NCC Applauds EPA Revisions for Pesticide Applications

MEMPHIS, Tenn. – The National Cotton Council appreciates the EPA’s proposal to change some aspects of the Worker Protection Standards (WPS) that were finalized under the last Administration.

EPA Administrator Andrew Wheeler made the announcement today regarding the proposal that provides much needed changes to what is called the Application Exclusion Zone, or AEZ. The AEZ is a 25- or 100-feet, unoccupied, “floating” area around any pesticide application equipment that “moves” with the equipment. This zone is to remain unoccupied during the pesticide application. Problems arose, though, because farmer’s homes and buildings are most often in or next to their fields and would have to be vacated under the AEZ rules. Also, many fields are adjacent to other properties and public roads where the farmer or applicator has no control.

The proposed revisions will: 1) modify the AEZ to be enforceable only on the farmer’s property; 2) exempt immediate family from having to leave their homes or outbuildings; 3) clarify that applications can resume as soon as an individual has vacated the AEZ; and 4) simplify the decision-making process on whether the AEZ must be 25-feet or 100-feet.

NCC Chairman Mike Tate, an Alabama cotton producer, said, “I believe these changes, when finalized, will provide much-needed assurance to farmers and applicators, reduce their potential liability, eliminate the loss of useable field edges and still protect human health and the environment. Our industry is grateful for the practical, commonsense approach that Administrator Wheeler and his team continues to utilize when determining how best to ensure public safety and health without undue, burdensome regulations on family farms.”

In EPA’s news release regarding the agency’s proposal, Wheeler noted that the proposal would “enhance the agency’s Application Exclusion Zone provisions by making them more effective and easier to implement. In listening to input from stakeholders, our proposal will make targeted updates, maintaining safety requirements to protect the health of those in farm country, while providing greater flexibility for farmers.”

Agriculture Secretary Sonny Perdue stated in EPA’s release that, “President Trump made a commitment to our farmers to reduce burdensome regulations, and this is another example of him making good on that promise. This action will make it easier for our farmers and growers to comply with the Application Exclusion Zone provisions, providing them with the flexibility to do what they do best – feed, fuel, and clothe the world.”

The proposal will be open for public comment for 90 days from the date it is published in the Federal Register.

FSA: Trade and Disaster Assistance Available to Georgia Agricultural Producers Impacted by Tariffs and Natural Disasters

By:  Tas Smith, State Executive Director, USDA Farm Service Agency, Georgia

Agricultural producers are facing tough times.  Under the direction of President Donald Trump and Secretary of Agriculture Sonny Perdue, USDA is committed to ensuring producers suffer minimal financial impact from the wrath of Mother Nature and trade tariffs implemented by China and others.

Trade Impact Assistance

On July 29, signup began for the 2019 Market Facilitation Program (MFP) and will continue through December 6, 2019.  MFP provides up to $14.5 billion in direct payments to agricultural producers who have been affected by unjustified retaliatory foreign tariffs on U.S. farm goods; causing a loss of traditional export markets.

Non-Specialty Crops

Assistance for covered non-specialty crops is based on a single county payment rate multiplied by a farm’s total plantings, in aggregate in 2019.  A producer’s total payment-eligible plantings cannot exceed total 2018 plantings.  Calculations will consider new farmers, fallow ground, and farms exiting the Conservation Reserve Program (CRP).

County payment rates range from $15 to $150 per acre, depending on the impact of unjustified trade retaliation on that county.  Producers will receive a payment based on 2019 planted acreage multiplied by county payment rate.

Livestock

Dairy producers who were in business as of June 1, 2019, will receive a per hundredweight payment on production history, and hog producers will receive a payment based on the number of live hogs owned on a day selected by the producer between April 1 and May 15, 2019.

Specialty Crops

For specialty crops, producers will receive a payment based on 2019 acres of fruit or nut bearing plants.  Rates include:  Dairy (milk): $0.20 per hundredweight, Hogs:  $11 per head, Nuts:  $146 per acre, and table grapes:  $0.03 per pound at 20,820 pounds per acre.

Payment Limitation and Eligibility

Payments for each category of covered commodity (non-specialty, livestock and specialty) are limited to $250,000 per person or legal entity, but no applicant can receive more than $500,000 (for example, a dairy producer who grows cotton and produces pecans can only receive $500,000).

To be eligible for payments, applicants also must either: have an average adjusted gross income for tax years 2015, 2016, and 2017 of less than $900,000 or derive at least 75% of their adjusted gross income from farming.

