R.I.P. – The Loan Chart

By Kelli Merritt
By Kelli Merritt

The Loan Chart has taken a fatal blow. After more than half a century of existence, it simply didn’t have the capacity to adjust to the shifts we saw in this past year. Specifically, there has been no way to account for cotton staple longer than 36. Until recently, no one had the capability to grow the type of crop that the fashion industry demands today.

This is a chance to position the best of our crop…”

At times in 2014, the mills stepped up and offered 10 to 12 cents more for machine-harvested premium cotton. Not because they were altruistic, but because they had a pressing demand for premium cotton and a dramatic shortage of supply. This trend will continue – especially this year. USDA is predicting 22 percent less Pima planted in the United States, mainly due to the California drought. With some spinners forced to substitute long staple upland for Pima, machine-harvested premium Upland will take on a level of relevance never seen before.

What’s next? Cotton will most likely adopt the two-tiered system other commodity markets have used for years. In the fruits and vegetables market, top quality produce is sold at a premium to a single buyer and second quality to a discounter – a second buyer. For example, years ago when I grew watermelons, I received one price for near perfect melons, and another for very good melons – from one buyer. Then, I received a third price for misshapen, scratched or otherwise lesser melons of the same crop from a different buyer – a discounter. I was rewarded for the extra care and protection of the fruit. Same crop. Different prices. Different buyers. The more melons I could sell to the first buyer, the better my year.

Make no mistake about it. Merchants have been doing this with our cotton for years. They separate and sell off portions of the same crop and broker it at different rates. It costs them something. They have to warehouse the cotton, separate the bales by quality, carefully cultivate relationships with mills and select the buyers that value quality. However, as the difference in price between low and high quality increases, this practice might be something more producers can transition into doing for themselves with more of a direct-tomill sales link. Like all paradigm shifts, it will require adjustments.

The first step in this direction is an unwavering commitment to quality. This leap begins with careful strategic planning for capital investments. Seed selection, fertility, plant growth regulators, harvest aids and precise timing of all inputs make a difference. Knowing the right people is the intermediate step for the transition to a two-tiered marketing system. And finally, protecting the risks we take today will ensure our future success. This begins with hedging, which is especially important this year. It will be critical to short the market in the next few weeks because futures prices usually peak in March or June. Last year, many producers bought puts at 80 cents and sold them at 60. That is 20 cents per pound added to their bottom line.

I went back to the last five years and analyzed if I would have made money with or without a hedge placed in the spring or early summer. Four out of the last five years, it has been beneficial. The only year I would have made more money without a hedge is 2010, and that year was an anomaly that could not have been predicted under any circumstance. Hedging is not a sure thing, but for many of us, it means the difference between making a profit and not making a profit.

The loan chart may not be completely dead, but it’s reeling from a mortal blow. Out of the ashes of its antiquated domination come new opportunities for farmers.

This is a chance to position the best of our crop to be sold to mills hungry for quality and willing to pay a premium. Let’s be forward thinking enough to be ready to take advantage of this shift.

– Kelli Merritt, Lamesa, Texas merrittkelli@gmail.com

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