Most of the cotton-speaking world now knows U.S. farmers are expected to plant 3 million fewer acres of cotton when the 2007 planting season has been completed.
Conventional wisdom says cotton growers are shifting out of the crop because of $4 corn and $8 soybean futures although the truth may actually be that many have become totally disgusted with poor cotton prices and low equity offers.
But some producers may soon be forced to swallow a pill that could be even more galling, according to cotton program experts. They may have to pay merchants 1 cent to 1.5 cents per pound to get them to take their cotton out of the CCC loan to avoid paying 4 cents to 4.5 cents in USDA storage charges.
In other words, those farmers may pay a negative equity to cotton shippers because of changes in USDA's rules for handling those charges.
In 2006, USDA added an additional forfeiture cost to the CCC loan agreement to reflect the compression charges levied by most cotton warehouses. Compression charges can run about $7 per bale or 1.5 cents per pound for a 480-pound bale.
Growers will also be expected to pay CCC for any amount in which a warehouse tariff exceeds $2.60 per bale per month, for any storage charges incurred before cotton entered the CCC loan and for receiving charges by the warehouse. USDA previously covered those.
“The bottom line is that if a grower has cotton in a warehouse with a high tariff, it could cost him an additional 2 cents to 4 cents per pound to forfeit cotton to the government when loans start to mature in June,” says Woods Eastland, president of Staplcotn Cooperative and former chairman of the National Cotton Council.
“The grower has always had two options: (1) to forfeit the cotton to the government or (2) sell his equity in the cotton to a merchant. This summer growers may have to pay a merchant to take the cotton off his hands.”
The changes come from a final rule published by USDA last September. The rule was aimed at addressing the “wet cotton” and cotton flow issues merchants had been complaining about since part of the record 2005 crop had to be stored outside due to lack of storage on the Texas High Plains.
The rule established a uniform maximum storage credit rate of $2.66 per bale per month for all warehouses outside the states of Arizona and California where the rate was set at $4.37 per bale per month. It also said CCC would bill producers for any warehouse compression fees that were unpaid for forfeited cotton.
Although the rule was published in the Federal Register the timing of its release — on the eve of harvest — may not have been the best for growers.
“I'm afraid a number of growers aren't aware of these changes and some of them — such as being billed for the compression charge — could really hurt,” said Cecil Williams, executive vice-president of the Cotton Producers of Missouri. “You're looking at costs of 4 cents to 4.5 cents per pound just to get cotton out of the loan.”
In other years, the changes would be hardly noticed. When prices are higher — or lower — than they have been in recent months, growers could request a loan deficiency payment on their cotton in lieu of placing it in the CCC loan and sell their cotton to a merchant. Or they could sell their equity to a merchant who would redeem it from the loan and pay any charges.
In the 2005-06 marketing year, when U.S. cotton exports exceeded 18 million bales, growers forfeited only 125,000 bales of loan cotton to the government. This year, USDA estimates forfeitures could reach 750,000 bales, but some observers think the figure could be closer to 3 million bales.
Some blame the demise of the Step 2 program for the current price woes. When Congress eliminated Step 2 in response to the WTO ruling in the case Brazil brought against the U.S. cotton program, the University of Missouri's Food and Agriculture Policy Research Institute estimated the net effect was to reduce U.S. prices by about 1.3 cents per pound while increasing world prices by about 0.4 cent.
Eastland believes the high ending stocks currently being forecast for the U.S. market — an eye-popping 9.2 million bales or nearly 50 percent of total use for the 2006-07 marketing year — has changed the balance in the market. And China has been noticeably absent from the U.S. market.
“The marketing year for the U.S. crop has shifted to later in the year,” he says. “The marketing year ends July 31, but more cotton is being sold after the end of the marketing year because mills know they can buy cotton cheaper.”
When U.S. mills were the primary market for U.S. producers, they bought cotton year-round, which helped smooth the flow of cotton. With domestic mills now accounting for less than 5 million bales of annual use, the focus has shifted to foreign mills, which tend to buy cheaper cotton first.
“USDA says the U.S. cotton program is broke, but I don't think it is,” says Chip Morgan, executive vice-president of the Stoneville, Miss.-based Delta Council. “In 2002, we had 4.5 million more bales going to domestic mills. In 2006, we grew 4.5 million more bales. That's a 9-million-bale swing in supplies the market has had to try to absorb, and the market is struggling to do that.”
By this time of the marketing year, China normally has purchased at least 4 million bales of U.S. cotton. “So far they've bought 500,000 bales if we're lucky,” he said. “So we've added more than 10 million bales to the supply of U.S. cotton.”
“If you look at export sales as of this date in 2005-06 and compare it to 2006-07, they're almost identical — except for purchases by China,” says Eastland. “Right now, China appears to be making sure Chinese cotton gets used first. They're paying their producers in the 70s (cents) for their cotton to get it in from the countryside.
“Chinese polyester is being quoted for 63 cents a pound so their mills are using more polyester in their blends to bring the price down from what they're having to pay for Chinese cotton. So we're also fighting another fiber.”
If USDA moved the adjusted world price by 150 points, experts believe U.S. merchants could clear out much of the 11 million bales the Delta Council's Morgan speaks about.
Eastland, Morgan and the National Cotton Council's Craig Brown met with Deputy Agriculture Secretary Chuck Conner about USDA taking administrative action to change the AWP. But USDA officials refused, citing the added cost.
At their annual meeting in February, Cotton Council delegates voted to ask USDA to adjust the AWP and take other steps to make U.S. cotton competitive in the absence of Step 2. But the merchant segment of the council later vetoed the resolution.
Sens. Thad Cochran, R-Miss., and Blanche Lincoln, D-Ark., have also written Conner asking him to implement specific recommendations by the grower, warehouse and cooperative marketing contingent that met with him.
Modify the transition period from current crop to new crop quotations used to determine the world price of cotton;
Change the calculation of the Adjusted World Price, by basing it on the three lowest-priced growths quoted Middling 13/32-inch cotton, CIF Northern Europe; or
Modify the calculation of the location differential to reflect transportation costs to export cotton between the average U.S. location and Northern Europe.
Morgan said putting the storage charges on the backs of producers could have ramifications beyond the grower and warehouse communities. “When the farmer obtained his loan for the 2006 crop, his banker thought he had a 52-cent loan (for base grade and staple),” he said.
“If the producer has to pay the merchant 150 points to buy his equity rather than receive 300 to 400 points to redeem his cotton from the loan later, it reduces the loan rate. When you back out the storage charges of 400 to 500 points and negative equity, the loan rate becomes 46 cents.”