MFP payments will be made in up to three installments, with the second and third installments evaluated as market conditions and trade impact dictates.  If conditions warrant, the second and third installments will be made in November 2019 and early January 2020.  The first payment will be issued based on the higher of the larger of 50 percent of a calculated county payment rate or $15 per acre.

A list of covered commodities, the MFP application, and payment rates can be found at farmers.gov/mfp.

Disaster Recovery Assistance

Hurricane Michael

The 2018 growing season was one of extreme difficulty for Georgia producers.  Last October one of the most productive crop years on record was battered and destroyed by Hurricane Michael.  According to the University of Georgia Cooperative Extension Service, Hurricane Michael caused more than $2.5 billion in losses to Georgia’s agricultural sector.

Responding to this devastation, Congress passed, and President Trump signed, the Additional Supplemental Appropriations for Disaster Relief Act of 2019.  The law provides assistance for production losses from Hurricane Michael through the Wildfire and Hurricane Indemnity Program Plus (WHIP+).

The disaster relief package also includes new Milk Loss and On-Farm Storage Loss programs to help producers who had to dump or remove milk without compensation or for losses of harvested commodities, including hay that was stored in on-farm structures.

Peach and blueberry producers will also receive assistance from 2017 freezes that affected 2017 and 2018 production through the original regulations of the 2017 WHIP program.

WHIP+

Signup for WHIP+ began on September 11 and will continue into 2020.  WHIP+ builds off the 2017 Wildfires and Hurricanes Indemnity Program (WHIP) and is available to producers who have suffered eligible losses of certain crops, trees, bushes, or vines.

To be considered eligible for WHIP+, producers must farm land in a Secretarially or Presidentially-declared disaster county.  Producers outside one of those counties may be still be eligible for assistance if they can prove that they experienced the minimum level of loss due to a qualifying, eligible disaster event.

Eligibility will be determined for each producer based on the size of the loss and the level of noninsured Crop Disaster Assistance Program (NAP) or conventional crop insurance coverage obtained by the producer.  A “WHIP+ factor” will be determined for each crop based on the producer’s coverage level.  Producers who elected higher coverage levels will receive a higher WHIP+ factor.  Producers who suffered crop losses due to Hurricane Michael will be compensated at 100 percent of their calculated WHIP+ payment, once the application is approved.

WHIP+ benefits will be subject to a per person or legal entity payment limitation of $125,000 or $250,000 if at least 75 percent of the person’s or legal entity’s average income is derived from farming, ranching, or forestry related activities, provided the participant submits the required certification and documentation.

Both insured and uninsured producers are eligible to apply for WHIP+.  Producers receiving assistance through WHIP+ will be required to purchase crop insurance or NAP coverage, at the minimum 60 percent level for the next two consecutive crop years.

USDA is also working with Georgia Department of Agriculture Commissioner to further assist growers through state block grants for producer losses not covered by WHIP+ or other USDA disaster programs.

For county rates, a WHIP+ application or related program information, visit farmers.gov/whip-plus.

For more information, please contact your local USDA Farm Service Agency Service Center farmers.gov/service-locator.

Respectfully Submitted,

 

Tas Smith
State Executive Director
USDA Farm Service Agency – Georgia

Coley, Meeks Reappointed to Cotton Commission Board

In late July, the Commodity Commission Ex-Officio Committee met to make appointments to the Georgia Cotton Commission Board of Directors.  GCC Vice Chairman Matt Coley, a cotton and peanut farmer from Vienna; and director Steven Meeks, a cotton, peanut, tobacco, and timber producer from Screven, were both reappointed to another three year term on the Commission’s board of directors.

Matt Coley and his father operate Coley Farms.  The Coleys also operate Coley Gin & Fertilizer, a cotton gin and peanut buying point that has been operating since 1945.  Matt has degrees from the University of Georgia’s College of Agricultural & Environmental Sciences.  He spent time in Washington as a staffer for Senator Saxby Chambliss and was instrumental in developing the 2008 Farm Bill.  Matt holds leadership positions in many cotton organization, including serving as a member of the National Cotton Council’s Sustainability Task Force.  Coley has served on the Georgia Cotton Commission board since 2012 and as Vice Chairman since 2017.  He was a member of the Leadership Georgia class of 2016 and serves as a member of the National Peanut Buying Points Association board.  Matt and his wife have two daughters who attend Crisp Academy, where he serves on the school board.

When asked why it was important to him to be involved with the Georgia Cotton Commission, Coley said, “As a 4th-generation cotton producer, one of my top priorities is working to make sure that the next generation has the opportunity to continue producing cotton in the future.  The work of the Georgia Cotton Commission helps ensure this by utilizing the $1/bale investment from Georgia cotton producers for research, education and promotion.  It is a great honor to be able to help steer Commission funded projects that will not only help cotton growers today, but also benefit the next generation of Georgia cotton producers.”

