As the U.S. harvest gains momentum, growers should consider "locking in" the loan deficiency payment or LDP on their cotton while it is still in the module or in trailers, a National Cotton Council economist says.
In recent years, most producers have waited until their cotton was ginned - and prices have generally moved lower - before requesting an LDP or placing their cotton in the marketing loan. But, that may not be a good strategy in 2000, according to the NCC's Mark Lange.
Speaking at a meeting of the American Cotton Producers in Raleigh, N.C., Lange noted that if cotton prices should continue to rise on reports of drought and heat damage, the increase could have a downside for U.S. cotton growers.
"You need to keep in mind that a Cotton Outlook A Index of 66 cents per pound essentially eliminates any LDP payment," said Lange, the NCC's director of economic services. (With the A Index at 66 cents, the adjusted world price will be above the CCC loan rate of 51.92 cents, thus ending any marketing loan gains for U.S. producers.)
At the time Lange spoke in Raleigh, the A index was at 61 cents a pound. Since then, world cotton prices have been strengthening because of concerns about the effects of drought and high temperatures on the U.S. crop.
"It looks like we are going to go through some ratcheting up of world prices over the course of this harvest period," he said. "It could well be that you need to remind yourself and your ginner that when cotton goes into the module, you can lock-in your LDP on that cotton.
"We might be in a situation where the A Index is rising during this harvest, and it might be to your advantage to secure the LDP rate while the cotton is in the module. Your county FSA office has forms that you need to fill out to take care of this."
Lange noted that although New York cotton futures have been trading at a level that is considerably higher than last year at harvest, the increase won't completely offset the potential loss in loan deficiency payments.
"Thus, the net cash value on a per pound basis is likely to be lower than it was last year," he noted. "Hopefully, for some of you, there will be a few more pounds available than last year, but they are likely to be sold for a lower net price."
While speculators appear to be focusing on weather conditions in the U.S., some good things have been happening for cotton on the world market.
In its August forecast, USDA said that the world carryover stocks declined by four million bales to 40.1 million bales at the end of the 1999/2000 marketing year July 31. It projects that world mill use will rebound by more than 4 million bales to 91.2 million for the year.
"That 91-million-bale number makes me nervous," said Lange, "because it includes nearly 21 million bales of mill use by the Chinese. I think the Chinese are using a lot of cotton, but I'm not sure they're using enough to push this up over 91 million bales. But, it is up significantly from where we were before."
For the 2000/01 marketing year, USDA is forecasting that world mill use will increase to 92.2 million bales and that world cotton stocks will decline nearly five million bales to 35.2 million. That would put stocks down by more than nine million bales in two years.
"We are already seeing a tremendous reduction in world stocks," says Lange. "We all know what tightening of the world stocks to use ratio means to prices, and we are tightening it both ways. We're pulling down stocks and we're seeing increases in demand."
The other important development is that China is doing the stock reduction, he noted. "Those of you who read newsletters know that most of the U.S. merchant community believes there will be significant sales of cotton to China sometime in the new crop year."
China, in fact, is quoting new crop cotton for export, and most merchants believe that the People's Republic could sell 500,000 to 700,000 bales of that cotton in this crop year. "But, they also think that this kind of stock reduction means there will be purchases by the joint venture mills in China certainly by next spring.
"I would caution, however, that none of these merchants have sales on the books," he said. "They are selling some Pima to China, but there are no significant sales of upland cotton."
Lange said he also has qualms about USDA's prediction of 92.2 million bales for 2000/01. "It may not be quite that good because that includes 22 million bales of prospective mill use in China, and I'm not sure they're going to spin that much.
"They are consuming a lot more cotton than they were two years ago," he noted. "That's because of the big policy change in which they lowered the price that the Chinese textile mills pay for Chinese cotton. It has been a tremendous stimulus to the mill use of cotton in China."
Lange said USDA has issued new guidelines on a situation that could have caused problems for producers who hit the $75,000 payment limitation after requesting LDPs on cotton in modules.
The guidelines say that farmers who reach the $75,000 limitation on marketing loan gains - and thus would have to forfeit part of the payment - can still place that cotton in the CCC loan and redeem it with marketing certificates. Before the new guidance, requesting an LDP on module cotton was an irreversible decision.
"The producer must still have beneficial interest in the cotton and make application within the loan availability period," said Lange. "But he can put the cotton in the loan if he exceeds the $75,000 limit after he has requested the LDP."