July 26, 2001

Cotton Producers Can Expect Sizable POP This Fall

Don Shurley
Professor/Economist- Cotton
University of Georgia


The 2001 US crop is likely to be 19 to 20 million bales. USDA's July forecast was 19.2 million bales. While there are many unknowns, it will be difficult to pull out of the current weakness in the market. One factor that producers have relied on in recent years to augment low cash prices has been the Loan Deficiency Payment (LDP) or POP.

The POP is derived from the A-Index or "world price" of cotton as shown in the table below. When the A-Index goes down, the AWP declines and producers will be eligible for a POP payment if the AWP is less than the loan rate.

This past year, the A-Index was strong during harvest time and the POP reached a maximum of about 4 cents. After harvest, the "A" begin to decline as did US prices as world production was larger than expected and demand began to slip. This resulted in producers getting a large marketing loan gain if cotton was stored in CCC loan or a POP of 15-20 cents or more if producers declined the POP at harvest and held the cotton in regular storage.

One thing that has happened in the past 2 years is that the A-NY relationship has gone from what typically was a minus 3 to 5 cents to a plus 3 cents or more. This is because US cotton prices have weakened more relative to foreign prices. The result is that even though US prices are low, we're not likely to get as much POP to help us out as we have in the past.
 
 

Example of US and World Price Relationship and Calculation of POP Payment



 

Futures and Cash
A-Index - NY Relationship
AWP and LDP (POP)
Futures (Dec) 7/25/01 40.90
+3.25
 A-Index 7/26/01 44.15
Basis 7/25/01 -4.15 Adjustment 13.64
Current Cash Position 36.75 AWP 30.51
POP (51.92-AWP) 21.41
Total Price
58.16

With world production and stocks increasing, the A-Index is currently at about 44 cents and may go even lower. Currently, if the "A" stays were it is, we're looking at a 21 cent POP this fall. With futures prices in the low 40's, this translates into something in the upper 30's for a cash market. So, if the A-NY relationship stays the same as it is now, producers are looking at a total of around 60 cents this fall one way or the other.

It is likely this year will be the opposite of last. The "A" will probably increase over the winter months. This means, the temptation will be to take the large POP this fall. Then, the MAJOR decision becomes what to do with the cotton. According to the latest data, only 4% of the Georgia crop and 5% US is contracted. Profitable opportunities have been almost non-existent.
 
 

Estimated Acreage Equivalent of Cotton Forward Contracted as of July 1


2000 Crop 2001 Crop
Georgia 22% 4%
Southeast 19% 6%
US 9% 5%
Source: USDA-AMS

The alternatives available include POP and sell, POP and store, POP and place "on-call" or price later, POP and sell plus Call Option, or place in Loan. At 21 cents per pound, the $75,000 limit on LDP's (POP's) and marketing loan gains will be reached at approximately 715 bales.

With cotton prices so low, it is natural for producers to consider spending as little as possible or nothing on late season inputs. Every input should always be evaluated in good years as well as bad. But cost savings must be weighed against potential yield and quality losses and remember to base this decision on 58 to 60-cent cotton and not 40.

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