Cotton's Week: April 25, 2008

The House and Senate approved another one-week extension of selected provisions of the ’02 farm bill, one the President indicated that he will sign.

Conferees continued to discuss ways to pay for an additional $10 billion above baseline and the provisions of an agriculture tax package to be added to the farm bill. They also accepted compromise recommendations on items in several more titles including crop insurance, specialty crops, and extension of the Commodity Exchange Act. However, there are provisions in each of those titles which remain in dispute and may require votes.

House and Senate Agriculture, Budget and Finance and Ways & Means leaders met privately in an attempt to reach agreement on budget offsets and the tax package as well as to narrow differences on commodity and conservation provisions. If they are successful, then recommendations could be offered to the full conference committee the week of April 28.

The leaders reportedly have identified an offset using increased customs user-fees which may be acceptable to the Administration and have further pared down the Senate’s $2.5 billion tax relief package to about $1.6 billion. The offset for the tax package would be a reduction of six cents in the 51 cents tax credit provided to ethanol blenders.

In addition to offsets, conferees continue to hear calls for “reform” from the White House including further reduction in payment limits (adjusted gross income) and a modification of beneficial interest rules used to determine loan deficiency payments and marketing loan gains.

Earlier, the President sent a message to conferees suggesting they abandon efforts to write new legislation and pass a one-year extension. Conferees indicated that would be an unacceptable outcome at this point and agreed to continue their work.

Speaker Pelosi also called for additional nutrition funding above the $9 billion agreed to in the most recent framework.

Finally, as earlier reported, the budget framework previously discussed would require a reduction in commodity program spending of about $730 million in order to keep total spending at $10 billion above the baseline. The way to achieve the reduction in commodity programs is as yet undetermined.

The continuing rise in certain commodities’ prices has brought increased attention to trade policies of both exporting and importing countries. A number of countries recently have  announced changes in policies in order to partially insulate their domestic markets from increasing prices.

Record rice prices have prompted actions by Brazil and Argentina.

Brazil’s government announced a temporary ban on rice exports in order to insure domestic supply for the next six to eight months. The move leaves unfilled orders for 500,000 tons from other Latin American countries and Africa. Argentina is also halting exports to contain local prices, and Pakistan has raised the prospect of curbing exports in the near future. In a move designed to encourage exports, Ukraine's government will cancel grain export quotas.

The current price situation also is prompting importing countries to lower their tariffs. To name a few, Philippines, Saudi Arabia, Egypt, India and Indonesia have made recent announcements to reduce or eliminate selected tariffs.

Developed countries also are being pressured to increase funding for international food aid programs. Recently, Japan pledged $100 million in emergency aid to help countries struggling with rising food prices.

In testimony at a special Commodity Futures Trading Commission (CFTC) forum, American Cotton Producers Chairman Chuck Coley said the cotton futures market currently is totally dysfunctional and decisive action is needed now to restore confidence in the markets for all industry segments to operate in this crop year.

“If this is not accomplished, the viability of the U.S. cotton industry is at stake,” the Vienna, GA, producer said. “Unfortunately, the state of the market does not allow the CFTC to evaluate its options over an extended period of time.”

Coley stated that the impact of unregulated investments by index funds and other speculators have resulted in a complete divergence of cash and futures prices. This scenario is common to grain, oilseed and cotton markets but appears more severe in cotton futures trading.  As an example, he noted the high level of volatility and called attention to synthetic cotton price increases of more than 30% in one day in early March had no relevance to the fundamental market conditions.

Coley testified that the frustration shared by cotton producers stems from a futures market that is now unable to discover future prices with any historical correspondence to cash prices and provide a hedging mechanism.

“Cotton merchants are no longer offering forward contracts to producers because of extreme price risks,” he said. “A large Memphis merchant was quoted as saying their company has not bought a single bale of cotton in a month because they didn’t know how to hedge it. Likewise, producers are unable to convince their bankers to assume similar risks for their own price protection. Therefore, as cotton prices have soared and plunged over the past month, producers, along with merchants are merely bystanders.”

He said also deeply troubling is the price volatility’s impact on buyers liquidity and growers concerns over buyers’ financial viability.

“Cotton futures markets must be returned to their historical function of price discovery and risk management relative to real market conditions,” Coley stated. “Cotton producers face extreme pressures from escalating input costs which threaten their viability and yet currently have no mechanism to forward price their production at reasonable costs. We strongly urge the CFTC to use its authority and exercise its responsibility to protect market participants against manipulation. As growers we concur with recommendations from our merchandizing segments that call for more transparency in trading. We urge CFTC to apply the same speculative limits and reporting requirements to all market participants. Consideration also should be given to increasing speculative position margins and disallowing any increase in speculative position limits. The CFTC should also urge the Intercontinental Exchange to consider expanding certification delivery points and take measures that would ease certification costs.” 

