Cotton's Week: June 6, 2008

The Senate approved farm legislation (HR 6124) which includes all 15 titles. The legislation, approved by a vote of 77-15, is identical to HR 2419 which was vetoed and overridden but inadvertently omitted Title 3.

The House previously passed the new legislation on May 22 by a vote of 306-110. The 14 titles of HR 2419 which were vetoed and subsequently overridden became law on May 22 but after further consideration, Congress decided to repeat the process and pass a complete bill with all 15 titles rather than just the trade title to avoid any question of constitutionality.

Consideration of the new legislation was delayed when Sens. DeMint (R-SC) and Coburn (R-OK) objected to an expedited process and insisted on a debate and vote.

During the debate, Coburn argued the bill spends too much on nutrition and too little on commodities but also argued the bill is not compliant with the World Trade Organization (WTO) citing the ruling in the Brazil cotton case. He did not offer any alternative proposal to bring the legislation into compliance.

DeMint argued the bill was “bloated” with wasteful spending and complained about direct payments being made even when prices are high even though the direct payments are designed to be WTO compliant. He cited an incorrect assertion by Citizens Against Government Waste (CAGW) which says “….this farm bill includes $5.2 billion annually in direct payments to individuals, many of whom are no longer farming, without any regard to prices or income, 60 percent of which go to the wealthiest 10 percent of recipients….” Apparently, CAGW did not take time to review the new income test for program eligibility.

A spokesman for the Bush Administration said the President would veto the bill stating “……when grocery bills are on the rise, Congress has called on families to pay more in subsidies to wealthy farmers at a time of record farm profits……..”

Once the president vetoes the new legislation, the House and Senate are expected to once again override the veto. The previous veto was overridden by the House and Senate by votes of 316-108 and 82-13, respectively. Cotton Belt Senators who voted against the new legislation were: Coburn (R-OK), DeMint (R-SC), Domenici (R-NM), and Kyl (R-AZ). Sens. McCain (R-AZ) and Webb (D-VA) did not vote.

Locations, dates and times have been set for 45 meetings across the Cotton Belt in which key provisions of the new Food, Conservation and Energy Act of 2008 will be reviewed.

NCC staff is conducting the meetings during the weeks of June 16 and June 23 as a service for its members. The presentations are aimed at providing the best available information on the new farm bill and will conclude with a question and answer period. Other industry, media and agribusiness representatives also are invited to attend.

The revised schedule of meetings, with all times local, can be found at on the NCC’s web site at http://www.cotton.org/issues/members/07farmbill/meetings/frmmtgs.cfm.

Net export sales for the week ending May 29 were 572,000 bales (480-lb). This brings total ’07-08 sales to slightly more than 14.8 million bales. Total sales at the same point in the ’06-07 marketing year were roughly 13.8 million bales. Total new crop (’08-09) sales are 783,400 bales.

Shipments for the week were 250,700 bales, bringing total exports to date to 10.7 million bales, compared with the 9.1 million bales at the comparable point in the ‘06-07 marketing year. With a little more than two months remaining in the marketing year, weekly shipments must average roughly 384,000 bales to reach the USDA projection of 14.20 million bales.

The Commodity Futures Trading Commission (CFTC) announced several policy initiatives – including a cotton market investigation - aimed at addressing concerns in the agricultural futures markets that were raised at its April 22 roundtable.

The CFTC news release said the Commission's Division of Enforcement has been conducting an ongoing investigation of the February/March ’08 price run-up in the cotton futures markets. Although the CFTC ordinarily conducts enforcement investigations on a confidential basis, the Commission “is taking the extraordinary step of disclosing this investigation because of today’s unprecedented market conditions and concerns expressed by market participants at the Commission’s agriculture roundtable. The specifics of the ongoing investigation remain confidential. All Commission enforcement inquiries are focused on ensuring that the markets are properly policed for manipulation and abusive practices.”

NCC President/CEO Mark Lange said the US cotton industry remains concerned about the ability of the futures to provide meaningful risk management and price discovery – so that commodity market participants can be better protected against manipulation. He said the NCC stands behind testimony presented to the CFTC and reiterated in written comments to a House agriculture subcommittee: the need for more transparency in trading and reporting; additional regulation of swaps and Over-the-Counter (OTC) trades; and speculative limits and reporting requirements must be consistent across all market participants.

