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The information listed in this section refers to provisions of the 2002 farm bill. The figures listed here change weekly and refer to a number of financial factors that affect cotton growers as well as cotton sales and shipments. Calcot makes no guarantee that the information listed here is definitive or accurate. The Loan Deficiency Payment (LDP) is one provision of the farm bill and is one type of payment for which a grower may be eligible (the other two being the direct fixed payment and the counter-cyclical payment). Here’s how it works: USDA maintains a program known as the marketing loan. If at the time of harvest a grower does not like current prices (presumably because they are too low), the grower can put cotton into the government loan, as most refer to it. The idea behind this action is that the grower will accept a cash payment, with the base grade set by law at 52.00 cents per pound. There are some premiums if cotton is better than base grade, and likewise, discounts if the cotton is below base grade. Regardless, the grower can place cotton into the loan. Later, when the grower or his co-op sells the cotton, the cotton will be redeemed from the loan, and it can be redeemed either by repaying the loan, or, more commonly, by withdrawing the cotton and repaying the loan at what is known as the Adjusted World Price (AWP). A quick word about the AWP: this is compiled from a figure calculated by a British company, Cotlook, which publishes a daily and weekly look at cotton price quotations from all over the world, adjusting and comparing prices from various origins for delivery at a given place and date. This is known as the Cotlook A Index. It is used in the beginning process of calculating the AWP. (There’s more info at the bottom of this page on the A Index.) According to Cotlook, the AWP “is calculated from CIF (cotton, insurance and freight)
“The Shipping Differential is derived from the average over the preceding 52 weeks, or as many of that number of weeks for which quotations are available, of the difference, calculated from Thursday’s values only, between the average of the Memphis and California/Arizona CIF North Europe quotations, and the Middling 1-3/32" (31-35) domestic spot market average. “However, the Shipping Differential in any week may not fall below 85 percent, or rise above 115 percent, of an assessed actual transportation cost (now 13.01 cents) . A further discount, the Coarse Count Adjustment, is applied by reference to the amount by which the World Quality Difference exceeds the appropriate Loan Quality Difference. It applies to cotton of any grade stapling 1-1/32" or shorter, and to selected lower grades in longer staples.” Clear? Anyway, the AWP is compared to the basic loan, and the grower may keep the difference between the loan proceeds (52.00 cents) and the AWP. Let’s say the AWP at the time of redemption is 40 cents. So the grower may keep the 12 cents difference, and add that to his or her final selling price. USDA also allows growers to forego the loan by accepting that difference, if they so choose. This is known as a marketing loan gain (MLG), but its value would be the same as the LDP at the time of redemption. The farm bill does set a limit on LDP and MLG amounts of $75,000 per grower for the first entity and $37,500 for each of the next two entities. So, a farm structured according to the three-entity rule is eligible for payments up to $150,000. Which seems like a lot, but really isn’t. Say a grower can claim a ten-cent per pound LDP. That means 1.5 million pounds are eligible. At 500 pounds per bale, that’s 3,000 bales, which in the
The LDP will rise and fall each week, if the AWP rises or falls—which it usually does. That’s why we list the current week, the previous week and the calculation for the following week. Prices change every Thursday when the secretary of agriculture calculates the AWP for the week. As of August 1, 2006, due to a WTO ruling, cotton's Step 2 program of export competitiveness certificates ended. We're including this information here for historical purposes; however, please note, Step 2 no longer is operative. Step 2 was the middle part of the farm bill’s three-step competitiveness provisions. These were payments made to domestic users and exporters of raw Here’s how it worksed: The secretary of agriculture calculated the AWP for the week. First, or STEP 1, the secretary could amend the value of the AWP if it fell below 115 percent of the Basic Loan (52.00, or 59.80 cents), by the amount the weekly average of the cheapest US CIF North Europe quotation exceeded the weekly average of the A (NE) Index. Next, the Secretary could authorize STEP 2 certificates for the week, which could be triggered ONLY if the weekly average of the cheapest US CIF North Europe quotation exceeded the Step 2 was equal to the difference prevailing on the date the cotton was opened in the mill, or on the date of bill of lading for exports, and could be made in cash or, to an equivalent value, in the form of a generic marketing certificate, which could be used to procure government-owned commodities. However, even if it seemed the formula might be triggered due to the relationship of prices, payments could be suspended under Step 2 if the AWP exceeded 134 percent of the basic Loan (or 69.68 cents). In other words, if prices were high enough, there was no need for them. A World Trade Organization panel ruled the U.S.'s Step 2 program was trade-distorting, despite substantial evidence to the contrary. The ruling required the U.S. cease the Upland program as of July 31, 2006. There is also a STEP 3, which we don’t list here. Step 3 provides for the opening of a special import quota equal to one week’s estimated domestic
It's unclear how Step 1 and Step 3 will work in the absence of Step 2. The last information listed here is for Extra Long Staple cotton, which has only minor provisions in the farm bill. There is a marketing loan program but essentially ELS is not considered a program crop. There are, however, export competitiveness certificates for ELS cotton. Some in the trade call them “Step 2,” but that is inaccurate. It is similar but different. It is also calculated using Cotlook quotes, but due to the specialized nature of ELS marketing, it’s much simpler. It is still the ratio between U.S. prices and world prices. There’s probably more information here than you ever wanted to know, but…just for the record, the Cotlook A Index was first calculated in 1966. The basis of the calculation has changed over the years with regard to quality and location. As from August 1, 2004, the Cotlook A Index represents C/F Far Eastern values and in referring to historical data Cotlook will treat C/F Far Eastern values as being the basis of the A Index with effect from March 2003. The quality description of the Cotlook A Index is Middling 1-3/32”. The quotations are compiled and published daily, and the Dual Index System applies for reflecting nearby and distant offering rates. The Index is the average of the cheapest five of the eligible growths (currently 19) listed in the category ‘medium grades.’ However, only two African Franc Zone quotations are permissible Index constituents on any day. Four growths are currently listed, namely Ivory Coast,
For more info on Cotlook and its terrific publication, Cotton Outlook, it’s at http://www.cotlook.com. |