The National Cotton Council is recommending USDA begin using price quotes from Far East markets rather than Northern Europe to calculate the adjusted world price for the cotton marketing loan program.
The change is one of a series the Council is proposing to make U.S. raw cotton exports more competitive in the world market and to move more cotton out of the Commodity Credit Corp. loan to prospective, mostly foreign, buyers.
The new quotes would continue to come from the British-based Cotton Outlook Ltd., which compiles the Cotlook “A” Index, which USDA has used to determine the adjusted world price or AWP since Congress first approved the cotton marketing loan in the 1985 farm bill.
The Council also wants USDA to change the method for determining premiums and discounts in the CCC loan schedule from a simple average of spot market data averaged one-to-one with the previous year's loan schedule to the three-year weighted moving average of weighted spot market data.
NCC leaders said the comprehensive set of recommendations they've been working on “addresses virtually every criticism leveled at the cotton program and strengthens the industry's ability to defend the central component of the producers' safety net.”
The latter has drawn increasing criticism from such “non-governmental organizations” as Oxfam, the British charity group, and U.S. media outlets who have blamed the U.S. cotton program for everything from current low world cotton prices to poverty in Africa.
U.S. cotton merchants have also been seeking changes in the loan program to help move cotton from the CCC loan.
The new recommendations build on what has been a successful cotton program, according to John Pucheu, the Council's chairman and a cotton producer from Tranquillity, Calif.
“We have the advantage of supporting a program structure that is sound and has a proven track record, while at the same time providing needed adjustments to improve its functionality in today's market,” he said. “Our success will continue to depend upon a unified effort by our membership.”
Pucheu said the current low world cotton prices are causing problems not only for cotton producers individually, but for the cotton industry, as a whole, as Congress prepares to write a new farm bill.
Much has been said about the reduced baseline for the new farm bill. The ethanol-driven higher prices for grains and oilseed's mean projected spending on commodity programs is primarily the direct payment for many crops.
“Cotton stands out in the budget discussion because cotton is expected to have outlays in all three program areas of direct payments, counter-cyclical payments, and marketing loan gains for much of the next six years,” he noted.
Cotton industry leaders have been meeting for several months to discuss adjustments to the upland cotton marketing loan with the guiding principle that the loan's role as a producer safety net should not hinder competitive offers for U.S. cotton in both domestic and international markets, said Pucheu.
“It became clear in April that industry consensus had to be achieved in short order to reduce the likelihood of disastrous legislation or regulatory action against cotton. It also was recognized that attempting to maintain the status quo for the marketing loan likely would empower cotton program critics and enable detrimental action for new farm legislation and regulatory changes that would possibly be associated with the 2007 crop.”
He said the Council's Marketing Loan Working Group, chaired by NCC Vice Chairman Larry McClendon, a Marianna, Ark., producer, has met several times to find agreement on changes to provisions of the marketing loan.
The working group crafted a comprehensive and linked set of recommendations on a number of adjustments to the cotton marketing loan and adjustments to the AWP to fully recognize transportation cost, efficient movement of cotton and increased flexibility in loan redemptions.
Among those are:
A change in the method for determining premiums and discounts in the loan schedule from a simple average of spot market data to the three-year weighted moving average of weighted spot market data. The weighted spot market data would reflect the average of the seven USDA Agricultural Marketing Service spot market regions weighted by the region's share of production.
NCC will also urge AMS to explore other sources of price data (including forward sales by merchants to domestic and foreign mills) that would enhance the accuracy of the premium and discount information.
Recommended changes in the loan schedule would provide that for qualities of cotton in which the leaf grade is more than one grade above the color factor, the premium/discount will be set equal to the premium/discount of the quality with the same color factor but with a leaf grade that is one better than the color factor. (Example: The premium/discount for a 41-1&2 is set equal to the premium/discount for 41-3 for each staple length.)
The adjusted world price should be based on the three lowest quotes in the Far East markets as reported by Cotlook. It will also recommend that, in the determination of the AWP, the location adjustment is equal to the actual survey-based transportation costs. The proposed changes to the determination of the AWP should be implemented for the 2007 crop, it says.
The NCC will recommend the agriculture secretary should further reduce the AWP to reflect the negative trade impact of trade barriers faced by U.S. cotton. This adjustment should be applied once a year using a transparent methodology.
The NCC will recommend that the quality adjustment in the AWP calculation should include the premium from the loan schedule for 31-3-35, micronaire 3.7-4.2, strength 30 grams/tex, and uniformity of 83 to reflect the value of cotton that is normally delivered under an “A” contract.
The NCC will recommend the institution of a mandatory fine count adjustment to the AWP for those qualities of cotton for which the premium in the loan schedule exceeds the premium of 31-3-35 cotton.
If the difference between the loan schedule premium for 21-2-36 cotton and the 31-3-35 premium exceeds the wedge between the average of the three lowest international “Higher Grade” quotes (Far East), excluding U.S. quotes, and the average of the three lowest international quotes of “A”-type cotton (FE), excluding U.S. quotes, then the fine count adjustment for 21-2-36 cotton equals the amount by which the difference in loan premiums exceeds the price wedge in FE quotes. Proportional adjustments will be applied to all qualities for which the loan schedule premium exceeds the 31-3-35 premium.
The NCC will recommend that the Department of Agriculture adopt a seamless transition of the AWP from old crop to new crop.
Two new procedures would be recommended for redeeming cotton from the loan and setting LDP rates. The first would authorize the holder of the 605 Option to Purchase (or any marketer of loan cotton) to ship the cotton prior to redeeming it from the CCC loan, provided that a form of security is posted to protect the CCC's collateral interest in the cotton in the event of forfeiture.
The NCC board resolution on adjustments to the loan redemption rate and “fixing” of the AWP should be implemented so that after loan repayment, the producer (or designee) may apply for a one-time adjustment in the applicable loan repayment rate. Once cotton is in a module, producer may “fix” the LDP rate applicable to the cotton to be ginned from the module from that time forward.
The NCC will recommend that the current 75-day limit on storage credits for transferred loan cotton be removed.
The Council said the Marketing Loan Working Group will also discuss and provide guidance on possible amendments to existing Step 1 language and changes in coarse count adjustment procedures.