Cotton industry looking for ways to avoid economic disasterCotton industry looking for ways to avoid economic disaster
“We have producers on the High Plains that did not get financed last year,” says Shawn Holladay. “We have a lot that barely got financed after a very difficult time. Those people that barely got financed last year will be in the same boat or worse this year.”
January 12, 2016
Has the cotton industry done the impossible again in its efforts to address the economic woes that currently beset U.S. cotton?
Over the decades, cotton’s leaders have managed to pull a number of “rabbits out of their hats” just when it seemed the industry was going down for the count because of a combination of low prices, pest problems or high input costs.
In 1983, a Texas merchant came up with the idea for Payment-in-Kind. Later, a congressional staff member from Mississippi originated the concept of the marketing loan. Then someone in the industry thought up the idea of marketing certificates for CCC loan redemptions.
The latest in the long list of innovative solutions is the National Cotton Council’s proposal for the agriculture secretary to designate cottonseed as an “other oilseed,” an action which would make cottonseed producers eligible for the same program benefits as those who grow soybeans, canola, sesame, safflower, crambe and other oilseeds.
“Cottonseed is an oilseed; it’s always been an oilseed,” says Sledge Taylor, chairman of the National Cotton Council and a producer and ginner from Mississippi. “It’s becoming more a part of the value chain in cotton production. Other oilseeds are eligible for ARC and PLC, and we think cottonseed should be eligible to participate in ARC and PLC.
Cottonseed 'insured crop'
“It’s also an insured crop, and in 2016 it will be available as an insured crop for the STAX program. We feel like it is a crop; it’s an insurable crop; it’s recognized by USDA as such; and we feel the secretary has authority under the 2014 farm bill to designate it as an oilseed.” (ARC is Agricultural Risk Coverage, PLC Price Loss Coverage and STAX Stacked Income Protection Plan.)
So how did cotton, which played a leading role in writing most of the previous farm bills, get to this juncture? Why are its leaders and a large number of farm-state members of the House and Senate asking the agriculture secretary to make such a designation for cottonseed?
Basically, it’s because the government of Brazil did a number on the U.S. cotton program in the World Trade Organization. Brazil claimed the U.S. government was unfairly subsidizing its cotton farmers to the detriment of Brazilian cotton producers.
U.S. subsidies have been no greater than those of other countries such as China, which paid its producers nearly $1.50 a pound to grow cotton from 2011 to 2014. But because the U.S. is envied for its technological advancements in agriculture and other sectors, a WTO panel ruled against the U.S. government –twice.
And, because the U.S. government honors its trade agreements, the U.S. government began taking steps to reduce the subsidies it did provide to cotton growers, including removing cotton as a program crop from the 2014 farm bill.
Cotton remains eligible for the marketing loan, and growers can purchase STAX - an additional insurance product covering or shallow losses. But STAX was written for a time when cotton was trading for 80 to 90 cents per pound.
Chinese, Indian subsidies pile up
The irony is that one of the main reasons cotton prices have dropped is the subsidies paid to their producers by China and, to a lesser extent, India and Pakistan. While it was paying growers the equivalent of 30 to 40 cents a pound above the world market price, China built cotton stockpiles of more than 50 million bales, which account for well over 50 percent of the world’s cotton surplus.
The impact of prices below 60 cents a pound is being felt throughout the Cotton Belt.
“We have cottonseed oil mills closing, cotton gins closing, and I can speak from experience that they have some value when they’re operating, but when they close they have very little value,” says Taylor.
“Cotton is an economic multiplier. That money from the production, processing and sale of cotton gets turned over in the community several times through the warehouses and the gins, oil mills, processing plants, and once those quit operating, their value on the tax rolls goes down, as well. Most rural communities don’t have a lot of industry, and they depend on cotton warehouses and oil mills.”
The cottonseed as an-other-oilseed-concept is based on need, according to Shawn Holladay, president of Plains Cotton Growers in Lubbock, Texas and a producer-director of the National Cotton Council. He said cotton producers cannot sustain their operations if low prices and high costs continue.
Barely getting financing
“We have producers on the High Plains that did not get financed last year,” he said. “We have a lot that barely got financed after a very difficult time. We’re coming off a drought, had some high production costs, a lot of weather-related issues in 2015 and a low price. Those people that barely got financed last year will be in the same boat or worse this year.”
