Until there is an economic downturn in a major cotton-producing country — which forces it to cutback its subsidy programs and discourage producers from planting — world and U.S. cotton prices could remain in a depressed state.
That's an assessment of the cotton market from Mark Lange, National Cotton Council vice president, policy analysis and program coordination. Lange spoke during a recent meeting of the Mid-South chapter of the National Agri-Marketing Association, in Memphis, Tenn.
“Cotton harvest is in full swing and cotton prices are exactly one-half of what they were year ago today,” Lange said. “Last year at this time, cotton traded on the December contract for 62 cents a pound. Today, it's trading at 31 cents. Absolutely incredible. There were people who thought that the market may weaken in the spring, but nobody thought we would see a horribly depressed market.”
As usual, large supplies in the United States and around the world are the major factor behind the declining prices. To whittle down our domestic supply, the United States needs to export a huge volume of cotton — about 9 million bales per marketing year, according to Lange.
“We can export 7.5 million bales simply because the United States is a supermarket of sorts for mill buyers around the world,” Lange said. “We have all kinds of qualities of cottons, from high quality to low quality. People can buy what they want and get it in a timely manner.”
So how do we find markets for the remaining 1.5 million bales? “You kick somebody in the teeth, and you beat them on price,” the economist said. “That's what this market is starting to try and do. The spread between the U.S. quote and the A Index is getting narrower and narrower.”
Lange noted that further declines in price could be forthcoming. For now, farmers have a safety net in the marketing loan rate. But will this be the case after the next farm bill?
Lange noted that the proposed House farm bill “continues decoupled (AMTA) payments and maintains the marketing loan and Step 2 program. There is also a counter-cyclical program based on price, addressing the problems of the last four years, when Congress had to step in with additional payments to help farmers.”
The counter-cyclical program pays the cotton producer 15 cents per pound on his entire base when prices are low, noted Lange. “If the cash price is below the loan rate, the farmer gets the difference between the loan plus the decoupled payment (about 59 cents) and 73.6 cents.
One criticism of the House bill is that it is too well-funded, spending $73.5 billion above the baseline over the next 10 years.
But Lange believes that fear that proposed bill would continue to contribute to over-production is lessened somewhat by the fact is that growers don't have to plant cotton to be eligible for the counter-cyclical payment.
“Obviously, there's going to be a risk with not planting,” Lange said. “If enough growers don't plant, the price is going to rise and you won't see much of a counter-cyclical payment.
The House proposal appears on opposite ends of the spectrum from a Senate concept paper unveiled Oct. 17 by Sen. Richard Lugar, R-Ind., that would phase out marketing loan programs over five years and replace them with farm revenue insurance programs, which would require a premium to be paid by the farmer.
“What you're going to insure is the market revenue of the farm on a five-year average,” Lange said. “You would multiply your production times the price to get this base revenue for your farm.
“But picture where we've been for the last three years, at the lowest prices for commodities for 30 years. It's not a farm safety net. It's a tightrope over the asphalt. Furthermore, you only get to insure up to 80 percent of the average revenue for the past five years.”
In spite of this summer's resolution authorizing $73.5 billion over 10 years, the Senate concept would support spending of only $25 billion over the baseline, Lange added.
Meanwhile, the Bush administration hasn't sent a clear signal of which direction it wants to go with a farm bill, only that it wants to delay debate until spring. But one thing is for sure. The current $73.5 billion allocated for farm programs is in jeopardy if Congress waits that long.
“In February, we will face a budget reconciliation program in Congress. If nothing is in place, the current $73.5 billion over 10 years could end up closer to $25 billion, because of (the weakening) economy and spending priorities on the war on terrorism.
There is still uncertainty over how the last year (2002) of the current farm bill would figure into a new farm bill signed into law this coming spring.
The FAIR Act allocated $4 billion in AMTA payments to growers in 2002. For cotton producers, the subsidy comes out to around 5.7 cents per pound.
“Obviously, they could come in and say that in a new farm bill, no one gets less than that,” Lange said. “But there have been a lot of questions. And there could be a real problem if you tried to do broad, sweeping changes.”
For example, growers armed with production flexibility contracts from the FAIR Act may even consider not signing up with a new program. That may be on the minds of those in Congress who want to delay action on a farm bill until 2003.
Also, when Congress allocated $73.5 billion for a new farm bill early this summer, it allocated $7.35 billion in supplemental assistance specifically for 2002. What happened to it?
“Right now, we don't have a vehicle to lock that $7.35 billion up,” Lange said. “But part of the problem is that nobody wants to lock it up while you're talking about a new farm bill. We may have to wait and see if the new farm bill arrives. If not, then we try to get the $7.35 billion.