CFTC Acting Chairman Walt Lukken and Commissioners Michael Dunn, Jill Sommers and Bart Chilton stated in the Commission’s release: “During the CFTC’s April 22 agricultural markets roundtable, the Commission heard from a variety of market participants with various concerns about current conditions in the agricultural futures markets. The Commission is committed to ensuring that our agricultural futures markets function properly in their risk-management and price discovery roles. The Commission recognizes that—although no single solution exists—there are several steps it can take to improve oversight of the futures markets and bring greater transparency and scrutiny to the types of traders in the marketplace, including large index traders.”

The CFTC’s other initiatives are focusing on: 1) Index Trading and Speculators, including a  review of trader reporting and classification and withdrawal of speculative position limits proposals; 2) Greater Risk Management Choices for Farmers and Agribusinesses, including a look at agricultural trade options and clearing for agricultural swaps; 3) Greater Transparency of Trader Information; 4) Margin and Agricultural Lending; and 5) CFTC’s Agricultural Advisory Committee as it relates to that panel’s future studies of pertinent issues.

Meanwhile, the Senate Agriculture Committee conducted a hearing on the nominations of Lukken and Chilton to serve another term as commissioners and Scott O'Malia to become a commissioner.

In his statement, Lukken said the Commission lacks the "regulatory tools" to determine whether commodities markets are operating in a "bubble" of high prices, and Chilton said he could not assure the Committee that markets are not experiencing what Chairman Harkin (D-IA) referred to as a possible "parallel with Enron".

Lukken said "right now, there's not a clear smoking gun as far as index traders" and higher prices are concerned. But Chilton acknowledged that there is concern that speculators are moving the markets by taking positions in commodity indexes making them "both passive traders and long traders".

Chilton and Lukken said CFTC has to look at the data differently than before. O'Malia said regulators are critical to ensure markets operate in a fair and transparent manner and regulators need adequate authority and tolls to respond as markets evolve.

A World Trade Organization (WTO) Appellate Body (AB) upheld all substantive findings of a WTO Compliance Panel’s earlier report against the US Export Credit Guarantee program and certain aspects of the US cotton program.

The AB upheld the Panel’s findings that the export credit guarantee program as revised by the United States continued to constitute an export subsidy – even though the AB found that the compliance panel failed to make an “objective assessment of the matter.”

The AB, using its own reasoning, nevertheless upheld the Compliance Panel’s report that the export credit guarantee program was not designed to cover its long-term operating costs and losses and is, therefore, an export subsidy. The AB upheld the compliance panel’s expansion of the findings in that case to include commodities not included in the original dispute settlement decision. The AB also upheld the compliance panel’s findings that the cotton marketing loan and counter-cyclical payments made under the ’02 farm bill had the effect of causing significant price suppression in the world market for upland cotton, constituting “present” serious prejudice to the interests of Brazil.

A spokesman in the US Trade Representative’s Office stated they were disappointed in the findings and continued to believe that changes made to the US cotton program and export credit guarantee program brought those programs fully into compliance with WTO recommendations and rulings.

NCC Chairman Larry McClendon stated that the NCC was “disappointed that the appellate body failed to overturn the Compliance Panel’s earlier decision.” He said the AB decision “is far removed from the current cotton market and the current operation of the U.S. cotton program.  Expenditures under the cotton program have fallen dramatically; U.S. cotton acreage is down; world cotton acreage is up; world cotton prices are up. I don’t see how anyone examining the current structure of the world cotton market could accuse the United States of suppressing world cotton prices.”

Once the decision is announced and adopted by the WTO’s Dispute Settlement Body, Brazil can decide whether to move forward with its attempt to retaliate against US imports. Brazil has claimed that the cotton portion of the case justifies $1 billion in retaliation. The average annual value of the entire Brazil cotton crop for ’99-02 was less than Brazil’s claimed level of damage. Brazil also claims that the export credit guarantee portion of the case justifies $3 billion in retaliation.

The United States has objected to these numbers; the matter was referred to arbitration; but the arbitration was suspended, pending the outcome of the compliance proceeding.

The June 10 World Agricultural Supply and Demand Estimates (WASDE) report will reflect a change in the US cotton table.

Section 1610 of the Food, Conservation, and Energy Act of 2008 (’08 farm bill) has eliminated the longstanding prohibition on USDA's publishing of cotton price forecasts. Therefore, the June 10 WASDE report will forecast the average price received by farmers for US upland cotton for the ’07/08 and ’08/09 marketing years. The price forecast for ’08/09 will be presented in a range format.   

The WASDE report will be issued at 8:30 am EST June 10 by the World Agricultural Outlook Board of USDA's Office of the Chief Economist. For previous WASDE reports and information on how the report is prepared, visit:  http://www.usda.gov/oce/commodity/wasde/.