Holladay said auctioneers are booked up with auctions for people who are going out of business, “some by choice; most because they’ve got to. It’s a dire situation in some cases because you get two years back-to-back where you’re losing money, and the input costs are enough to put you out of business at these prices.”
Growers face similar problems in the Southeast, says Mike Tate, a producer from Huntsville, Ala., and an advisor to the National Cotton Council’s board of directors.
“That’s especially true in the Carolinas where you had the drought last summer and then all the rain during harvest that caused some massive losses,” he said.
“When you look at Roundup resistance, and some of the severe weather we’re seeing coupled with the higher cost, it’s a challenge,” said Holladay. “We’ve seen a reduction in fuel costs, but we haven’t seen a reduction in any other inputs that rose due to the high price of oil. Fertilizer is beginning to come down a little, but not as significantly as it should.”
“And it probably won’t,” adds Tate.
‘Not here by choice’
“We need to be participating in Title I (of the 2014 farm bill) like every other commodity. The reason we’re not in PLC is because of the Brazil WTO case so we’re not here by choice,” says Holladay. “What we’re asking for is cottonseed to be designated as another oilseed. It will be the difference in a lot of producers being able to stay in business or not, and a lot of small town businesses surviving.”
The surge in the number of auctions being scheduled on the High Plains and other areas of the Cotton Belt is likely to pull back the curtain on how serious the problem has become, according to Holladay and Tate.
“When you start looking at people who are booking auctioneers, and you know their equipment is worthless, that tells you that they’re liquidating people they’re not going to loan money to,” said Holladay. “Used equipment on the High Plains is not going to bring any money right now because no one has any cash.
“Or you have farmers who have decided they’re just not going to lose any more money, and they’re baling. Those are the two types of guys you have out there now.”
“It’s becoming a desperate situation across the Cotton Belt,” said Tate.
Rain at the wrong time
Most farmers in west Texas are looking at two years of low prices and drought or, in the case of 2015, excessive rainfall at the wrong time and no rainfall when it was needed. Farm chemical prices growers pay remain high. “So our ask is that 2015 be included in the designation,” said Holladay.
Exactly what designating cottonseed as an “other oilseed” would mean to farmers is unclear. For one thing, USDA has just completed issuing ARC and PLC payments for the 2014 crops and won’t issue payments for 2015 until next fall.
Under the 2014 farm bill, payments for the 2015 crops of soybeans and other oilseeds can’t be made until after USDA has the price and yield data from the 2015 marketing year.
The ARC County program for soybeans and other oilseeds provides revenue loss coverage at the county level. ARC County payments are issued when the actual county crop revenue of a covered commodity is less than the ARC County guarantee for that crop.
PLC payments are issued when the effective price of a covered commodity is less than the respective reference price for that commodity. The effective price equals the higher of the market year average price or the national average loan rate for the covered crop.
In the traditional Cotton Belt, most growers signed up for PLC for program crops like peanuts, rice and soybeans because the formula is closer to the old target price calculations in previous farm bill. Thus, more growers would be likely to enroll in PLC for cottonseed if it becomes available.
Legal authority questioned
The prospects became a little more muddled the first week in January in when Agriculture Secretary Tom Vilsack was quoted as saying he wasn’t sure he had the legal authority to designate cottonseed as an other oilseed for farm program purposes.
Cotton industry leaders remain optimistic cottonseed will receive the oilseed designation despite such comments, and they say the eventual payment amount will depend on prices and yields in different parts of the Cotton Belt.
“Just the fact growers could expect a payment could make a difference in whether some growers receive financing for their 2016 crop,” said Taylor, noting rural bankers have been sending letters urging Secretary Vilsack to approve the cottonseed as oilseed designation.
Commodity groups such as the American Farm Bureau Federation and the American Soybean Association have also thrown their support behind the cottonseed proposal, asking the secretary to concur with the cotton industry request.
“They know that unless something is done to help the cotton situation, the growers who do get financing this winter will grow more corn and soybeans, which will just add to the surplus they’re trying to deal with in their markets,” says Holladay.
Younger producers, the ones who entered farming in the last 10 years, may be hurt the most because they don’t have the reserves some older operators may have accumulated over the years, he notes. “They’re the ones who may really be in a bind.”
Holladay says the cotton industry is not backing away from its support of the STAX program. “We are not throwing STAX under the bus. We believe it’s a good program, but we need to receive the same protection producers of other crops are receiving.”
For more on the cotton industry proposal, visit www.cotton.org.
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