Cotton's Week: September 12, 2008

The House Agriculture Committee conducted a hearing to review a Commodity Futures Trading Commission (CFTC) report on participation of swap dealers and index funds in commodity and energy markets.

CFTC’s Acting Chairman Walt Lukken presented a report compiled by CFTC which “represents a survey of swap dealers and commodity index funds to better characterize their activity and understand their potential to influence the futures markets.”  He said this type of a compelled survey relating to off-exchange activity is unprecedented, but the growth and evolution in futures market participation and growing public concern regarding off-exchange activity supported the need for this extraordinary regulatory inquiry.

The survey was an attempt to address the following questions: (1) how much total commodity index trading is occurring in both the over-the-counter (OTC) and on-exchange markets; (2) how much commodity index trading is occurring by specific commodity in both the OTC and on-exchange markets; (3) what are the major types of index investors; (4) what types of clients utilize swap dealers to trade OTC commodity transactions; and (5) to what extent would the swap clients have exceeded position limits on accountability levels had their OTC swap positions been taken or exchanged.

The report, available at http://www.cftc.gov/, includes detailed analysis of the data collected. Lukken cautioned, however, that there is a margin of error in precision due to survey limitations. He pledged that CFTC will continue to collect and analyze data to improve the data accuracy.

The Commission presented eight recommendations to the Committee, including:  enhanced reporting which may include a separate category for swap dealers; a new periodic supplemental report on swap dealer activity; a new supplemental reporting form for certain large traders; and a review of whether to eliminate the bona fide hedge exemptions for swap dealers. All are designed to improve transparency.

While these are being initiated by the CFTC utilizing existing authority, Lukken suggested that codification of the reporting requirements would be welcomed. He also renewed earlier requests for additional staffing and resources.

In late July, prior to the August recess, House members overwhelmingly voted to approve HR 6604, a measure to increase transparency and to strengthen oversight of futures markets. However, the margin was short of the two-thirds required under the process used to bring the bill to the floor. There are indications that the legislation will be brought back to the House floor during the week of Sept. 15.

Reps. Etheridge (D-NC) and Moran (R-KS), the chairman and ranking member, respectively, of the General Farm Commodities and Risk Management Subcommittee, introduced legislation (HR 6849) to require USDA to allow reconstitution of farms with fewer than 10 base acres.

The new farm law includes a provision to deny payments for farmers with fewer than 10 total base acres unless the farm is wholly owned by minority or socially disadvantaged farmers. The statement of managers accompanying the new farm law clearly states that Congress intends for USDA to allow affected farms to be combined before determining whether payments would be suspended. USDA has issued a notice to Farm Services Agency offices that would prohibit reconstitution.

HR 6849 would require the Secretary of Agriculture to permit a producer to reconstitute any farms which would be denied benefits under the so-called 10 acre rule in order to create a farm with more than 10 acres -- which would then retain eligibility for program payments including direct, counter-cyclical and ACRE.

The NCC has joined a number of other commodity and farm organizations in a letter urging prompt action on the legislation.

In its September crop report, USDA estimates the ’08-09 US cotton crop at 13.85 million bales -- up 80,000 bales from the August report. Upland production was estimated at 13.39 million bales and ELS production at 459,000 bales. The USDA report notes that production estimates are based on conditions as of Sept. 1 and the full impact of Hurricane Gustav may not be fully reflected.

Harvested area was estimated at 7.83 million acres, implying a non-harvested area of 1.58 million acres based on USDA’s revised acreage report. The resulting abandonment rate is roughly 16.83%. The national average yield per harvested acre was estimated to be roughly 849 pounds, 28 pounds above the five-year average.

On a regional basis, the Southeast crop is estimated at 3.10 million bales, based on harvested acres of 1.93 million and a regional average yield of 773 pounds, 18 pounds above the five-year average for the region. In the Mid-South, expected production is 3.82 million bales. Harvested area is estimated at 1.87 million acres and the expected yield of 979 pounds per harvested acre.

The Southwest upland crop is estimated at 5.63 million bales. Expected harvested area is 3.58 million acres and the regional average yield is 754 pounds, 68 pounds above its five-year average of 686 pounds per harvested acre. Upland production in the West is an estimated 840,000 bales with harvested area of 279,000 acres and a regional average yield of 1,445 pounds, 98 pounds higher than the region’s five-year average.

The ELS crop is an estimated 459,000 bales. Harvested area is pegged at 170,000 acres with an average yield of 1,296 pounds per harvested acre.

The September crop report also revised the planted area to 9.41 million acres, an increase of 168,000 acres from the June acreage report. 

In its September report, USDA reduced ’08-09 US exports 500,000 bales from the August report to 14.50 million bales due to lower world import demand, and sees mill use unchanged at 4.40 million bales. This generates a total ’08-09 offtake of 18.9 million bales. Ending stocks for ’08-09 are projected at 4.90 million bales for an ending stocks-to-use ratio of 25.9%.

For the ’07-08 crop year, USDA gauged US cotton production at 19.21 million bales. Mill use was unchanged from the August report at 4.60 million bales. Exports were lowered 250,000 bales from the August report to 13.65 million bales based on the final estimate from USDA’s U.S. Export Sales report. Total offtake for the ’07-08 crop year is estimated at 18.25 million bales. Ending stocks were lowered to 9.90 million bales based on a preliminary survey of ’07-08 end-of-season stocks by the US Census Bureau. The estimated stocks-to-use ratio for the ’07-08 marketing year is 54.2%.

The USDA September report raised ’08-09 world production estimates 10,000 bales from the August report to 112.17 million. World mill use was lowered 840,000 bales from the August report to a projected 123.70 million bales due to deteriorating world economic conditions and their impact on textile demand. Consequently, world ending stocks for ’08-09 are projected to be 52.32 million bales for a stocks-to-use ratio of 42.3%.

For the ’07-08 marketing year, USDA puts world production at 120.36 million bales, up 1.05 million bales from the August report. World mill use was raised 190,000 bales to 123.82 million. World ending stocks on July 31, ’08 are now pegged at 60.83 million bales. This has a corresponding stocks-to-use ratio of 49.1%.

Net export sales for the week ending Sept. 4 were 144,400 bales (480-lb). This brings total ’08-09 sales to approximately 4.8 million bales. Total sales at the same point in the ’07-08 marketing year were slightly more than 5.0 million bales. Total new crop (’09-10) sales are 51,300 bales.

Shipments were 242,400 bales, bringing total exports to date to 1.3 million bales, compared with the 1.7 million bales at the comparable point in the ’07-08 marketing year.

NCC has scheduled a meeting with EPA officials on Sept. 19 to discuss ways to maintain the cotton uses of Furadan.

On July 31, EPA published in the Federal Register a notice of intent to revoke all food and feed tolerances for carbofuran (Furadan) (see 7/25 Cotton’s Week). Without a tolerance, a pesticide can not be labeled for use; therefore, this action would be the first step in cancellation of all uses of Furadan on food/feed crops including cotton. Although Furadan is only labeled for in-furrow application for cotton, it has been a crucial product for the control of late season aphids under Section 18s.

The NCC, in conjunction with the National Corn Growers Assoc. and the National Potato Council, submitted an earlier request to EPA for a 90-day extension of the public comment period for this proposal.

EPA expects that all requests to maintain a tolerance will be accompanied by a full risk assessment that evaluates the risk associated with all dietary exposures from both food and water associated with the applicable use patterns including aggregate and cumulative risks. The purpose of the request for an extension is to provide adequate time to prepare comments that demonstrate that the current use patterns do not result in unacceptable risks to human health and to provide the economic impact of EPA’s proposal.