Steven Meeks operates Nine Run Farms and serves as operations manager for FMR Burch Farms.  After graduating from the University of Georgia College of Agricultural & Environmental Sciences, Meeks worked for Congressman then Senator Saxby Chambliss as well as the US Senate Committee on Agriculture, Nutrition, and Forestry and was a key staff member during the drafting, passage, and implementation of two farm bills.  Meeks serves on numerous cotton industry boards and has served on the Georgia Cotton Commission board since 2012.  He serves as a trustee for Leadership Georgia, of which he was a member of the 2012 class, and on the UGA CAES Dean’s Advisory Council.  Meeks has served the people of Appling, Brantley, Pierce, and Wayne Counties as a State Representative since 2018.  In the General Assembly he is a member of the Agriculture & Consumer Affairs; Energy, Utilities & Telecommunications; and Intragovernmental Coordination Committees.  Meeks and his wife, the former Joy Burch, have one son, John William.

Meeks said of his reappointment, “I am honored to have been reappointed to the Georgia Cotton Commission Board of Directors.  Cotton is Georgia’s number one row crop and the work that Commission does in research, promotion, and education is instrumental to the continued sustainability, both financially and environmentally, of cotton production in Georgia and will keep this economically important crop in Georgia for generations to come.”

The Georgia Cotton Commission is a producer-funded organization located in Perry, Georgia. The Commission began in 1965. Georgia cotton producers pay an assessment enabling the Commission to invest in programs of research, promotion, and education on behalf of all cotton producers of Georgia. For more information about this and other topics please call 478-988-4235 or visit us on the web at www.georgiacottoncommission.org.

Whitaker on Cotton Defoliation and Harvest

It’s seems like just yesterday we were planting the 2019 Georgia cotton crop, yet here at the end of September producers have already gotten started with defoliation and harvest.  We typically get started at the end of September, but things are moving faster this year.  Much of this is due to the challenges we’ve faced with tropical systems over the past three years.  Producers have made efforts to limit our exposure to the risks associated with these storms by spreading out planting, particularly by planting more of the crop earlier in the window such that their crop isn’t entirely exposed to wind and rain damage regardless of when it occurs.  Earlier plantings, along with limited rainfall and relentless heat have pushed many acres to be harvestable much earlier than usual.  Overall, the entire Georgia crop is maturing earlier than I’ve seen in quite a few years.  Harvest progress is ahead of schedule compared to most years, but there is a long way to go before we get the entire crop to the gin.

In addition to spreading risk by widening our planting window, producers are also working to limit unnecessary risks from tropical systems by being timelier with defoliation timing and harvest.  Several factors have caused cotton harvest in Georgia to typically lag behind the rest of the country.  Much of it has to do with our extremely long growing season and due to the fact that Georgia has such a large peanut crop.  Timely harvest is important for cotton, but critical for peanut and with only so much time in the day, producers have been forced to put peanut harvest ahead of cotton harvest.  However, with the introduction of round bale cotton harvesters (which require only one person to harvest the crop compared to a crew with basket pickers) and the much earlier maturity of currently planted cotton varieties (compared to full season varieties we’ve grown in the past) we now have both the ability and need to be more timely with cotton harvest than ever before.

When making decisions on defoliation and harvest timing, we ultimately are making a decision on which bolls to harvest.  If you ask a producer which bolls on the plant they want to harvest the answer you will get every time is “all of them”.  The issue with that answer is that all of the bolls on a plant are not ready to harvest at the same time.  Cotton bolls develop over a wide window of time and it can ultimately be several weeks between the time the earliest and latest boll on the plant reach maturity.  Weather during the harvest season impacts how long those earliest maturing bolls can still be harvested while waiting on later set bolls to mature.  If little to no rainfall or wind occurs, we have the opportunity to wait (since cotton can remain on the boll for extended periods of time under the right circumstances), yet in most years weathering impacts the ability to successfully harvest those earlier set bolls if we wait too long for those later developing bolls to mature, thus leading to a situation where we don’t have the opportunity to harvest “all of them”.  Therefore, appropriate defoliation and harvest timing decisions have to be made to ensure we harvest the most and the best bolls on the plant.  Research has shown that the value of a boll varies greatly based on where it is located in the canopy and typically bolls set earlier in the year (and lower in the plant canopy) are worth two to three times more than a boll set later in the year (and in the top of the canopy).  So, when making the “right” and most profitable defoliation timing decision we may often end up with unopen and subsequently unharvestable bolls in the top of the canopy.  Leaving bolls in the field unharvested never makes a producer happy, but is often the right decision when considering profitability.