Coley emphasized that the ACP is not seeking legislative or regulatory changes that bar parties from entering the market but it is incumbent upon the CFTC to use its authority to regulate futures markets to provide meaningful risk management and price discovery. 

Saying many in the cotton industry question what the public policy position of the CFTC should be regarding futures markets, Coley asked several questions:  Should these markets be regulated so that their primary purpose is to facilitate the cash market by providing price discovery and risk transfer, which has been its historic role?  Or should they be regulated so that their primary purpose is to provide an investment vehicle to invest in commodities without taking title to the physical commodity?

“Our concern is that it has become the latter and that is not healthy for cotton or any commodity markets,” he said.

Forum participants and the public can submit comments for the official record by sending written statements to agforum@cftc.gov by 5 pm EDT, May 7, ’08.

USDA’s Agricultural Marketing Service (AMS) published a notice in the Federal Register establishing the classing fees for the ’08 crop of cotton at $2.00 per bale as compared to $1.85 per bale for the ’07 crop. The fee is established using a formula specified in the ’87 Cotton Classing Fees Act which requires the fee to be set at a rate sufficient to cover the services’ costs.

Darryl Earnest, USDA-AMS-Cotton Division, will address the upcoming American Cotton Producers meeting in Little Rock to provide additional background on the ’08 fees.

The notice can be found at www.ams.usda.gov/cotton/rulemaking.htm. Comments should be submitted by May 2, ’08 to www.regulations.gov, referencing docket number AMS_FRDOC_0001; April 17, 2008; page 20842.

Dr. Keith Menchey will rejoin the NCC on May 1 in the organization’s Washington, DC, office, where he will serve as manager, Science and Environmental Issues.

He previously worked for the NCC from '99-03 and was responsible for science and environmental regulatory matters -- primarily involving pesticides, biotechnology and the Clean Water Act.

Menchey left the NCC to accept an appointment by then Maryland Governor Bob Ehrlich to serve as assistant secretary for Policy and chief of staff in the Maryland Dept. of Agriculture. During his term, he helped develop state agricultural policies, emergency preparedness plans and energy policy.

Menchey has served as a Congressional Science Fellow with the US House Agriculture Committee. He also has served as a Washington liaison for the American Society of Agronomy and most recently worked in the Biotechnology Regulatory Services at USDA’s Animal & Plant Health Inspection Service. He is a graduate of Colorado State U. where he majored in production agriculture. He completed graduate work at the U. of Maryland College Park where he majored in plant genetics and breeding and earned his M.S. and Ph.D. degrees in Agronomy.

According to the Commerce Dept., March (five-week month) total cotton consumption in domestic mills was 199.69 million pounds for a seasonally adjusted annualized rate of 4.23 million bales (480-lb). Last year’s March annualized rate was 4.78 million bales.

The February (four-week month) estimate of domestic mill use of cotton was lowered by 5.97 million pounds to 170.25 million. The revised seasonally adjusted annualized rate of consumption for February is 4.53 million bales. This is lower than last year’s February annualized rate of 4.82 million bales.

Based on Commerce estimates from Aug. 1, ’07-April 5, ’08, projected total pounds consumed during crop year ’07-08 would be 2.25 billion pounds or 4.68 million bales. USDA’s latest estimate of ’07-08 crop year mill use is 4.70 million bales.

Preliminary April domestic mill use of cotton and revised March figures will be released by Commerce on May 22.

Net export sales for the week ending April 17 were 173,000 bales (480-lb). This brings total ’07-08 sales to approximately 12.5 million bales. Total sales at the same point in the ’06-07 marketing year were roughly 11.6 million bales.

Almost 60% of export sales have been made to China, Mexico and Turkey. With 3.6 million bales, mills in China account for 29% of total sales. Mexico and Turkey have purchased 1.8 and 1.7 million bales, respectively. Indonesia remains a solid market with purchases of 1.1 million bales, while Thailand’s 700,000 bales places them as the fifth largest export customer.

Total new crop (’08-09) sales are 494,200 bales.

Shipments for the week were 293,400 bales, bringing total exports to date to 9.1 million bales, compared with the 6.9 million bales at the comparable point in the ’06-07 marketing year. In order to meet USDA’s current projected total ’07-08 exports of 14.5 million bales, weekly shipments must average over 350,000 bales. Year to date, weekly shipments have averaged 240,000 bales.