Cotton's Week: October 23, 2009

President Obama signed into law H.R. 2997, the "Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Appropriations Act, 2010." That law provides FY10 appropriations for USDA, the Dept. of Health and Human Services, and other related agencies. For legislation details, see Cotton’s Week 10/09.

The House Agriculture Committee approved legislation - Over-the-Counter Derivatives Markets Act (HR 3795) - by a bipartisan voice vote.

The legislation’s main thrust is that derivatives must be cleared if they are sufficiently standardized to be accepted by a clearinghouse. Such contracts also would be required to be traded on a regulated exchange. Contracts deemed by a settlement house to be too customized to be cleared still would have to be reported, and all parties except end-users would need to meet capital and margin requirements. The legislation’s drafters have said those capital requirements would be sufficiently rigid as to deter use of custom contracts.

Unlike an earlier bill (HR 977), approved by the Committee in February, the measure would exempt end-users of a risk-management product from the clearing requirement. Chairman Peterson (D-MN) said that end-users had convinced him that they were not responsible for the crisis in ’08 that led Congress to act, and they would be financially harmed if forced to settle trades through a clearinghouse. End-users are companies including large airlines, public utilities and even agriculture producers that use derivatives to hedge risk inherent to their businesses.

The Committee adopted a bipartisan amendment limiting the Commodity Futures Trading Commission's (CFTC) ability to set position limits for derivatives dealers, which typically are large banks. Chairman Peterson said the Agriculture Committee's bill “protects the ability for end users to use swaps to hedge risk while holding swap dealers and major swap participants to new standards for capital, margin, business conduct and other requirements to reduce their ability to again place our financial system in such dire straits.” He stressed that the target of the proposed new regulations “is not the end-user but their swap dealer or major swap participant counterparty.”

USDA-released ’09 enrollment data indicate that 17.634 million acres of upland cotton base are enrolled in either the Direct and Counter-Cyclical Program (DCP) or in the Average Crop Revenue Election (ACRE) program. For upland cotton, the overwhelming majority of base acres opted for the DCP with enrollment of 17.604 million acres, while just 30,000 cotton base acres were enrolled in the ACRE program.

Several Cotton Belt states reported that no upland cotton base acres opted for the ACRE program.

The NCC sent a letter to USDA Secretary Vilsack in preparation for next week’s session of the US-China Joint Commission on Commerce and Trade in Hangzhou, China. The letter reminded the Secretary of the continuing market access issues that US raw cotton faces with China and also thanked the Department for the excellent work of the Agricultural Marketing Service Cotton Division in harmonizing Chinese cotton standards.

The NCC has registered objections to China's cotton fiber import practices and policies for several years. China continues to allot a significant portion of its WTO-mandated import quotas to its "cotton processing sector" and requires an equivalent level of textile and apparel exports to effectively offset the cotton fiber imports. This practice denies national treatment for cotton fiber imported under cotton processing import licenses and undermines the intent of the US-China WTO accession agreement. Further, China uses the limited market access assured by its Tariff Rate Quota to insure high domestic prices for raw cotton. China varies its import duty for over-quota imports, using the variable levy as a price support mechanism for China's cotton producers.

For the past 12 months, auction prices in China have remained 10 to 13 cents per pound above the average world price, as measured by Cotlook Limited. The high internal price for raw cotton causes Chinese mills to substitute polyester fiber whenever possible thus reducing mill cotton use.

A further market access barrier has arisen in the past year with a new Chinese cotton importer registration process that threatens to make exporting to China even more difficult for US cotton exporters.

A team of eight leaders from the China Cotton Assoc. (CCA) visited the Cotton Belt on Oct. 17-23 to learn more about the US cotton industry. The visit followed successful trips to China by NCC delegations in ’06, ’07 and ’08, as well as an earlier US visit by a CCA delegation in ’07.

The tour, sponsored by the NCC, the Cotton Foundation and Cotton Council International, included stops in Washington, DC; Cary, NC; Memphis, TN; and Lubbock, TX.