Although we have a long way to go, the 2019 Georgia cotton crop seems to be a decent to good one.  We certainly don’t have the crop that we had before Hurricane Michael tore through the state last year or what we had in 2012, but I do expect us to produce average yields that will be among the top five or so years on record, which is quite an accomplishment given the growing season.  We dodged a bullet with Hurricane Dorian and hopefully we’ll be able to harvest this year’s crop without interruption.  For help with making defoliation timing decisions along with choosing the right product combination and rates contact your local UGA County Extension Agent.  For more information this and other cotton topics be sure to visit the UGA Cotton Webpage and sign up to receive updates at www.ugacotton.com.

This article was written by UGA Extension Cotton Agronomist Dr. Jared Whitaker.

CCI: Major U.S. Cotton Customers to See Their Raw Fiber Source Firsthand

MEMPHIS, Tenn. (September 16, 2019) – Textile manufacturing executives representing 14 countries will visit the U.S. Cotton Belt September 30-October 4 on the 41st COTTON USA Orientation Tour.

Sponsored by Cotton Council International (CCI), the export promotions arm of the Memphis-based National Cotton Council (NCC), the Orientation Tour’s major objectives are to increase U.S. cotton customers’ awareness of the types/qualities of U.S. cotton, help them gain a better understanding of U.S. marketing practices and enhance their relationships with U.S. exporters. More than 900 textile executives from 60 plus countries have participated in this biennial Tour, which was initiated in 1968.

“We want to show these important U.S. cotton customers the source of the high quality, responsibly-produced fiber they use in their textile operations,” said CCI President Hank Reichle, a Mississippi cooperative executive. “We also want to showcase how intently focused our industry is on sustainability and the degree to which we are committed and invested in continuous improvement in our production practices. Hopefully, they will come away with an even better appreciation of our fiber’s premium value and how it can make their textile operations more competitive.”

This year’s Orientation Tour includes executives representing 32 companies in Bangladesh, China, Ecuador, El Salvador, Guatemala, India, Japan, Korea, Pakistan, Peru, Taiwan, Thailand, Turkey and Vietnam. The manufacturers are expected to consume about 3.7 million bales in 2019, and the U.S. market share with them is estimated at about 33 percent. The countries represented on this year’s tour consume about 101 million cotton bales per year in their textile mills, which represents about 82 percent of the world’s cotton consumption.

The Tour participants will visit a Mid-South cotton farm; tour a cotton warehouse in the Lubbock, Texas area; observe cotton research in North Carolina and Mississippi, and tour the USDA cotton classing office in Bartlett, Tennessee. They will meet with U.S. cotton exporters and get briefings from CCI, the NCC, Cotton Incorporated, the American Cotton Shippers Association, the Texas Cotton Association, the Lubbock Cotton Exchange, AMCOT, the American Cotton Producers, the Delta Council, the Plains Cotton Growers Association, the Western Cotton Shippers Association and Supima.

# # #

Cotton Council International (CCI) is a non-profit trade association that promotes U.S. cotton fiber and manufactured cotton products around the globe with our COTTON USA™ Mark. Our reach extends to more than 50 countries through 20 offices around the world. With more than 60 years of experience, CCI’s mission is to make U.S. cotton the preferred fiber for mills/manufacturers, brands/retailers and consumers, commanding a value-added premium that delivers profitability across the U.S. cotton industry and drives export growth of fiber, yarn and other cotton products. For more information, visit www.cottonusa.org.

NCC: WOTUS Rule Withdrawal Is Right

MEMPHIS, Tenn. – The National Cotton Council (NCC) applauds today’s announcement by Environmental Protection Agency Administrator Andrew Wheeler that the 2015 Waters of the U.S. (WOTUS) rule has been withdrawn.

The next step will be a new final rule expected towards the end of this year.

NCC Chairman Mike Tate noted that the U.S. cotton industry has long sought consistency and simplicity in water regulations and said, “EPA’s decision ends the uncertainty caused by the WOTUS rule and the resulting, sometimes conflicting, court verdicts that led to a patchwork of regulations nationwide.”

Tate, an Alabama cotton producer, stated, “Cotton producers and all of agriculture deserve a commonsense and understandable rule that not only ensures environmental and human health but protects farmland and our rights to conduct our operations in a responsible and economically sustainable manner with flexibility that wasn’t present under the 2015 rule. While nothing is perfect, we foresee the new rule as one that does not label as ‘waters of the U.S.’ those vast areas of dry land that have been farmed for generations.”

