RSS Feed
|
|
|
|||||||||||||||||||||||||||||||||||||||||
|
Ag Line: Cotton Marketing Update As Thanksgiving approaches, we do indeed have a lot to be thankful for. As you make room at the dinner table this Thanksgiving, please remember the farmers who have worked tirelessly to produce the abundant and safe food supply that we have available. Each year we, as a family, try to make two or three pecan pies from our own crop. However, this year pecan prices are so high, each pie would be worth about $10! Maybe next year, we will make enough pecans for a pie or two. As this year's cotton harvest season comes to a close, farmers endured one of the toughest droughts in recent memory. Many farms in the county received very little rainfall, and others received enough rain to yield a decent harvest. Even though we suffered through a severe drought, the weather we experienced at harvest time was wonderful. We had many days of sunshine and warm weather that allowed bolls to open and mature. I visited a particular field that originally had a yield estimate of 160 lbs. This same field five weeks later yielded 470 lbs. What a difference cooperating weather can make! The majority of cotton is now in the module. Farmers must decide what to do with their cotton. Dr. Don Shurley, UGA economist, wrote an interesting article on the Loss of the Step 2 Export Subsidy. I would like to share this article. Loss of Step 2: World-US Price Spread Widening, Will Impact Producers The "total money" received by the cotton producer for cotton depends on a very important relationship - the "spread" between the A-Index (the world price) and US price. This is because the Loan Deficiency Payment (LDP) is calculated from this A-Index. Depending on how the producer markets his/ her cotton, the producer will either (1) receive an LDP, forgo the Loan and sell the cotton, or (2) place the cotton in the Loan and later redeem the cotton realizing a Loan Gain, or (3) place the cotton in the Loan and later receive a merchant equity through an Option-To-Purchase agreement. While this sounds complicated, the important thing is that in all three scenarios the LDP or the Loan gain or the equity payment are all dependent on the "spread" or relationship between the A-Index and the US price of cotton. When this spread widens, either the A-Index (world price) is going up in relation to US prices or US prices are falling in relation to the world price. Neither is good. Effective August 1, the Step 2 provision (a subsidy paid to US exporters and mills) was eliminated as the result of Brazil's successful complaint in WTO against the US cotton program. There is evidence that the loss of Step 2 has weakened US cotton prices in relation to world prices. What has happened in recent months is that this spread has widened from the more typical 5 cents to currently about 8 to 9 cents. US prices (cotton futures prices) have weakened about 3 to 4 cents per pound in relation to the A-Index or world price. This widening of the "spread" does not change the LDP but, because of weaker prices, results in less total money received. The example below illustrates approximately the current situation. Total money to the producer has dropped 4 cents due to the wider spread. Had the AIndex declined as US futures declined and maintained the typical 5-cent spread, the lower A-Index would have resulted in a larger LDP and offset the lower cash market to the producer. Or, had US prices simply been able to maintain the 5-cent spread rather than weakening, total money would have been unchanged. This widening of the "spread" could be due to the loss of the Step 2 provision. Without the Step 2 payment, US cotton would need to be cheaper to remain as competitive on the export market. This spread could change (could improve/narrow?) as we move through the marketing year. Producers should be aware that their "total money" depends not on local prices or LDP alone but on the combination of the A-Index, the "spread," and the local cash basis and how these move in relation to each other. Because the spread has widened, the producer has lost money. The producer can improve his/her position by taking advantage of opportunities when the spread and basis narrow. The University of Georgia Cooperative Extension offers educational programs, assistance and materials to all people without regard to race, color, national origin, age, sex or disability.
Example of Futures, Cash Price, and LDP Depending on A-Index Spread
2/ A-Index minus the "adjustment" for grade and location of 16.1 cents/lb
3/ Loan Rate (52 cents/lb) minus the AWP
|
for larger version       |
|||||||||||||||||||||||||||||||||||||||||
