KNOWLEDGE IS KEY TO AVOIDING SURPRISES
ON UPLAND COTTON FORFEITURES IN 2006

Friday, October 27, 2006                           By Shawn Wade

      Deciding what to do with yourcotton isn't one of those things that a grower should let drift to the bottomof their harvest season "To-Do" list in 2006 says Lubbock-based Plains CottonGrowers, Inc. (PCG).

      According to PCG officials,growers need to be mindful of recent changes by the USDA Farm Service Agencyand the Commodity Credit Corporation (CCC) and take some time to figure out howthe changes could impact them this marketing season.

      With current market activitythat would generously be described as sluggish, market watchers are virtuallyunanimous in their belief that a large part of the 2006 crop will work its wayto market through the CCC marketing loan program. Those same market experts arealso fairly consistent in their belief that the 2006 crop could also have arelatively high number of loan forfeitures compared to recent seasons.

      In order to prepare for thateventuality, it is imperative that producers have a clear understanding of theins and outs of the marketing loan program. Producers also need to understandtheir potential financial obligations when they pledge their cotton into theloan and sell at a later date or if they elect to forfeit their cotton loancollateral to CCC.

      Having not done it much overthe last decade or so, forfeiting cotton would essentially be a new experiencefor almost any grower in 2006. Throw in the fact that several rule changes thatgo into effect with the 2006 crop year have added new wrinkles to the cottonmarketing loan program and the marketing loan process quickly becomes aminefield that could spring a nasty economic surprise on the grower.

CCC Adds New Cotton MALProvisions for 2006

      With the addition of severalnew wrinkles to the upland cotton marketing loan program starting with the2006-crop, cotton producers need to be aware of how each one could impact theirmarketing plans.

      The first change thatproducers need to be aware of is the change in CCC policy regarding theforfeiture of loan cotton. In a final rule that became effective August 30 ofthis year, CCC has changed its procedures regarding loan forfeitures and thehandling of charges, specifically compression, that accrue during the storageand handling of loan cotton.

      In the past CCC policy hasbeen to pay all outstanding warehouse charges at the time of forfeiture toensure that the loan collateral they are acquiring is free of all liens andother encumbrances.

      CCC would subsequentlyrequire the producer who forfeits the cotton to reimburse CCC for any storagecharges that accrued before the cotton was entered into the loan plus anyoutstanding receiving charges associated with putting the cotton in storage andissuance of an Electronic Warehouse Receipt for the cotton.

      In the past, according toUSDA, compression charges were often not specifically listed as due on the EWRat the time of forfeiture and would be charged to CCC at a later date. Inreviewing its policy regarding cotton loan forfeitures, CCC has determined thatcompression fees, regardless of when they are charged, amount to an encumbranceagainst the cotton that existed before loan forfeiture and are not theresponsibility of the CCC.

      To implement this decision,CCC has clarified its policy to also specifically include fees associated withcompression in the list of charges CCC is not responsible for and that will becharged back to the producer when loan cotton is forfeit.

      Producers forfeiting cottonwill be required to reimburse CCC for any charges associated with payment ofcharges that are deemed the producers responsibility and necessary to allow CCCto assume responsibility for storage and delivery charges from the date offorfeiture until the date CCC removes the cotton from its inventory.

      The CCC policy change has noimpact on producers who sell loan cotton through an equity contract in whichthe merchant provides an equity bid offer that reflects any potential chargesthat are outstanding against the cotton, including compression.

      In a nutshell producers needto be aware that the decision to forfeit cotton to CCC at the end of the9-month loan period does come with a significant financial obligation.

      Based on average High Plainswarehouse tariff rates, and assuming two months of accrued storage before thecotton is entered into the loan, a producer who forfeits cotton could berequired to reimburse CCC for approximately $16 per bale in storage, receivingand compression fees on 2006-crop cotton. With no pre-loan storage to accountfor a producer could still be responsible for reimbursing CCC for as much as$12 a bale in receiving and compression charges.

      Producers in parts of thecotton belt where compression is usually not charged at the warehouse level,but where average warehouse storage rates are above the CCC maximum storagecredit amount, may have entirely different issue to deal with. In thissituation the producer forfeiting cotton would be responsible for reimbursingCCC for the amount of the warehouse storage fee above the maximum CCC storagecredit rate for the entire length of the loan plus any pre-loan storage fees aswell.

      At the end of the day,regardless of where you grow cotton, letting CCC assume loan collateral throughthe forfeiture process may not be the cheap and easy route producers want totake.

      The best advice for producerswho are trying to get the highest possible price for their cotton is to keep asharp pencil handy and carefully compare the net income they would receive fromselling their crop to what they would end up with if they were to forfeit thecotton after nine-months in the loan.

      The bottom line is thatforfeiting cotton has never been a no-cost action on the part of the producerand the changes made by CCC starting with the 2006 crop have increased thatcost for cotton producers on the Texas High Plains.

      The second change thatproducers need to be aware of is the addition of rules allowing a grower, ortheir properly designated agent, to authorize the transfer of loan cotton fromthe original receiving warehouse to a secondary location without canceling themarketing assistance loan.

      The key point that producersmust keep in mind when deciding to transfer their loan cotton from onewarehouse to another is that all of the costs associated with the move areultimately the responsibility of the producer or the agent authorized to act onthe producers behalf.

      To protect the producer andinsure that they do not inadvertently provide authority for a third party tomove their cotton USDA has implemented a separate authorization process forloan cotton transfers. The new authorization was added to the current CCC-605,"Designation of Agent - Cotton" form which is used by the producer todesignate an agent authorized to act on their behalf to repay their loanobligation and redeem MAL cotton.

      To insure that producersconsciously agree to the transfer of their loan cotton, and before either theproducer or his agent can transfer said cotton, FSA will require the producerto complete and sign an all-new transfer authorization section that has beenadded to the CCC-605 form.

      Once all necessaryauthorizations have been completed a producer or his designated agent may thentransfer cotton loan collateral from one CCC-approved cotton storage warehouseto another CCC-approved cotton storage warehouse subject to the followingconditions:

      (1) The cotton is representedby electronic warehouse receipts; (2) The request is submitted by a producer ora properly designated agent of the producer; (3) The transfer is agreed to bythe receiving warehouse operator; and (4) The CCC marketing assistance loanthat is secured by such cotton matures at least 30 days after the date on whichthe request for the transfer is submitted to CCC.

      All costs incurred in thetransfer of loan cotton collateral are the responsibility of the producer orhis designated agent.

 

2006 COTTON QUALITY SUMMARY

      Thefollowing is a summary of the cotton classed at the Lubbock and Lamesa USDACotton Division Cotton Classing Offices for the 2006 production season.

 

Week Ending October 26, 2006:

 

Office

Bales

Color

Leaf

Staple

Lamesa

35,768

21+ - 41%

31 - 45%

3.18

35.89

Lubbock

73,311

21+ - 28%

31 - 55%

3.43

36.23

 

Mike

Strength

Uniformity

Bark

Lamesa

4.27

29.14

80.76

6.6%

Lubbock

4.16

30.32

81.35

8.6%

 

 

Season Totals To Date:

 

Office

Bales

Color

Leaf

Staple

Lamesa

85,959

21+ - 66%

31 - 23%

2.91

35.80

Lubbock

144,527

21+ - 52%

31 - 34%

3.17

36.09

 

Mike

Strength

Uniformity

Bark

Lamesa

4.33

28.89

80.80

4.6%

Lubbock

4.21

30.40

81.40

7.1%