Shurley: Understanding the Cotton Marketing Loan and LDP/MLG

Note: The purpose of the Marketing and Policy Insights publication series is to provide timely education, discussion, and analysis of critical issues facing the cotton producer.  The analysis and opinions expressed and any errors are those of the Author.  This publication is not affiliated with the University of Georgia.  The author can be reached by email at donshur@uga.edu or dshurley@abac.edu, by phone at (229) 386-3512 or 386-7275 or on Facebook at https://www.facebook.com/don.shurley.5

Cotton is a “loan eligible” crop. Bales of cotton can be stored and the producer receives a government CCC loan, pledging the cotton as collateral. The loan program is not meant to be a major marketing tool, but it can be and it is for some producers. The Loan provides cash flow and can serve to reduce price risk.

The cotton producer can store cotton under the Loan, take an LDP (Loan Deficiency Payment) if available and forgo the Loan, or bypass the Loan altogether. Southeast producers, for example, have little experience with the Loan and rarely use it compared to other parts of the country.

The 2018 farm bill established that the loan rate for upland cotton is the average Adjusted World Price (AWP) for the previous 2 completed crop marketing years—but it cannot be less than 45 cents/lb, cannot exceed 52 cents/lb, and cannot decline by more than 2% from year to year.

The loan rate for the upcoming crop year must be announced by October 1 of the year before planting—which means the average AWP for the immediate prior crop year will not have been determined at that time (cotton is on an August-July marketing year). So, there is a 1-year lag—the loan rate for 2019 cotton, for example, is determined based on the average AWP for the 2016 and 2017 crop years. The average AWP for the 2016 and 2017 crop years was over 52 cents. So, the loan rate for the 2019 crop is 52 cents.

The loan period is 9 months. Once the cotton is in loan, eventually it must come out of loan and be sold (unless forfeited to the CCC which hardly ever happens). From the producer’s standpoint, this will take place in 1 of 2 ways—the producer can either redeem the cotton at the loan repayment rate in effect (as discussed in the next section) or the producer can accept a merchant “equity” offer (as also discussed later).

Loan Repayment Rule
So, the loan rate for cotton is allowed to float between 45 and 52 cents subject to the AWP. The AWP is also important for another reason—what I call the “loan repayment rule”. The “loan repayment rule” essentially says that the CCC loan is repaid at the loan rate plus charges or the AWP, whichever is less. So, the loan rate itself can be tied to what the AWP was for the most previously completed 2 crop years and is set/fixed as of October 1 for the next crop year. Then, during that next crop year the loan repayment rule may allow the loan to be repaid at the AWP if the AWP falls below the loan rate.
The Far East (FE) Price
The AWP is derived from the Far East (FE) Price or what is commonly considered the “World price” of cotton. This FE Price is quoted daily and is the average of the 5 lowest (cheapest) prices (by origin) for 31- 3/35 cotton delivered FOB the port at several select southeast Asia locations. The following is an example of recent daily price quotations:

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The daily FE price is then averaged for the “week” beginning on a Friday and ending the following Thursday. This example shows the daily and weekly average FE price for the “week” beginning on Friday, August 23, 2019 and ending on Thursday, August 29, 2019. The average FE Price for the week was 68.70 cents/lb.

The Adjusted World Price (AWP)
As just shown, the FE price is determined daily. The AWP, however, is determined weekly based on the average of the daily FE prices for the week. The FE is the “World” price—the AWP is this World price “adjusted” for cost-to-market and quality. From the weekly average FE price, the costs from FOB southeast Asia back to average US location are deducted and an adjustment/deduction is also made for quality (the FE price is quoted for 31-3/35 compared to US base quality of 41-4/34).

For the 2019 crop year, the costs-to-market is currently set at 15.20 cents/lb and the quality adjustment to 41-4/34 is 2.05 cents. So, the total “adjustment” to arrive at the AWP is 17.25 cents/lb. The following is an example of how the AWP is determined:

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The average of daily FE prices for a week is used to determine the AWP that will be in effect for the following week. For example, the FE price for August 23-29 averaged 68.70 cents. The resulting AWP is 51.45 cents and will be in effect beginning the next day on August 30 through the close of business the following Thursday, September 5.

During the week beginning August 30, if the daily FE price is running less than 68.70, then the AWP for the following week beginning September 6 will decrease. Likewise, if the FE price is running higher, the AWP for the following week will increase.

