Tom Smith, president of Calcot Ltd. told Western Farm Press that while there is “certainly room for recovery” in the final months of this marketing year which ends Aug. 31, growers will “likely” be asked to make a repayment.
The exact amount will be announced at the cooperative’s annual meetings beginning Sept. 25.
“We are working with our banks right now on a repayment plan and we should have something in place in time for the series of meetings planned with growers in California and Arizona beginning the week of July 9,” Smith said.
It will be only the second time in the cooperative’s almost 75 years history that an advance repayment has been necessary. The last time was in 1968.
“Certainly growers are disappointed and rightfully so. These are tough times,” said Smith. “I am not sure where we stand in terms of average prices other growers outside Calcot received,” said Smith. “However, I know a lot of people outside of Calcot are also very disappointed.”
Thirteen consecutive down weeks on the futures market have driven prices well below market levels of last August when Calcot set its advance payment amounts.
The high value of the American dollar along with domestic mills fixing prices early when prices were 20 to 30 cents above current levels have been a “double whammy” for the domestic textile industry. And that has driven prices to unprecedented lows, according to Smith.
“We have never, ever had a bear market like this one,” Smith said.
“I am confident demand will exceed supply at some point…and it is long overdue.”
“When the advance payment decisions were made last Aug. 28, December and July futures contacts were in the 66 to 69 cent range,” said Mark Bagby, Calcot’s director of communications.
“Even during harvest-time when contract prices are historically low, December 2001 contracts were at 63 and July at 66 cents,” he said.
“We have seen a 30-cent drop in futures in less than a year,” said Bagby.
That drop did not go unnoticed by the financial community. The financial agency Finch downgraded Calcot’s commercial paper rating from F1 and F2 and the information was posted on the Internet.
“Naturally, this caused a great deal of anxiety and concern amount Calcot members…and rumors abound,” Calcot president Tom Smith wrote in a letter to the cooperative’s members where he provided “some facts about the financial viability of” Calcot and “to put to rest some of the rumors.”
“We believed our initial advances last fall were conservative at 63 cents for Acalas; 59 cents for California Uplands and 56 cents for Southern California/Arizona Upland cotton,” Smith said.
Smith points out, however, that the marketing season is not over. It ends Aug. 30 and market recovery before then would erase the problem, he added.
Bagby pointed out that the overadvance only affects seasonal pool cotton. Call pool growers make their own marketing decision, and Pima producers will not be affected because prices are good for Extra Long Staple cotton.
“We can count our blessing for Pima and the climate we have to support such good production in the San Joaquin Valley,” said Bagby. “Pima is a niche market cotton, but it is a very large niche for the San Joaquin Valley. Not only are prices good for Pima, but if we did not have the Pima acreage we do there would likely be even more upland to burden the market.”
Pima producers in the California seasonal pool were advanced 86 cents per pound and in Arizona it was 85 cents. The Commodity Credit Corporation loan rate for Pima is 82 cents.
By comparison, the CCC loan rate for upland is capped at about 52 cents.
“The strong dollar is killing 3 million bales of domestic consumption and adding to U.S. stocks,” said Bagby. Domestic textile mills are closing because of the flood of yarn and finished goods.
“The American dollar is a very good currency earner for foreign nations. This may be good for the American consumer buying clothes at Wal-Mart, but it is killing American agriculture and the domestic manufacturers of cotton,” said Bagby.
One of California’s biggest competitors is Australia where Bagby said a 43-cent New York futures contract is equivalent to 86 cents per pound for an Australian cotton producer.
“We are locked into a loss at 43 cents while Australian cotton growers are seeing a good profit…all because of the strong dollar,” said Bagby.
Eighty percent of the 1.3 million bales of California and Arizona cotton sold last year was exported, according to Bagby. Calcot sales last season totaled $567 million.
While the news is bad at Calcot, the Bakersfield, Calif. based cooperative may be in better shape to weather the storm than other U.S. cooperatives and marketers since it is strongly positioned in export markets.
Most of the cotton producing states from Texas east relies more heavily on domestic cotton sales than exports. As domestic markets falter, they will be forced to turn to the export market where Calcot is a consummate marketer.
“Twenty years ago we were probably 50/50 export and domestic sales,” said Bagby. “We are very well equipped to deal in the export market today. Unfortunately, as long as we have such a strong dollar, it is extremely painful to be in that market.”