“DO I need to run home and see if the check's in the mailbox?” The veteran Tulare County, Calif., producer answered his own fastidious question with, “I don't think we heard that today.”
For decades he has left Calcot's annual meeting hearing “the check's in the mail.” He found only a bill for his 2000-2001 crop in the mailbox when he returned home from a somber noontime annual meeting of one of the nation's largest marketing cooperatives in Visalia, Calif., that resembled a wake more than the typical Calcot meeting.
An emotional Calcot president, Tom W. Smith, informed the cooperative's 1,725 members at three meetings in California and Arizona recently that upland seasonal pool producers will be required to payback from $18 to $25 per bale to the cooperative over the next two years to cover $25.3 million in over advances mailed at the beginning of the season last September. The over advance was projected in July to be $30 million. The $5 million difference was about the only good news of the day.
The low end of the payback figure is for desert cotton. Ironically, lower-quality desert is in demand because mills were looking for bargain cotton rather than the more expensive, higher quality SJV Acalas and California Uplands.
The payback money will come from this year's meager advances, retains and final settlement for profitable Pima cotton if those producers also delivered upland.
A unprecedented 37-cent-per-pound cotton price free fall in 2001 prompted only the second advance payback in the cooperative's 74 year history. Prices fell to a 15-year low in a matter of weeks during the early part of the season.
Smith admitted Calcot's management was “overly optimistic” in its advance recommendation last fall. “There were actions we could have taken (through the marketing year) to insure all the advances were protected,” said Smith. “We did sell futures; we did buy put options, and we made some fixed price sales. But we didn't get enough done in time to protect the advance levels.”
Calcot handled 1.5 million bales of cotton with sales of $455 million in 2000-2001. The year before it sold 1.3 million bales for $567 million.
“Mistakes were made,” said Calcot chairman Bruce Heiden of Buckeye, Ariz. “A lot of mistakes also were made in the industry.”
He said steps have been taken to ensure that those mistakes are not repeated. They include a “very specific” new board-mandated risk management policy with oversight from the board's executive committee to make sure it is followed. The board also has hired an executive search committee to find Smith's replacement. Smith is scheduled to retire in September 2003.
Smith has been with Calcot for almost 45 years and has been president for the past 24. It was a tearful Smith who pledged to the 350 gathered in Visalia that the cooperative is “making the necessary adjustments to restore your faith in Calcot.
“I know the turn of events of the past season have shaken everybody's confidence in us to some degree or another,” he noted. “We intend to come out of this better and stronger than ever.”
It also will be an even leaner cooperative operating this season because $500,000 has been trimmed from the Calcot's operating budget, said Heiden, and employees will receive no raises this year.
Out of almonds
The other bad news is that the cooperative's almond business is closed down, and the two-year venture into another commodity cost Calcot $658,000, according to Heiden, who added that the losses will come from “unallocated reserves” and not the cooperative's cotton pool.
The news only got worse when Smith talked about marketing this season's crop. The prospects were dismal before Sept. 11, and they have gotten worse since, he said. This year's advances for uplands and Pima are only slightly above the base federal loan rates.
Today's dismal futures prices “don't show any signs of substantial improvement anytime soon. The current performance of the financial markets indicates things will be pretty bleak in the short term.”
Even without the threat of war, “the world has a huge crop coming off the stalk.” The U.S. is posed to harvest a record 20-million-bale crop “The world already has more than enough cotton and we're going to be adding to it, as will India, Pakistan and other large producers.”
Improvement in the world economy will be necessary to work through these excessive supplies and “in the short term that is doubtful. Even at these low prices, buyers are working with low volumes as everyone is nervous about whether the world will be at war.
“It is hard to imagine, but cotton prices could go even lower than they are right now,” said Smith.
The government loan and “currently a large loan deficiency payment potential” play a “huge role” in successfully marketing cotton this season.
That is in jeopardy after this season because a new farm bill must be written to replace the one expiring next year. The terrorist attack on America slowed down that political process. Smith said he is hopeful a new farm bill can be in place before this year ends, but “today that seems unlikely.”
Smith calls the House version of a new farm bill “very good — but there is considerable opposition to it in the Senate. With the threat of war hanging over everyone's heads, however, that opposition could diminish, if the price tag isn't seen as too high.”
“We're facing more uncertainty at this time than I can recall at any point in my 24 years as president of Calcot,” said Smith. “The season ahead will likely have more than its usual share of surprises. We can only hope that they will be good surprises.”