Cotton's Week: August 17, 2007

Cotton's Week: August 17, 2007

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Farm Bill, Trade Focus of Joint Meeting

Attendees at the joint meeting of the American Cotton Producers and The Cotton Foundation in St. Louis heard updates on key issues ranging from the farm bill status and outlook to an update on World Trade Organization-related activities.

Producers provided state-by-state crop situation updates, and they discussed topics for consideration on the ’08 Beltwide Cotton Conferences’ program.

During the Cotton Foundation’s annual meeting, Missouri producer, Charles Parker, was elected president and Clyde Sharp, an Arizona producer, was elected chairman.

Foundation trustees for ’07-08 include producers: Chuck Coley, Georgia; Mark Nichols, Oklahoma; and Cannon Michael, California. Allied industry trustees are: Trent Haggard, Case IH; Mark Lindsey, DuPont Crop Protection; Karen Marshall, Monsanto; Ted McKinney, Dow AgroSciences; Dave Rodger, John Deere; Allen Scarborough, Bayer CropScience; and Neil Strong, Syngenta.



Unity a Plus for Farm Bill Process

NCC President John Pucheu told ACP/Cotton Foundation meeting attendees that there is still a long way to go in the ’07 farm bill development but a productive ’07 NCC Annual Meeting helped prepare the NCC for that process.

“The Council was able to re-confirm our priorities for sound farm policy,” Pucheu said. “We also prepared to undertake a number of internal initiatives in preparation for farm bill debate.”

“A majority of the Council’s recommendations – regarding the structure and operation of the cotton program – were included in the legislative language approved by the House,” the California producer told attendees.

Pucheu also emphasized that the NCC has continued its active involvement in World Trade Organization (WTO) issues, including Doha agricultural negotiations and the Brazil compliance case.

“I would note that the U.S. actions taken to comply with the WTO Panel ruling have had a significant impact on the U.S. cotton industry,” Pucheu said. “The loss of Step 2 has reduced U.S. competitiveness in international markets and ultimately impacted the producer through lower equity offers. In addition, the current world market situation flies in the face of Brazil’s claims. During the 2006 marketing year, India was undercutting world prices by as much as 5 cents per pound; Brazil was selling government stocks to dampen domestic cotton prices; and China was using its variable levy system to increase internal prices and stimulate production. It cannot be credibly argued that the U.S. cotton program is causing any country serious prejudice in 2007 - the first year the cotton program has operated without Step 2.”

Pucheu also reminded attendees that the NCC has been actively communicating with the Administration regarding texts that have emanated from WTO agricultural negotiations. Throughout this year, Pucheu said the NCC has been delivering a consistent message to US trade negotiators that “first and foremost, the U.S. should not improve its offer until other countries agree to meet the U.S. offer on market access. We also have detailed our industry’s priorities on market access and pointed out that a successful Doha outcome must include significant increases in market access to China.”

Pucheu, in noting the importance of strengthening U.S. cotton’s relationship with China, announced the NCC’s hosting of a Chinese delegation in September to all four Cotton Belt regions as part of its Memorandum of Understanding it signed with the China Cotton Assoc.


Brazil Facts Don’t Add Up

In another report to the joint meeting, NCC’s Counsel Bill Gillon said that while Brazilian officials were in Geneva arguing that US subsidies were depressing world cotton prices, USDA reports indicate that the Brazilian government was busy selling government-held cotton stocks on the Brazilian market in order to lower internal Brazilian cotton prices.

“The actions of Brazil’s own government in April and May of 2007, when it sold nearly two-thirds of its government held cotton stocks to drive down prices are clearly incompatible with Brazil’s contemporaneous arguments that the United States was suppressing world cotton prices,” he said. “The Brazilian government was arguing (and the WTO Panel apparently agreed) that the U.S. cotton program was causing price suppression in the world market, even though the Brazilian government was taking action to drive down domestic cotton prices. Brazil’s words to the WTO were blatantly inconsistent with Brazil’s own actions at the time.”

 “Since the United States eliminated its step 2 program, U.S. cotton exports declined significantly, U.S. acreage dropped 28 percent and production is expected to decline by 20 percent or more for 2007,” Gillon noted. “Cotton production and exports are dramatically up in India and Brazil’s production has also risen since the first Panel decision and world cotton prices are up.”

Gillon said that when the Compliance Panel report is made public, he hoped it would explain the discrepancy between the apparent decision and the current world cotton market.

 “So far, while maintaining that the U.S. is causing significant price suppression, no WTO Panel has told us what ‘significant’ means. This Panel had strong evidence before it tending to show that the U.S. program (even before parts of it were eliminated) could have had no more than a two or three percent impact on world prices. If the Panel did not discredit that evidence, we may have a decision by the WTO that a two or three percent movement in prices is ‘significant,’ which seems to fly in the face of common sense.”

He also stated that a variable levy system restricting imports into China acts as a price support program for Chinese cotton producers – a system that has been equivalent to at least $5.7 billion in subsidized support for ’05 and ’06. “That program continues to provide support to Chinese cotton producers in 2007,” he added.

Citing the recent announcement of one million tons of previously unreported stocks of cotton in China, Gillon stated, “the overall lack of transparency in the Chinese cotton system results in millions of pounds of stocks suddenly appearing within China -- undercutting worldwide demand and adding tremendous uncertainty to the world market.”


