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U.S. cotton merchants seeking alternative to loan program

The American Cotton Shippers Association is putting the U.S. cotton industry on notice that its members want to replace the Commodity Credit Corp. non-recourse loan with a program that will move more cotton into market channels.

Association officials said lower cotton prices – and the loss of Step 2 – have made the CCC loan program “the primary market for U.S. cotton,” forcing U.S. merchants to look elsewhere for cotton to sell in the export market.

“In recent months, U.S. cotton merchants, unable to supply their foreign customers with U.S. cotton, have been meeting current export demand by selling West African and Uzbekistan cotton,” said Manfred Schiefer, president of the American Cotton Shippers Association and a merchant based in Lubbock, Texas.

“Anticipating no immediate resolution of this problem, some of our member firms are now booking sales of new crop Australian and Brazilian cotton for spring delivery,” he said, noting that U.S. exports are falling further behind last year’s levels.

ACSA leaders do not have an alternative in mind for the CCC loan as yet, said Neal P. Gillen, executive vice president and general counsel for the Association. He said any proposal must continue to provide a safety net for U.S. cotton producers.

“We are committed to maintaining the principle of the marketing loan,” said Gillen. “We know that it is a source of financing for producers, and it works. But we’re in a situation now where we can’t get farmers to sell cotton, and the United States is steadily losing market share.”

Schiefer said cotton merchants believe the situation boils down to a structural problem with the CCC loan program.

“We have plenty of U.S. cotton available – it’s here, but producers will not sell at current market prices because the loan premiums make the CCC the primary market for U.S. cotton. Suddenly, we find ourselves the residual supplier to the world.”

In some cases, he said, merchants are obtaining cotton from New York Board of Trade certificated stocks, which he said are cheaper than new crop cotton.

“Unless things change, a large amount of cotton will be forfeited to the CCC and eventually sold in competition with next year’s crop,” Schiefer said. “This is a development that producers will not welcome.”

Gillen said ACSA members have been looking at a number of alternatives to the CCC loan program, including providing some relief on POP payments, adjusting the loan rate and revisiting the CCC loan premiums and discounts schedule or re-exploring the Rule 5 issue.

“Whether any of these would work we don’t know,” he noted. “Our primary objective is to spur some discussion within the industry to try to come up with a solution. If there are pitfalls, other segments can point them out.”

For now, Schiefer said, ACSA leaders want to work with the other segments of the cotton industry to find legislative or administrative alternatives to a program that it believes is costing U.S. cotton producers their share of the world market.

“We are prepared to make our case to the Congress and the administration, and, hopefully, we can do so as a united industry,” he said. “Simply put, there is no support for a program that produces cotton at record levels and then locks it up in the CCC loan. The program is flawed and it must be fixed.”

Current export sales are trailing sales at this time last year. (U.S. cotton exports for the week ending Dec. 14 totaled 6.05 million bales, down from 9.8 million at this point in 2005.) U.S. export sales finished the 2005-06 marketing year at a record 17 million bales vs. USDA’s forecast of 15.8 million bales for 2006-07.

“China will come in and buy U.S. cotton on a short-term basis,” said Gillen. “Normally, you only have a 90-day window to make those sales so U.S. merchants will have to shake and bake. Our members are looking at cotton for March and May delivery now and they’re booking Brazilian and Australian new crop cotton to meet that demand.”

National Cotton Council President and CEO Mark Lange said the slowdown in the export market reflects “a new era” for the U.S. cotton industry.

“This is the first time in 15 years that world cotton prices have not been strong and the U.S. cotton industry has not had Step 2,” he said. (Step 2 was one of the U.S. cotton program provisions challenged by Brazil in its 2004 WTO complaint. Congress voted to end Step 2 last July 31.)

“It’s taking some time to adjust to the loss of Step 2 and to the changing dynamics in the world cotton market,” said Lange

Lange noted that the Cotton Council has been supportive of the 2002 farm bill, “but it’s becoming clear that we will be revisiting the farm bill in its entirety and not simply extending it. I think all segments of the Council will want to be involved in this process.”

Schiefer and Gillen said the level of frustration over the CCC loan situation is running high. But most merchants do not appear to be ready to leave the Council as former ACSA and National Cotton Council President William B. Dunavant Jr. recently announced his company, Dunavant Enterprises Inc., was doing.

“We see a lot of frustration out there,” said Gillen. “And, quite frankly, we would like to see more leadership on the Council’s part on this issue. We don’t believe discussing this for three days at the Council annual meeting in February will be enough to resolve it.”

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