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Keeping Cotton Competitive


By Larry McClendon
Marianna, Ark.

Selected cotton program provisions of the new farm law that became effective on October 31 will bring multiple benefits to the U.S. cotton industry.

How will the industry benefit?

Specifically, a new calculation of the adjusted world price (AWP) will make U.S. cotton available at competitive prices in domestic and international markets. The calculation applies to outstanding loans for 2007 and subsequent crops. This ensures that cotton loans, beginning with 2007 crop loans maturing at the end of October, can be redeemed at a competitive price. This change will return up to an additional $8 per bale to producers. Any loan deficiency payments, available to producers who choose to forego the loan, will be based on the new AWP calculation.

The new law also mandates that USDA makes storage credits available whenever the AWP is below the loan. To reduce program costs, though, the new law required that the maximum storage credit be reduced by 10 percent for the 2008-11 crops. The reduced storage rate will not apply to redemptions of 2007 crop cotton. Beginning with the 2008 crop, the reductions will apply to the maximum rate established by USDA in August 2006 and not individual warehouse rates – a step that helps significantly reduce any adverse financial impact on cotton producers and warehouses. Also included in the package is an economic assistance program for U.S. mills that consumes upland cotton. In addition, the rule extends the ELS cotton competitiveness program.

What other provisions will be implemented?

The USDA continues to develop rules and regulations related to the permanent disaster program (SURE), the Average Crop Revenue Election (ACRE) program, and, importantly – changes to payment limits and program eligibility. It is important to note that payment limitations and eligibility rules for 2008 crops are unchanged from 2007. The three-entity rule remains in effect as does the $75,000 per person limitation on total, cumulative loan deficiency payments (LDPs) and marketing loan gains (MLGs). This limit is cumulative for all loan-eligible commodities, except peanuts, which have a separate limit. The $40,000 per person limit on direct payments and the $65,000 per person limit on counter-cyclical payments also are in effect for 2008. The limits on direct and counter-cyclical payments also are cumulative for all crops except peanuts.

Because sizable marketing loan gains are possible, producers should consider the possibility of meeting their $75,000 per person limit on LDPs and MLGs because that can influence the way the 2008 crop is marketed. Assuming beneficial interest is maintained, a producer may put the remaining portion of the crop(s) under loan and redeem with certificates if the $75,000 limit is reached on LDPs. The marketing loan gain resulting from redemption of a loan commodity using commodity certificates does not count against a producer’s $75,000 limit on LDPs and MLGs. Producers are urged to consider their available options, understand the impact of the payment limit and consult with their Farm Service Agency office regarding their loan or LDP eligibility.

Larry McClendon is a Marianna, Ark., producer and ginner currently serving as chairman of the National Cotton Council of America. He and other NCC leaders contribute columns on this page.

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