Denied Storage Credit Conveyed

In a letter to the industry, Deputy Administrator John Johnson indicated that Commodity Credit Corp. (CCC) would not be revising loan redemption software during calendar year '07 to deduct denied storage credits for loan bales stored outside. Therefore, CCC’s initial loan redemption calculation will not reflect denied credits. For any bales that are to be denied storage credits because they were stored outside, CCC will separately invoice the redeemer of the cotton for any such denied storage credits, even though they were initially included in the redemption calculation. CCC will post a list of loan bales stored outside at each approved warehouse to provide merchants some advance information about potential storage charges to be repaid.



Final Employer Rule Issued

The Dept. of Homeland Security (DHS) issued a final regulation regarding employer responsibilities upon receipt of “no-match” letters. The final rule was published in the Federal Register on Aug. 15 and becomes effective on Sept. 14, ’07. The final rule and other information are posted on the DHS website at http://www.ice.gov.

Upon receipt of a no match letter from DHS or Social Security Administration (SSA), an employer will have 30 days to review the letter to determine if it properly recorded the employees’ names and social security numbers (SSN) or alien documents. If the employer made a clerical error, it is required to file the corrected information with SSA or DHS within the 30-day time period. If the employer reported the information correctly, it must confirm with the employee that the employee provided accurate information. The employer does not have responsibility to solve the problem for the employee; however the employer must inform the employee of the 90-day time frame within which the employee must provide verifiably legitimate documents. If during the 90-day period the employee provides corrected information, the employer is responsible for verifying the correction with DHS or SSA. If at the end of the 90-day period the employer cannot obtain verification that the document is acceptable, then the employer must take action to terminate the employee. If the document cannot be verified at the end of 90 days, the employer has three days within which to complete a new I-9 Form for the employee using the same procedures as if the employee was newly hired but may not use any document that was previously in dispute. The employer must require that a document establishing identity include a photograph. An employer that follows DHS’ procedures will have “safe harbor; and will not be considered by DHS to have constructive knowledge that it employed unauthorized employees. The safe harbor would apply even if an employee was later determined to be unauthorized provided the employer can prove it followed the DHS procedures.”

The regulation is silent or ambiguous on several critical questions, including the employer’s obligation to comply with the rule when it is impractical (for example, in the case of seasonal employees who have left employment) and whether termination of employees under no-match rule could trigger discrimination charges under Title VII of the Civil Rights Act of ’64 or the Unfair Immigration-Related Employment Practices provisions of the Immigration Reform and Control Act of ’86.



IRS Issues “Market Gain” Notice

The IRS Notice 2007-63 “Repayment of Commodity Credit Corporation Loans” provides information concerning the tax treatment of “market gain” when repaying non-recourse loans.

Under Sec. 77 of the Internal Revenue Code, farmers may elect to report CCC commodity loan proceeds in their gross income for the taxable year in which received. Under certain circumstances, loans can be repaid with cash or certificates at the lower of the original loan rate or an alternative rate (for example, a cotton loan can be repaid at the lower of the original rate or the adjusted world price). If the loan is repaid with cash or certificates at a rate lower than original loan rate, the difference is “market gain.” That section also states, “An individual taxpayer that has made a Sec. 77 election should report the market gain as an Agricultural Program Payment on line 6a of Schedule F, but not as a taxable amount on line 6b, for the year in which the loan is repaid. An individual taxpayer that has not made an election under Sec. 77 should report the market gain as an Agricultural Program Payment on line 6a and as a taxable amount on line 6b of Schedule F for the year in which the loan is repaid.”

The Notice states that the market gain associated with the repayment of a CCC loan repaid on or after Jan. 1, ’07 will be reported by CCC on Form 1099-G whether the loan is repaid with cash or certificates. The Notice is available at www.irs.gov/irb/2007-33_IRB/ar07.hmtl or by calling Mamette Myers of the Office of Associate Chief Counsel at 202-662-4920.


Sales, Shipments Robust

Net export sales for the week ending Aug. 9 were 371,600 bales (480-lb). This brings total ’07-08 sales to slightly more than 3.7 million. Total sales at the same point in the ’06-07 marketing year were approximately 2.0 million bales. Total new crop (’08-09) sales are 128,100 bales.

Shipments for the week were 363,100 bales, bringing total exports to date to 482,700 bales, compared with the 416,100 at the comparable point in the ’06-07 marketing year.


Prices Effective Aug. 17-23, '07

Adjusted World Price, SLM 11/16

51.40 cents

*

Coarse Count Adjustment

0.00 cents

Marketing Loan Gain Value

0.60 cents

Import Quotas Open

NA

Step 3 Quotas (480-lb. bales)

NA

ELS Payment Rate

0.00 cents

*No Adjustment Made Under Step I
 
Five-Day Average
 
Current 3135 c.i.f. Northern Europe

67.99 cents

Forward 3135 c.i.f. Northern Europe

 NA

Coarse Count c.i.f. Northern Europe

 NA

Current US c.i.f. Northern Europe

67.15 cents

Forward US c.i.f. Northern Europe

NA

 
2006-07 Weighted Marketing-Year Average Farm Price  
 
Year-to-Date (August-June)

47.32 cents

**

**August-July average price used in determination of counter-cyclical payment

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