POP or Loan Deficiency Payment (LDP) and Marketing Loan Gain (MLG)
Remember the loan repayment rule—if the AWP is less than the loan rate, the  producer can repay the loan at the AWP. When the AWP is less than the loan rate, this difference is called an LDP (Loan Deficiency Payment) or MLG (Marketing Loan Gain). The loan rate for the 2019 crop is 52 cents. For the week of August 30 through September 5, as shown above, the AWP will be 51.44 cents. This will be the first time an LDP/MLG has been in effect since late in the 2015 crop marketing year (since May 2016).

52.00 Loan Rate – 51.55 AWP = 0.55 cents LDP

An LDP (or what producers still like to call a “POP” payment) is applied for and the payment received if the producer agrees to forgo putting those bales in Loan. An LDP is in lieu of putting the crop in Loan—in other words, any bales receiving an LDP are not eligible for the Loan.

Let’s suppose it’s harvest time or after harvest. The producer must still have “beneficial interest” in the crop—still have ownership and title to the crop. If an LDP is in effect, the producer has 3 options—take the LDP and forgo the Loan, forgo the LDP and store the cotton in Loan, or forgo both the LDP and Loan (this 3rd option is not likely). Let’s assume the AWP is 49 cents and the loan rate is 52 cents. The producer has several choices including take the 3 cents and forgo the Loan—do what you wish with the cotton or forgo the 3 cents and store the cotton in Loan, sell later.

Past history and experience (in Georgia, at least) tells us that if a POP/LDP is available, producers will most likely opt to take the money. Especially if the crop is already contracted and never intended for Loan in the first place, producers are taking the LDP if it’s available.

Unlike an LDP, which may be received in lieu of a loan, a Marketing Loan Gain (MLG) may be realized when cotton is stored in Loan. The cotton is stored under Loan and if during the loan period, the AWP is less than the loan rate, a loan gain (MLG) is realized if and when the loan is paid off at less than the loan rate. The math is the same for both LDP and MLG—it’s the loan rate minus the AWP if the AWP is less. The only difference is simply the timing—one is received up front in lieu of the Loan (the LDP) and the other realized later if cotton is in Loan (the MLG).

Under the 2018 farm bill, there is no longer a payment limitation on LDP/MLG.

Price Relationships
A key to understanding how the Loan works and, more importantly, how the cotton producer will fare with the Loan whether an LDP/MLG is in effect or not, is in price relationships—not price itself, but price relationships.

The table below shows price relationships for the first 4 full weeks of the 2019 marketing year (as current as possible as of the date of this publication). Of course, the relationships are subject to change but can be relatively stable over the course of the marketing year.

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Our nearby cotton futures prices are currently running mostly 10 to 11 cents under the FE Price. As already mentioned, the AWP is 17.25 cents under the FE Price. Assuming a loan rate of 52 cents, when will there be a LDP/MLG in effect? Or, in other words, when will the AWP be less than 52 cents?

Assuming the most recent FE-Futures difference of 10.62 cents, the answer would be:
52.00 + 17.25 – 10.62 = 58.63 or roughly less than 59 cents nearby futures

In other words, if our nearby futures were 58.63 cents, then current price relationships would imply an FE Price of 69.25 cents and an AWP of 52 cents equal to the loan rate.
58.63 futures + 10.62 difference = 69.25 FE Price
69.25 FE Price – 17.25 adjustments = 52.00 AWP = Loan

For the first 4 weeks of the 2019 crop marketing year, our nearby futures has averaged 10.65 cents below the FE Price. This difference has ranged from 11.27 to 10.33 cents. One important price relationship is that when our futures prices go down, the FE Price also tends to go down. When futures goes up, the FE tends to go up. This may not happen every day or every week and not penny for penny, but over a period of time our futures price and the FE Price tend to track together.

So, what does this mean? Two things:
1-Based on current adjustments and price relationships, if our futures prices are above roughly 59 cents, there is no LDP/MLG. In most years, thankfully, cotton is above 59 cents and while there is no LDP/MLG, that means a better price for cotton.
2-When the price of cotton falls below roughly 59 cents on futures for the week, an LDP/MLG will likely kick in. Because our futures and the FE Price tend to move together, the lower the price of cotton the lower the FE and AWP and the higher the LDP/MLG. The LDP/MLG acts like a “shock absorber” protecting the producer from lower prices.

Merchant Equities
The MAL (Marketing Assistance Loan) or what we’ve simply referred to as the Loan, is nothing more than a way to store the crop and sell it later. It’s primarily a cash flow tool—get the loan rate up front and deal with pricing and the market later on.

