Last week was not a good one for program crops including cotton.
Effective Oct. 1, all 2013 program crops placed in marketing loan on or after that date will have a 5.1 percent reduction in loan proceeds.
The loan rate base of 52 cents per pound in the case of cotton is not changed, because this is set by previous statute and cannot be changed, but the resulting loan amount is to be reduced by 5.1percent due to automatic spending cuts (Sequestration) required by the Budget Control Act of 2011 (delayed by the American Taxpayer Relief Act of 2012).
If cotton is placed (stored) under loan, the grower then has two options:
• Redeem/pay the loan (plus interest and storage) and sell the cotton.
• In addition to the loan amount receive an “equity payment” from a merchant/buyer and the merchant will continue to carry the cotton in storage and later repay the loan and charges. Prior to harvest, the grower may instead enter into an “equity option contract” with the merchant/buyer whereby the equity may already be determined and the grower receive the loan plus equity upon harvest and delivery of the cotton.
Unlike the Mid-South, most individual growers in the Southeast do not typically use the loan as a marketing tool as just described. Marketing associations, however, are heavy users of the loan and these associations handle a large amount of cotton in both the Southeast and Mid-South.
When prices are sufficiently above the loan rate, there will be no Loan Deficiency Payment (LDP) or Marketing Loan Gain (MLG). For most growers, the loan is simply a cash-flow and marketing tool. It is a way to provide much needed cash-flow (the loan amount) soon after harvest with the remainder (equity) to be determined later.
Will reduce cash-flow