USDA has issued new regulations aimed at solving the “wet cotton” problem, a situation cotton ginners are calling “a tempest in a teapot” and one that cotton merchants argue threatens the reputation of U.S. cotton in international markets.
The new regulations, which deal with the storage, handling and ginning requirement for cotton pledged as collateral for marketing assistance loans, define “wet cotton” as a bale that exceeds 7.5 percent moisture (wet basis) at any point in the bale when measured at the gin.
Bales may not surpass that 7.5 percent moisture level and be eligible for a marketing assistance loan, according to the regulations, which were part of a final rule issued by USDA on Aug. 30. The rule also establishes other new criteria for cotton gins and warehouses.
Cotton ginners say the problems with wet bales have been caused by a small number of gins that were either trying to add weight to bales surreptitiously or did not understand how to properly handle equipment that can add moisture to cotton to aid in the ginning process.
“What was thought to be a widespread problem turned out to be limited to two gins that processed only 66,000 bales out of the 23-million-bale-plus 2005 crop,” the Southern Cotton Ginners Association said in a resolution passed at its summer conference in Hot Springs, Ark.
Neither the SCGA nor the National Cotton Council has identified the two gins. But the two organizations established a Bale Moisture Task Force that prepared a number of recommendations on the moisture issue. Kenneth Hood, a former NCC chairman and longtime cotton ginner, chaired the committee.
Most of the task force recommendations and other points included in the National Cotton Council's comments on USDA's proposed rule were adopted, according to Council Chairman Allen Helms, a producer from Clarkedale, Ark.
“Many of the Council's recommendations on the transfer of loan cotton, outside storage and the calculation of a national storage credit rate were included in USDA's final rule,” said Helms. “The rule also includes NCC recommendations on a reporting system to determine compliance with the warehouse shipping standard.
“Obviously, there are some areas of concern that will require clarification and some action on the part of the industry to resolve, but on the whole, we believe this process worked very well. It is clear that USDA gave serious consideration to the industry's consensus positions offered in the NCC's comments.”
The industry recommendations concerning calculation of national storage rates were included in the rule, but CCC did not accept the recommendation supporting the right of warehouses to increase their tariff rates up to the maximum credit rate.
The rule also does not include the NCC's recommendations regarding high moisture bales; instead, CCC chose to establish the 7.5 percent maximum moisture level requirement for baled cotton at the gin. The rule also incorporates recognized industry standards concerning bale condition as part of CCC's bale eligibility requirements.
“It is unfortunate that USDA's rule did not fully implement NCC's policy recommendations,” said Hood. “We will monitor this issue in the months ahead and work to increase awareness in our industry to avoid future problems. It is critical that we maintain confidence in the quality of U.S. cotton.”
Cotton merchants say they had been receiving complaints about water-damaged bales for several years. Generally, mills complained that the cotton they had purchased was one to two grades lower than specified and they demanded compensation from the merchants that sold them.
In 2005, merchants encountered “some dramatic examples of the problem,” according to John Mitchell, vice president at Cargill Cotton in Memphis, Tenn. “Those included bales in the warehouse dripping water, caked and rotten. But the main problem is more in the middle ground, where the bale isn't ruined, but the cotton quality has been changed as a result of added water.”
Other changes in the USDA final rule include:
Outside storage — A warehouse in an area determined by the Commodity Credit Corp. to have inadequate storage capacity may request approval to store bales outside and must agree to meet special storage and insurance requirements. USDA will not provide storage credits during the time the cotton is stored outside.
The outside storage issue gained national prominence when warehouses on the Texas High Plains were unable to provide inside storage for the huge crops growers harvested in 2004 and 2005. Merchants again complained that bales left outside for several months lost quality.
Revised storage credit — CCC's maximum storage credit rate for the 2006 and subsequent crops of upland cotton is the lesser of the 2005-crop tariff rate for the warehouse or the maximum level established for the state where the cotton is stored. The uniform maximum storage credit rate is $4.37 per bale per month for Arizona and California. The rate is $2.66 per bale per month for all other cotton-producing states. Warehouse tariff rates remain unregulated by CCC and may exceed the credit provided by CCC.
New bale quality requirements — CCC revised cotton loan eligibility regulations with two new requirements to promote quality assurance by ginners and warehouses. To be eligible for loan, cotton must be in good condition and not wet. Wet cotton is defined by regulations as a bale that, at a gin, exceeds 7.5 percent moisture (wet basis) at any point in the bale.
Good condition is defined as a bale of cotton that, by comparison with the photographic standards of the Joint Cotton Industry Bale Packaging Committee, is determined to be Grade A or Grade B. If CCC determines that cotton loan collateral does not meet these new quality standards, the loans for such cotton will be subject to immediate repayment at principal plus interest.
Transfer to another approved warehouse — Producers may move loan cotton receipted by an Electronic Warehouse Receipt from an approved cotton warehouse to another approved cotton warehouse without canceling their loan or the initial warehouse receipts. A transfer may be requested using form CCC-699C if the warehouse operator of the receiving warehouse consents to the terms of the transfer. A producer's agent vested with this specific authority on CCC-605, Part G, can also request the transfer of loan cotton.
Liens — CCC provides loans for cotton that is unencumbered by liens or unpaid charges. Many cotton storage warehouses levy a “compression charge” per bale received into storage that is paid by the buyer of the cotton upon load-out and cancellation of the receipt. For 2006 and subsequent crop-year cotton, CCC will bill producers for any warehouse compression fees that are unpaid for forfeited cotton. The producer's responsibility for this and other unpaid charges levied by the warehouse is contained in the CCC-601 in Item 10d.
For more information on the final rule, a fact sheet can be found at http://www.fsa.usda.gov/pas/publications/facts/html/uplandcot06.htm.
Visit http://www.fsa.usda.gov/pas/publications/facts/html/elscot03.htm for details on MALs for producers of ELS cotton.