Most of the time, an LDP/MLG will not be a factor because the price of cotton is above the “trigger” (above roughly 59 cents on nearby futures and an FE price of roughly 69 cents). Regardless of whether an LDP/MLG is in effect or not, if cotton is stored in Loan the producer must eventually (before the end of the loan period) either redeem the cotton (pay off the loan and charges and sell the cotton) or accept an “equity” offer from a buyer/merchant. In most cases, producers will go the merchant equity route.

If an LDP (POP) is in effect and the producer takes the LDP (and forgoes the Loan on that number of bales), the total money in the producers pocket is the LDP plus the eventual contract or cash sale of the cotton. The cotton can be sold or stored or whatever, but it no longer is eligible for Loan.

If the cotton goes to Loan and especially if there will be a MLG in effect, how the producer will fare depends on price relationships. But, let’s look at 2 examples, one without a MLG and the other with MLG.

Look first at the following example with no MLG—this is going to be the case most of the time. The producer has cotton in Loan at 52 cents. Assuming no loan forfeiture, the producer must now eventually do 1 of 2 things—redeem (repay at the loan plus charges or AWP whichever is less) or he/she may keep the loan amount and accept additional money (an equity payment) from a buyer/merchant. Nearby May futures is 68 cents. Let’s assume the FE price is 10.65 cents above futures. So, the FE price would be 78.65. The adjustments are -17.25 cents. So, the AWP in effect would be 61.40 cents or roughly 8 cents below nearby futures as shown in the example.

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If the producer went the redemption route—paid off the loan plus charges (or at the AWP if less) and sold his/her cotton, the net total money received would be 65.20 cents (loaned 52.00 – 56.30 payoff + sell 69.50 = 65.20). Alternatively, the producer could just accept an equity of 13.2 cents. The producer has already received and will keep the loan amount (52 cents). The equity estimate, as calculated, is the sale of  cotton minus the payoff (69.50 sell – 56.30 payoff = 13.20). This amount (13.20) when added to the loan amount already received (52.00) would equal the net received through loan redemption (65.20). The AWP is above the loan rate so there is no MLG.

In exchange for the equity paid, the merchant then assumes control of the cotton in loan. The merchant will pay the interest and other charges when the cotton is eventually redeemed from loan (sold).

Here’s another example but when a MLG is in effect. Nearby futures is much lower at 58 cents. Assuming the same FE and AWP differences, the AWP is below the loan rate resulting in a small Marketing Loan Gain (MLG) (52.00 Loan – 51.40 AWP = 0.60 cents MLG). Equity is estimated at 8.10 cents.

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As in the first example, the estimated merchant equity offer is the spot price sale of cotton (59.50) minus the payoff (51.40 AWP since that is less than the loan plus charges). When a MLG is in effect, interest and storage are forgiven—CCC interest is forgiven and applicable storage and warehousing costs are paid by the merchant/buyer but taken into consideration when determining the equity.

Note: The above are general examples and estimates of equity. In reality, merchants use a different approach to determine equity and their equity calculation may vary somewhat from what is shown here. But, these examples are good for teaching several points. When cotton is in the Loan, how the producer will fare depends on price relationships. Equity and total money in the producers pocket will increase

  • If futures increases in relation to the FE price
  • If the FE price declines in relation to our futures prices
  • If basis improves

Summary and Implications for Decision Making
Cotton is a “loan eligible” crop. Bales of cotton can be stored and the producer receive a government CCC loan, pledging the cotton as collateral. The loan program is not meant to be a major marketing tool, but it can be and it is for some producers. The cotton producer can bypass the Loan altogether, store cotton under the Loan, or take an LDP (Loan Deficiency Payment) if available and forgo the Loan.

An LDP or MLG is possible because of how the marketing loan for cotton works and the “loan repayment rule”. Based on current (2019 crop year to-date) price  relationships and adjustments, an LDP/MLG will be in effect when our cotton futures are below roughly 59 cents. Thankfully, LDP and MLG will not be a factor in most years. The 2019 crop, however, is the first time an LDP/MLG has been in effect since late in the 2015 crop marketing year (since May 2016).

History and experience (in Georgia, at least) tells us that if and when a POP/LDP is available, producers will most likely opt to take the money. Especially if the crop is already contracted and never intended for loan in the first place, producers will take the LDP if it’s available. Marketing associations are traditionally heavy users of the Loan, but most producers in the Southeast have little personal experience with the Loan.

The FE Price and our cotton futures prices tend to move together—when our cotton prices go down, the FE price is likely also going down. If the FE price is low enough, the resulting AWP can be below the loan rate which means we’ll have LDP/MLG. This helps insulate the producer from very low prices.

