Farmers need to keep better records and bone up on the farm bill as they develop marketing plans for any 2002 cotton they have left and for the 2003 crop, says Jackie Smith, Texas Extension economist at Lubbock.
Smith, pinch-hitting for Carl Anderson, who was snowed out of Lubbock, addressed the annual Southwest Crops Production Conference and Expo recently.
“Farmers have to understand the government payment program,” Smith said. He plugged an Extension cotton marketing workshop, scheduled for April 10 and 11, as a good place to hone marketing skills.
Analysts expect government payments to decline for the 2003-2004 crop-year as world market prices, the “A” Index, improves. World supply will be off and consumption will increase.
Potential for better than 65-cent-per-pound cotton exists, Smith said. “The world stocks-to-use ratio usually must move below 40 percent before an upturn,” he said. It’s there.
“U.S. stocks-to-use ratio has been bouncing around a bit and needs to drop below 20 percent before prices rise. The combination of a 40 percent world stocks-to-use ratio and a 20 percent ratio for U.S. cotton, could mean 60-cent cotton,” he said.
But as that world price moves upward, the loan deficiency payment gradually declines.
“The counter cyclical payment could disappear,” Smith said.
Smith said Anderson projects that “farmers would need to sell all their cotton for 71 cents a pound before the counter cyclical payment would disappear.” That’s not likely, the economist said.
“As farmers sign up for government programs, they need to understand the effect their decisions will have on marketing,” Smith said. To receive the loan deficiency payment and the market loan guarantee, farmers must produce the crop. They do not have to plant to receive the counter cyclical payment.
“But each grower should analyze his own operation to determine the best balance. The CCP is designed as a safety net. The LDP program was designed to get farmer prices up to the loan,” Smith said.
He said opportunities exist. New York December futures, for instance, have been trading at around 60 cents “and should go higher, 65 cents to 66 cents. So farmers have to make decisions.”
He said options could be part of the formula. In October, farmers could have paid 1.76 cents for a 58-cent call option with a December 2003 settlement price at 51.80 cents. Price for a 58-cent call jumped to 3.30 cents by Dec. 31, with a December 2003 settlement price at 57.50 cents. By Feb. 3, 2003, the cost of that 58-cent call was 4.33 cents, and the December 2003 settlement price was 59.48 cents.
Smith emphasized that producers must know what alternatives they have and what they can afford to accept from the market.
“Factors to consider include: the market trend is up; the U.S. market is export dependent, and the United States has lower carryover numbers.”
He also said by planting time some 2 million acres in the United States will be “swing acres. They can go into cotton or something else. Concern about CCP may encourage farmers to plant more acreage. “They may plant more to hedge that CCP,” Smith said. “But we recommend they be cautious about planting marginal acreage in cotton.”