Shurley on Cotton: A Wild Week for the Market

    Cotton prices (Dec14 futures) are currently threatening to return to the levels we saw a month ago. Since the low back on February 3rd, prices rallied and peaked back over 78 cents on February 11. Prices moved sideways for a while in a band between 77 ½ and 78 ½.

    Dec14 closed back over 78 cents on Monday but we have since had 3 consecutive wild days this week. Prices closed at 76.77 on Wednesday (down 74 points) then back up to 77.78 yesterday (up 101 points) yesterday. Today, Dec14 is currently around 77 ½.

    The rally (recovery) was impressive and gave us hope of even better things to come. This week puts a bit of cautiousness in that optimism. The only newsworthy items that could possibly have triggered this week’s decline were: (1) reports that China may lower its selling price in order to attempt to move its stocks to mills and (2) profit-taking by folks that got in at the bottom close to 76.

    I have advocated and still think that most growers are waiting for an opportunity to lock in 80 cents. This week’s decline and volatility, admittedly, seems to make that strategy a bit more risky. Contract basis has been very good. If you’re concerned about the risk and if it helps you sleep at night, you could consider taking advantage of the good basis and lock in a small percentage of expected 2014 production on advances back to the 78 to 79-cent area.

    Cotton and the Farm Bill. The following are a few items and analysis specific to cotton in the new farm bill–but some of these have major implications for other crops as well. Producers and landowners have major decisions ahead.

    • Loan Rate. The marketing loan rate for upland cotton will be allowed to vary between 45 and 52 cents/lb. The loan rate will be the 2-year average Adjusted World Price (AWP) for the previous 2 crop years but not less than 45 cents and not more than 52 cents. The loan rate must be announced by October 1 of the year before planting the next crop. For the 2013 crop, the marketing year does not end until July 31, 2014. So for 2014, the loan rate will be the average AWP for the 2011 and 2012 crop years. The 2014 loan rate will be 52 cents.
    • STAX and SCO. Direct and Countercyclical Payments are eliminated. The new “income safety net” for cotton will be STAX (Stacked Income Protection Plan). This will be a county or area-based revenue insurance plan that will cover losses between 10% (90% coverage) and 30% (70% coverage) of expected county revenue. STAX will cover “shallow losses” and supplement the farms existing yield or revenue policy. STAX coverage cannot overlap the coverage level of any other policy. STAX may be purchased and supplement other crop insurance on the farm or producers may purchase STAX alone. SCO (Supplemental Coverage Option) is a similar policy that covers from 86% down to the level of any other policy. With SCO, an underlying policy is required. Cotton producers can select STAX or SCO but cannot have STAX and SCO on the same acres. STAX and SCO will not be available until the 2015 crop year so producers just make their normal/typical crop insurance decisions for 2014.
    • Transition Assistance. Cotton is separate and apart from all other crops (“covered commodities” such as corn, soybeans, wheat, peanuts, etc.) in this new farm bill. All covered commodities are eligible for PLC (Price Loss Coverage) or ARC (Agricultural Risk Coverage). Cotton has STAX and not eligible for PLC or ARC and STAX will not be available until 2015. So upland cotton will receive a “transition assistance payment” for 2014 of 9 cents per pound on 60% the farms cotton base as of September 30, 2013 (or 5.4 cents on total cotton base). This payment will be received on the farms 2012 Direct Payment (DP) yield for cotton. This payment is made on the farms cotton base under the previous farm bill–it does not matter and is not effected by any decisions subsequently made with regard to base updating, generic base, or other crops planted on generic base. If STAX is not implemented for 2015, the transition payment will continue for the 2015 crop year but at only 36.5% of “old cotton base”. The payment limit on transition assistance payments is a separate $40,000 per person or legal entity.
    • Generic Base. The cotton base on a farm as of September 30, 2013 will now, for the purpose of this farm bill, become known as “generic base”. This generic base will be “retained” for the life of the bill–it cannot be increased or decreased. But “covered commodities” can be planted on generic base and those acres will be eligible for PLC and/or ARC payments (treated as if they were base acres of the covered commodity).
    • Base Update/Reallocation. At the election of the landowner, all other base acres on a farm (“non-generic base”) can be updated. If choosing to do so, the updated base will be the average acres planted from 2009-2012 (including any zero years). The total base on a farm cannot be increased. So, if the average acres planted to all covered commodities (excluding cotton) exceeds the total bases available (excluding generic base), then the average acres planted to each covered commodity will be reduced proportionately such that the total updated base is no more than the initial total amount of base.
    • Payment Yield Update. At the election of the landowner, on a crop by crop, farm by farm basis, the yield that would otherwise be used for making PLC payments may be updated. This updated yield will be 90% of the average yield per planted acre for 2008-2012, excluding any years in which the covered commodity was not planted. The farm bill language does not seem to specify any “plug” that would be used in the years not planted.


    • There are still unknowns and uncertainties about the new farm bill. The above is my interpretation of the language and subject to error and change. Most of the questions we have been getting concern base updating and use of generic base:
    • Cotton base cannot be increased. It cannot be decreased. The cotton base you have now stays. It is retained. If a farm has no cotton base now, it will not get any under this new bill.
    • If a farm has mostly cotton base (now known as generic base) but has been planted to mostly corn and soybeans in recent years, you may still likely have very little if any base of these covered commodities. So, updating your bases would do you any good–you don’t have the “non-generic base” to work with. In this case, you’ll still be able to plant a covered commodity on generic base and be eligible for any PLC or ARC payments.
    • If a farm has no peanut base but planted peanuts in 2009-2012, that acreage history can be used to get peanut base (to update bases). If you have none or very little other covered commodities base to work with, you can still update and get peanut base if you wish but otherwise can plant peanuts on the generic base and be eligible for PLC or ARC payments, if any.

    There are still many uncertainties and until the FSA rules and regulations are written, these unknowns will remain.

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