Next spring, producers may want to ponder their planting decisions a little more than normal. With a new farm bill in place, marketers are saying some new trends may be headed the Delta's way.
“Our thinking is this spring will be very interesting when farmers are deciding exactly what to plant. In the past, when we had the target price — the old deficiency payment — farmers had to plant the crop to participate. Well, that's not the case this time around,” says Steve Scott, head of Scott and Associates, a Little Rock, Ark.-based agriculture marketing service.
As a result, what's going to get keen attention is whether or not there will be a dramatic reduction in cotton acreage. Any such reduction, says Scott, is contingent on prices staying the same as they are now. Currently, however, there's no indication prices will move much.
Scott says the farm program suggests a farmer deciding what to plant should consider whether or not he can make money at loan levels and what the alternatives are.
“In other words, a cotton farmer may have a large cotton base and may be in line to receive a substantial counter-cyclical/direct payment from the government. But none of that should enter into his decision to plant cotton.”
Scott describes the situation to his clients as playing two games every season. There will be a soccer game going on in one field and a baseball game in the other.
The soccer game is analogous to “what crops will you plant and can you market those crops profitably? All you've got going for you on that field is loan levels, cost of production and straightforward marketing analysis.”
But over on the baseball diamond, the analogy is to a “counter-cyclical game. All of this will play out and will have nothing to do with what a particular farmer plants in the spring. If he has cotton base, he can plant nothing and still be in the counter-cyclical game.”
That frees the producer up to decide what crop he can make the most money on. What crop offers the most opportunity to lock in a profit? Or, if prices are down, what loan level offers the most protection?
These are very different considerations from the past. Several months ago, producers were looking at 2003 corn prices trading at around $2.65 or $2.70. December 2003 cotton prices, meanwhile, were trading at loan.
Scott says if those numbers hold at planting time, a farmer needs to crunch the digits and ask questions: How does $2.70 corn compare with 53-cent cotton? What does it cost me to raise cotton? What does it cost to raise corn? What does that 53 cents mean to my profit level? On and on it goes.
“Right now, $2.70 corn compares much better than 53 cent cotton. If you make two bales-plus cotton, you can do fine at loan. But if your cotton yield turns out to be average or below average, that's another story — you might lose money.
“The point is there's going to be some straightforward marketing decisions to make when planting. Right now, there would be a strong incentive for farmers in our area to cut way back on cotton and go with corn or milo. That's where the markets are pulling farmers.”
And landlords may become players in all this, says Scott. Landlords may make more money if producers on their land plant cotton. As a result, they may insist that farmers plant cotton, “because these landlords may own a gin, may have a warehouse, may have an infrastructure to keep alive. In that instance, a farmer may not be given a choice.”
But a farmer may know that if he plants cotton, there's a good chance he'll lose money. On the other hand, he knows he can make money planting something else.
“We'll see negotiations going on between landlords and renters. Both sides will need to view this in a different way, in a new light. We may start seeing some different types of rental agreements that allow farmers to plant the crops that best allow them to make money. It may take a season for that to shape up — I doubt very many have figured this whole thing out yet — but there's no doubt the market forces will be dictating that this happen.”
Producers have faced low cotton prices for a good while, but it hasn't impacted acres much. The Delta is still planting large cotton crops. Now, says Scott, there's a definite marketing reason not to do that. If things fall into place, “this could help alleviate low cotton prices.”
And the trend has been to go to more corn and milo anyway. It makes sense that even more corn and milo will be planted — especially in cotton fields. Producers know that if they follow corn with cotton, there's often a big boost in yield.
“We think, from a marketing standpoint, being flexible is the key. Where producers will really come out smelling like roses — and I think it could happen often — is when they collect the full counter-cyclical payment (which in the case of cotton is nearly 14 cents per pound) and also end up making money on the crop/crops they plant. I guarantee that producers who sold corn at $2.70 have a chance of making good money. With that scenario, farmers can hit a home run even without an explosive market.”
Are Scott's clients already aware of this or is he an educator?
“I've found that some producers are still under the impression that if they've got a cotton base, they must plant cotton. That's ingrained in the collective producer mindset. I'm not sure all this is generally understood.
“It may be this coming planting season — when farmers see their neighbors doing some different things — before it comes to full understanding. I think by the spring of 2004, everyone will understand what the new farm bill allows.”
Meanwhile, many of the government programs are still in flux. “They always are. Quite frankly, I'll be amazed if (the current farm bill structure) stays in play for its six-year life. The government can change it in a heartbeat. But while it's on the table, farmers can really make some headway.”
There are things a farmer can do to protect his counter-cyclical payment, says Scott.
“If you're sitting on a big cotton base, given the chance, you're going to want to protect it. The worst thing that can happen is cotton prices are low early, you don't plant cotton, then the market turns around late in the season, and you lose your counter-cyclical payment. Farmers must pay attention to that, and there are marketing strategies available to buy protection to maintain part if not all of that payment.”
Editor's note: For more information on Scott and Associates, visit www.scottagri.com.