Georgia Cotton September 12, 2000

E-Note
 

It has been another difficult season for Georgia cotton producers. There are areas of good to excellent yield around the state, but in general yields will be below average. Prices are better than last season but again, cost of production per pound of lint will be high for many producers due to low yields. So profit margins will be tight.
 

As harvest time approaches, cotton producers are advised to keep a close watch on the Loan Deficiency Payment (LDP) situation. The LDP or POP amount is not going to be anywhere near the 15-20 cent level enjoyed by most producers last year and there is a likelihood that the POP could even be zero. So we certainly don't want to lose what little amount there might be.
 

To understand the situation, let's first of all review that the LDP or POP is derived from the A-Index or "world price" of cotton. It doesn't depend on US prices. So we can't automatically assume that if US prices get weaker that the LDP will increase to compensate for it. Below is a table showing the current LDP calculation and amount.
 

The grade and location adjustment is fixed or fairly constant during the season. The loan rate is also fixed. So the LDP or POP is strictly dependent on the world price or A-Index. If the A-Index increases, the LDP decreases. If the A-Index decreases, the LDP increases.
 

The world price or A-Index has a tendency to move up or down in response to the world supply/demand situation. Compared to last season, the A-Index has increased from around 46 cents per pound to now about 62 cents per pound. For the 2000 crop marketing year world demand is expected to grow 2% from last year and up 9% from two years ago. Production is expected to decline and stocks (inventory) is expected to be the lowest since 1995/96. The graph below illustrates that the A-Index or world price has increased approximately 5 cents per pound since the first week in July. If the weekly average A-Index reaches 65.75 cents per pound, there will be no POP or LDP. 
 

The graph does show some potential good news, however. It shows that US prices (December cotton futures in this example) and the A-Index tend to move together. So if the world price increases (and the POP decreases) US prices may also increase to help offset the decline in the POP or LDP. Likewise, if the A-Index declines (and US prices also decline) the POP would increase to help offset lower US prices.
 

As harvest time rapidly approaches, the movement of the A-Index may be reason for some concern. It appears that US prices tend to be more sensitive (rise and fall in response to changing supply/demand conditions) than the A-Index. Should the 2000 US crop come in larger than expected, US prices could decrease without an equal and corresponding increase in the LDP. Also, even with a short US crop, US prices have already increased in anticipation of a smaller crop so we have to be alert to the possibility that US prices may stabilize or flatten out into harvest time and the A-Index could continue to creep upward.
 

The LDP has declined each week since the beginning of August as the world price of cotton (A-Index) has steadily increased. It is likely that the A-Index will continue to increase in response to tightening world supply/demand conditions. The LDP or POP has decreased from about 6 cents per pound in early August to 4.01 cents currently. The POP is expected to drop to about 3.55 cents per pound for the upcoming week of September 15-21. 
 

Should the POP continue to decline, it may pose difficult harvest and marketing decisions for some growers. Due to stress and the earliness of some cotton and the normal overlap with peanut harvest, growers may not pick cotton even when ready. Still others may delay harvest hoping for a few more bolls to mature and open.
 

Should the A-Index continue to decline, delay in harvest will result in less and less POP. So growers should monitor the A-Index very closely. The possible benefits from delay in harvest will have to be weighed against lower price received. If the A-Index should stabilize or decrease, the benefits from a higher LDP or POP will have to be weighed against the possible disadvantages of delayed harvest.
 

Growers are also reminded that the POP can be applied for once the cotton is in the trailer or module. They do not have to wait until ginning or after ginning and classing. The POP can be applied for by trailer and/or module number. After ginning, the POP available on the date of application will be applied to the bales from those trailers or modules based on gin records. If the A-Index is increasing, applying for the POP or LDP when the cotton is in the trailer/module will save time and result in a larger POP. If the A-Index is declining, delaying the POP would be best provided that "beneficial interest" is maintained.