach utilizes a linear programming framework to determine optimal enterprise mix with the goal of maximizing net

returns above variable costs while taking into account the relative return risk of each enterprise.

Target MOTAD modeling formulations were developed on the basis that decision makers desire to make choices which

maximize expected returns but are also concerned about returns not meeting a predetermined “target” level (Tauer). This

modeling approach has been used to evaluate a wide variety of crop production decisions including farm bill impacts on crop

selection (Davis, et al.), uncertain fieldwork time (Misra and Spurlock), impacts of crop diversification and rotation on risk

(Helmers, et al.), and double cropping (Burton, et al). The general objective function utilized in the model for this

study was of the form: Max Z = a COT + b COR + c RIC + d SOY where COT, COR, RIC, and SOY were defined as the

percent of an acre planted to cotton, corn, rice, and soybeans. The parameters a, b, c and d represent the mean net return

above variable production costs per acre for each commodity utilizing 2006 production cost estimates with 1996-2005

detrended crop yields, 1996-2006 actual market prices (or loan rates if higher), and 2005 and 2006 projected mean diesel

and nitrogen prices. The mean diesel price in northeastern Louisiana from 1996- 2005 was $0.94 per gallon. Mean nitrogen

fertilizer prices during that same time span was $0.24 per pound. In order to calculate net returns above variable costs so

that objective function coefficients can be determined, diesel and fertilizer prices were detrended for each year. Land

arrangements, i.e., percentage of land owned and share rented, crop market price, and loan rate were unadjusted from their

yearly prices/rates in an effort to isolate the sole impact of variable costs to each of the four crops. Yields were detrended

from 1996-2005 to allow residuals to better reflect an overall average when considering a forecasted 2006 mean yield

estimate.

By allowing the 2005 price of $1.45 per gallon of diesel fuel and $0.30 per pound nitrogen fertilizer to act as a mean price,

net returns above variable costs could be analyzed on the magnitude of the extent to which fuel and fertilizer affect net

returns per acre and crop enterprise selection. This process was then duplicated using the 2006 price of $2.20 per gallon of

diesel fuel and $0.40 per pound of nitrogen fertilizer serving as the mean price. Net returns above variable costs and crop

selection were analyzed based on the observed increase in input prices from 2005 to 2006.

Production costs used in the analysis were taken from projected cost estimates for the 2006 crop year in Northeast

Louisiana (Paxton, 2006; Salassi, 2006). Costs for typical production systems for the four crops included: (1) solid planted

stacked gene cotton; (2) stale seedbed RoundUp Ready soybeans; (3) conventional corn; and (4) water planted Clearfield

rice. Variable costs for 2006 were utilized in the analysis with adjustments for alternative diesel and nitrogen input price

distributions. Using regression analysis, mean 2006 trend crop yields per acre were estimated at 150 bushels for corn, 900

pounds for cotton, 38 bushels for soybeans and 66 hundredweight for rice. Estimated net returns for each crop

were adjusted for average land tenure in the region with 33 percent of the cropland owned and 67 percent share rented.

Share rents were 20 percent for corn, cotton, and soybeans and 30 percent for rice. These share rents are typical of

northeastern Louisiana as evidenced in the LSU Ag Center’s work in evaluating share rent models for various state

commodities. Estimates of mean net market returns above variable production costs, along with standard deviation and

coefficient of variation, are shown in Table 3 for the two sets of diesel and nitrogen prices. Using the 2005 diesel and nitrogen

prices as mean prices (NRAVC-1), net returns above variable costs average $70.91 per acre for cotton, $60.49 per acre for

corn, $62.57 per acre for rice, and $73.70 per acre for soybeans using 1996-2005 market prices and detrended yields. Using

the 2006 input prices as mean prices (NRAVC-2), the mean net returns of all four crops decreased, although the impact was

greater for rice and corn.

The increase in fuel and fertilizer prices also increased the variability of net returns as estimated by the coefficient of

variation. Functional linear programming constraints specified in the Target MOTAD model included the following:

Constraint 1 ensures the sum of the percentages of each of the four crops does not exceed 100 percent. Constraints 2-9

specify a minimum and maximum percentage for each specific crop which allows the percentage of regional acreage

accounted for by each crop to vary within the range of plus or minus 30 percent of the historical acreage average of the

region. Over the past ten years, cotton has accounted for an average of 39 percent of the region’s acreage, corn 24 percent,

rice 7.3 percent, and soybeans 29.6 percent. The basic purpose of these constraints is to model the general direction of

acreage change in response to fuel and fertilizer price increases while maintaining some measure of asset fixity for

specialized production equipment. Risk constraints were also included for 10 years of historical return data. The Target

MOTAD equally weights net return risk across the ten year period. Coefficients for each crop in these constraints

represented net returns above variable costs using 1996-2005 actual market prices (or loan rates if higher), detrended crop

yields with a mean of projected trend 2006 yield levels, and 2006 variable production costs with variable diesel and nitrogen

input prices based on 1996-2005 input price variation and 2005 and 2006 mean price levels. The goal of Target MOTAD is to

maximize net returns around a specified target level of income. Since the crop decision variables in the model were defined

as the percent of an acre devoted to each crop, target income levels of $40, $60, and $80 were specified, representing a

likely range of market net returns per acre across all four crops. Model results provide multiple sets of optimal crop

enterprise solutions with alternative net returns objective function values and associated levels of net return risk. The

measure of risk for each solution is the mean absolute deviation which is defined as the average deviation per year around

the specified target income for each solution enterprise mix.

Results

Results from t