The new farm bill gives cotton growers in the upper Southeast a bottom line reason to update bases, even if cotton prices move above 65 cents per pound over the next five years. An increase in yields and acreage makes updating bases an “option you'll want to consider,” says a North Carolina State University ag economist.
Producers have until April 1 to update bases on acres from 1998-2001 or keep their bases under the 1996 bill at Farm Service Agency offices.
Speaking at the Southeast Cotton Conference, Blake Brown, North Carolina State Extension ag economist, gave examples of how updating bases could benefit producers, offered an outlook for the coming year and talked about the issues that could push cotton prices higher in the next five years of the farm bill. Cotton and peanut bases provide the most opportunity for producers.
The new farm bill allows producers to update acres and yields, as well as update payment yields. Farmers can receive loan deficiency payments (LDP), direct payments and counter-cyclical payments. LDP is based on actual production; direct payments and counter cyclical payments are decoupled from production and calculated at 85 percent of old or new base acres, regardless of the farmer's current production.
The producer has four options: Maintain current program acres, add peanuts, soybeans or other oilseed crops produced from 1998-2001 with current base acres, add additional oilseed crops while reducing other program crops acre for acre, or update bases and yields for all crops.
Farmers can also update payment yield for counter-cyclical payments by adding to the old payment yield 70 percent of the difference between the old program yield and the farm's average yield for 1998-2001 or updating the yield to 93.5 percent of the farm's average yields for the same four-year period. (More information is available at local FSA offices.)
An increase in cotton acreage and yield in North Carolina since the 1996 farm bill makes updating cotton base an attractive option, Brown says. In the previous base-building period, North Carolina had some 512,000 acres of cotton and average yields of 670 pounds per acre. In the 1998-2001 base-building years of the new farm bill, acreage increased to 855,000 while yield went up to 687 pounds per acre.
Using a cotton price of 52 cents per pound and updated yields of 670, a farmer could expect to get a $78 counter-cyclical payment for base acres. By updating all bases at a 600-yield payment, the farmer could expect $112 for every acre of cotton base. At a national average price of 52 cents per pound, the counter-cyclical payment is 13.7 cents per pound. The target price for cotton is 72.4 cents per pound.
Updating bases locks payments in for five years. “We're talking about another five years left in this farm bill,” Brown says. “We don't know what prices will do during that time.”
Counter-cyclical payments are based on the national average price. With cotton prices starting to make an upward move, the national average price would have to go over 65 cents per pound before the counter-cyclical payments of six and two-thirds cents per pound would disappear. “We would have to have a substantial recovery in cotton prices before counter-cyclical payments go to zero — that's not an impossibility over the next five years,” Brown says.
Carl Anderson, a Texas A&M economist, has talked about hedging against counter-cyclical payments. In other words, buying a call option to protect against rising cotton prices. “That's the irony of ironies: protecting ourselves against rising cotton prices” to protect the base payment. “It's something you should be aware of,” Brown says.
For upper Southeast producers, the question of updating base comes down to cotton and peanuts. Brown says one option is to sell the peanut base and keep the cotton base. “Deleting cotton base is very expensive.”
Brown reminds producers that payments should not affect production decisions.
At play beyond the field are factors that influence price. Brown says a stable supply and prices between 54 cents and 60 cents via the U.S. cotton program, lower ending stocks globally and elimination of the Step 2 trigger should help narrow the gap between the loan deficiency payment (LDP) and the all-important “A Index” set by the International Cotton Advisory Council (ICAC).
In an ideal marketing situation, the gap between the A Index and the LDP is narrow. The ICAC says the A Index is going to average 54 cents in the coming year. Speculation has it going as high as 65 cents.
“What we'd like to see are some reasons for the U.S. price to be in the upper 50s this year, which would mean a small LDP,” Brown says. “What we would like to see is the A Index move slower and the U.S. spot price to go faster.”
A weakening of the dollar against foreign currencies, particularly the Australian dollar and the already-weakening Brazilian Real would increase the competitiveness of U.S. cotton in the global market, Brown says.
“Once we get through the transition maybe we're talking about cotton back toward 60 cents.”
As with any talk about crop forecasts, the dynamics will be played out a planting time. The wild card could be soybean prices.