Loan Cotton Incurs Additional Costs When AWP Moves Above Base Loan Rate

LUBBOCK,July 11, 2003                        By Shawn Wade

      Withstrong fundamental market signals supporting futures prices and a steadilyincreasing Adjusted World Price, producers seem to have a compounding number ofmarketing and production decisions facing them as they enter the middle inningsof the 2003 growing season.

 

AWPIncrease Adds Costs To Loan Cotton

      Oneof the trends many growers have been watching has been the steady increase inthe Adjusted World Price for cotton.

      TheAWP effective for the week of July 10-17 has been announced at 50.37 cents perpound. That means the Loan Deficiency Payment rate for the July 10-17 timeperiod is 1.63 cents per pound.

      Toa producer the increase in the AWP is evidence that cotton prices are moving upthrough a combination of tightening cotton stocks, increased demand anduncertainty of how much production there will be in 2003.

      Adownside of the AWP increase does exist, however, for producers who still have2002-crop cotton in the loan. Should the AWP equal or surpass the 52-centUpland cotton base loan rate growers become liable for paying specific chargestied to the cotton.

      Whenthe AWP is below the upland cotton base loan rate of 52 cents per pound,accrued storage charges and interest are forgiven when the cotton is redeemedand the loan is settled. The producer would only be responsible for payingstorage charges accrued prior to the date the cotton entered the CCC loan.

      Ifthe AWP rises above the base loan rate then the grower is responsible forrepaying all storage and interest charges when the cotton is sold and the loanis settled.

      Thenet effect could add up to $12-15 per bale in charges a grower would have topay if they wait until after the AWP passes the Loan rate to sell their crop,or if they decide to forfeit the crop to the CCC to settle the loan.

      Withprudent planning growers should be able to avoid these costs. The quickestroute is to go ahead and sell their 2002 cotton before the AWP rises above 52cents, or redeem the cotton themselves and avoid paying storage and interestcharges.

      Thisstrategy would prove beneficial to the producer by protecting the full amountof the loan price through the combination of the cash sale price and theremaining marketing loan gain they realized by redeeming at a lower price perpound.

 

TimeTo Think About Hedging 2003 CC Payments

      Anothertrend many growers have already noticed is the general strengthening of futuresprices across 2003 crop New York futures contracts.

      Oneof the issues associated with increasing prices is that as new crop pricesimprove, 2003 counter cyclical payments (CC), authorized in the 2002 Farm Bill,will begin to shrink if the average price received by growers for the 2003marketing year rises above the 52 base loan rate.

      Thissituation would affect everyone, but will be most disruptive to growers whohave lost their 2003 crop or who face significantly lower yield potential andhave less cotton to sell at the higher market price. Farmers with cotton in thefield with a good chance to take a crop to harvest will likely have theadvantage of higher prices to offset any reduced CC payment rate.

 

CCPayment Workshops Being Scheduled

      PlainsCotton Growers and the Texas Cooperative Extension service are currentlypulling together a series of meetings scheduled for early August to providetips and strategies growers can employ to hedge against the erosion of the 2003CC payment.

      Atotal of three CC payment workshops have been scheduled for August 5 and 6. Thetwo meetings scheduled for August 5 are: Plainview, at the Ollie Liner Centerbeginning at 9:00 a.m.; and, Muleshoe, at the Bailey County Coliseum startingat 2:00 p.m.

      Thelast meeting has been tentatively scheduled for August 6 at Brownfield in theCity Park Meeting Room, beginning at 9:00 a.m.

      Onthe bright side of the CC payment picture is the indication that the 2002-cropCC payment will indeed equal the maximum rate allowed by the current Farm Bill.

      Counter-cyclical payments arecalculated using the weighted average price received by farmers for theapplicable Upland cotton marketing year that begins August 1 and runs throughJuly 31 of the following calendar year.

      The following table shows theaverage price received each month by farmers and the associated weightedaverage price based on cumulative marketings through each month.

AveragePrice Received Through May

For 2002-03 Upland Cotton

(Weighted by Marketings)

 

Marketings

Prices

 

(000's of Running bales)

(cents/Lb.)

 

Monthly

Cum.

Monthly

Weighted

August 2002

354

354

33.00

33.00

September 2002

412

766

35.20

34.18

October 2002

749

1,515

39.00

36.56

November 2002

1,417

2,932

41.90

39.14

December 2002

2,380

5,312

42.10

40.47

January 2003

1,980

7,292

44.00

41.43

February 2003

1,374

8,666

45.20

42.03

March 2003

795

9,461

47.30

42.47

April 2003

592

10,053

45.00

42.62

May 2003

552

10,605

45.60

42.77

June 2003

N/A

N/A

43.50

N/A

Source:National Agricultural Statistics Service