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Shippers seek ‘modifications,’ not wholesale changes in cotton loan

The American Cotton Shippers Association’s board of directors has adopted a set of proposals aimed at making U.S. cotton more competitive while maintaining the marketing loan program as an “essential producer safety net.”

The proposals, drafted by the association’s farm policy development committee, were approved at an end-of-December board meeting. ACSA officials plan to discuss them with producer organizations and submit them to the National Cotton Council for approval at its February annual meeting.

Besides pledging to seek the continuation of the marketing loan program, the ACSA board also reiterated its strong support of the direct and counter-cyclical payment components of the 2002 farm bill.

“We believe these changes, which cannot be adopted earlier than the 2008 crop, would eliminate the problems we are incurring today, where cotton is tied up in the loan,” said ACSA President Manfred Schiefer. “Without Step 2, U.S. cotton is not competitive in the world market place as the current program provides few incentives for producers to market their cotton.”

Step 2 was the export arm of the farm bill’s Three-Step Competitive Program that provided payments to help U.S. cotton compete in the world market. Congress eliminated Step 2 at the end of the 2005-06 marketing year last July 1 after the program was ruled to be in violation of World Trade Organization rules.

Without Step 2, growers have less incentive to sell equities or otherwise redeem cotton from the CCC loan program.

“They simply put it in the loan and wait for higher prices that may or may not come,” said Schiefer, a Lubbock merchant. ‘These changes would encourage producers to, immediately after the harvest, focus on the costs of doing business by making available new marketing options to motivate producers to sell their cotton.”

The ACSA proposals would:

-- Give producers the option to bypass the loan program and fix the loan deficiency payment in any week within 10 months following their harvest.

“This would allow producers to market their cotton promptly after harvest while retaining the flexibility to fix their loan deficiency payment at the most opportune time in the marketing cycle for their crop,” said Schiefer.

-- Allow the holder of the CCC Form 605 Option to Purchase, who has purchased an option from the producer to repay his price support loan, to market the cotton prior to redemption. The holder of the 605 would be required to provide the CCC a form of surety that protects the CCC’s collateral interest in the cotton.

This change in policy would move cotton to market while assurance is provided to both the producer and the CCC that the outstanding loan and all charges are paid.

To make the marketing loan more competitive, the current formula used to determine the loan premiums and discounts would be modified for the first time since 1982 to bring about an equal balance in loan values across the Cotton Belt.

“The current formula is unfairly weighted and results in premiums higher than justified by current market conditions,” said Schiefer. “The proposal would correct this imbalance by giving proportional weight, by volume, to each of the seven growth areas spot market prices.”

Location differentials

Another change in the loan payment formulation would eliminate location differentials, which provide cotton in the eastern region of the cotton belt with higher loan values than those received in other producing regions.

“As a result, some Eastern producers receive almost 3.5 cents more per pound in their initial loan advance than producers in the Far West and 2 cents more than producers receive in West Texas,” said Schiefer.

“This change reforms an outdated policy established over 50 years ago to offset the cost of shipping cotton to textile mill consuming markets located in the Southeast. Domestic consumption, export trade, and shipping patterns have significantly changed requiring that this outdated policy be discontinued as the bulk of the U.S. cotton now moves off the West Coast to our export customers in the Far East.

A proposal for FOB truck loan terms would reflect the true net value of loan collateral and show the producers all the charges related to the movement of cotton into and out of a warehouse. It would allow the producer to focus on the marketing alternatives for his cotton and provide opportunities to maximize his profit when considering his marketing alternatives.

While these reforms might reduce the initial loan payment rate to some producers, ACSA officials said, the decrease would be offset by an increase in the value of the producer’s option-to-purchase.

“These policy changes would maintain the safety net aspects of the marketing loan and make it more competitive by encouraging producers to focus on the market and not the loan,” said Schiefer. “Those producers who capture the marketing opportunities available immediately after harvest and ginning are more likely to maximize their profit potential.”

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