An LDP (POP), if available, is available because prices are very low. If taking the LDP, the producer should be aware that there is no longer protection from prices going lower on those bales (on the bales “POPed”). Producers should be prepared to sell or consider alternatives to manage downside risk.

An LDP is available because price is very low. Low prices are obviously, not what we want. If you think or are willing to take the risk that prices are going to improve, then you could take the LDP and market the cotton later on the (hopefully) higher market. Alternatively, you could forgo the LDP and store the cotton in Loan—which would afford protection from lower prices just in case in the form of a MLG.

If an LDP (POP) is available and the producer doesn’t take the LDP, then the best strategy may be to put the cotton in loan and you may still realize a MLG later. The MLG is the same calculation as the LDP. Whether there is an LDP/MLG in effect or not, if cotton is stored under Loan, how the producer fares will depend on price relationships as this affects the spot price and the loan equity.

If cotton is in Loan and a MLG is in effect, remember that the FE Price (and thus the AWP and resulting MLG) and our futures price tends to move together. But, the MLG is fixed for a week whereas our futures obviously change daily. While the MLG is fixed for a week (until the close of business on Thursday), if the daily FE price during that week is increasing then you can be assured that the AWP will increase and the MLG decrease effective the following week. If the FE Price is going up, our futures are probably also going up. Selling into this increasing market before the MLG declines effective for the following week would be one way to increase your total money received.

The Loan is a marketing tool whether or not an LDP/MLG is in effect or not. In most years, cotton prices will be high enough that an LDP or MLG will not be triggered. The Loan is mostly a cash flow tool. The cotton must eventually come out of Loan and sold on the spot market.

Acknowledgements
Appreciation is expressed to merchants and USDA FSA staff who provided valuable time and expertise to review this publication. Any errors and misinformation are unintended and the responsibility of the author.

NCC Farm Bill Educational Webinars

Sign-up for the 2018 Farm Bill has begun (deadline is March 15, 2020).  The National Cotton Council staff will conduct 2018 Farm Bill education webinars later this month as follows:

Thursday, September 19, 8:00 am
Monday, September 23, 8:00 am
Wednesday, September 25, 8:00 am
Thursday, September 26, 10:00 am

All times are Central.  All cotton industry members and other interested parties are invited to participate.  Organizations or individuals are encouraged to relay this information to their respective financial institutions and other agri-businesses. All webinars will cover the same information on Seed Cotton ARC/PLC election, 2019 and 2020 crop enrollment, marketing loan provisions, program eligibility provisions and the Economic Adjustment Assistance for Textile Mills (EAATM)

In addition to the webinars, the NCC continues to update its farm bill resources at http://www.cotton.org/issues/2018/fminfo.cfm. A list of frequently asked questions and answers will also be posted following the webinars along with a series of short YouTube videos focusing on specific provisions of the farm bill.

For this webinar, guests will need to use Zoom software. To connect, click https://cotton.zoom.us/j/589146147.  (If this is your first experience with the Zoom software, you will be prompted to download the Zoom client). Please include your personal email address.  Also, if you are hosting a group session, when prompted, please provide the number of participates.  If you have difficulty joining the webinar, email Michelle Huffman at mhuffman@cotton.org  or Shawn Boyd at sboyd@cotton.org for assistance.

Please note that all audio will be through your computer, tablet or smartphone as there is no conference line audio provided.  Participants will be unable to verbally ask questions. All questions will be submitted electronically via Zoom client and answered orally by the presenter.  An electronic version of the PowerPoint presentation will be available prior to the webinar at the Council’s website in the 2018 Farm Bill portal (Members Only).

If you are organizing listening groups for the webinar suggested equipment is as follows:

Small Room/Conference Room with:

  • Computer with HDMI or VGA out
  • TV with HDMI connection
  • Projector with screen if no monitor available
  • Bluetooth Speaker/Soundbar.  Available at most retailers, they have both Bluetooth and 1/8” audio connections. The soundbar will need to plug into outlet.
  • Speakers for computer if soundbar is not practical. Suggest using the largest size desktop speakers available.  Generally, they have 1/8” audio connection.

Larger Room with:

  • Computer with HDMI or VGA output
  • Projector with screen (minimum 6ft wide screen)
  • Large Speakers rated for a big room/PA Speakers (may need RCA_1/4” to 1/8” adapter to plug into laptop)

We look forward to providing timely information regarding the 2018 cotton provisions and urge your participation.  Any questions can be forwarded to the NCC office or your Member Services Representative.