The delegation participated in special regional industry seminars in the Southeast, Mid-South and Southwest. Local hosts and seminar speakers were NCC leaders and representatives of several cotton interest organizations.

Information provided by the CCA during this leadership exchange has helped the NCC’s understanding of the world’s largest producer and textile consumer of cotton and the largest importer of raw cotton.

The CCA was modeled after the NCC to include all Chinese cotton industry segments. A Memorandum of Understanding was signed in ’06 between the NCC and the CCA that promotes cooperation between both countries’ cotton industries.

In response to the abnormally wet weather across much of the US Cotton Belt, the NCC and National Cotton Ginners Assoc. staff developed recommendations to help producers/ginners maximize their efforts at preserving the crop’s existing quality.

The document, “Recommendations For Handling Seed Cotton Exposed To Excessive Rainfall,” is available in the NCC’s web site’s Technical area at http://www.cotton.org/tech/quality/rainfallandseedcotton.cfm. 

Key commodity organization leaders will see cotton production and processing operations on the Texas High Plains on Oct. 26-28, as part of the NCC’s Multi-Commodity Education Program (MCEP).

The exchange between commodity producer leaders in the Sunbelt and the Midwest/Far West regions is designed to provide the program’s participants with: 1) a better understanding of production issues faced by their peers in another geographic region and 2) an opportunity to observe agronomic practices, technology utilization, cropping patterns, marketing plans and operational structure. The program is supported by The Cotton Foundation with grants from Deere & Company and Monsanto.

The tour’s producer participants include: Kody Bessent, executive assistant/producer relations specialist, Texas Wheat Board; Mike Clemens, vice chairman, Public Policy, National Corn Growers Assoc.; Brad Doyle, director, Arkansas Soybean Assoc.; Joe Steiner, vice president, American Soybean Assoc. (ASA); and Brad Warren, past president, Colorado Wheat Administrative Committee. Cassandra Schlef, ASA’s communications coordinator, also is with the group.

The participants’ tour will begin on Oct. 25 in Lubbock, TX, with visits to Plains Cotton Growers Assoc., the Texas AgriLife Research & Extension Center, the USDA Agricultural Research Service Ginning Laboratory, Plains Cotton Coop Assoc.; PYCO Industries, Farmers Coop Compress and USDA’s Agricultural Marketing Service’s Cotton Division. The group also will visit Hurst Farm Supply (John Deere) in nearby Lorenzo that day.

The National Cotton Ginners’ Assoc. (NCGA) has submitted comments on the Dept. of Labor’s (DOL) proposed changes to the H2-A Program. While the ginning industry historically has not been a large user of the H2-A Program, the ’08 Rule streamlined the process and made it more likely that gins would be able to use this program.

The NCGA commented that the proposed rule would suspend the recently implemented ’08 Rule and revert back to past burdensome and punitive provisions. The Proposed Rule stated that the ’08 Rule had failed to provide an increase in foreign workers. NCGA comments stated that the uncertainty created by the DOL’s previous attempts to rescind the Rule was more likely to be the cause of this lack of additional workers being hired under this program.

The Commerce Dept. said September (five-week month) cotton consumption in domestic mills was 139.2 million pounds for a seasonally adjusted annualized rate of 2.90 million bales (480-lb). Last year’s September annualized rate was 4.15 million bales.

The August (four-week month) estimate of domestic mill cotton use was lowered 790,000 pounds to 131.2 million. The revised seasonally adjusted annualized consumption rate for August is 3.41 million bales, lower than last year’s August annualized rate of 4.60 million bales.

Preliminary October domestic mill use of cotton and revised September figures will be released by Commerce on Nov. 25.

Net export sales for the week ending Oct. 15 were 57,100 bales (480-lb) – a marketing year low. This brings total ’09-10 sales to about 3.9 million bales. Total sales at the same point in the ’08-09 marketing year were about 6.7 million bales. Total new crop (’10-11) sales are 106,600 bales.

Shipments of 126,000 bales – a marketing-year low – bring total exports to date to 2.0 million bales, compared with the 2.8 million bales at the comparable point in the ’08-09 marketing year.