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Changes in Loan Rules Could be Costly for Producers

By CassiDe Street

Cotton BalesCotton producers across the country are about to see a change in the CCC loan program. Beginning with the 2006 crop, producers and marketing pools could possibly owe compression charges if the cotton they placed in the CCC loan ends up forfeiting.

“According to USDA, producers and pools that place cotton in the loan but fail to sell the cotton will be liable for those charges,” says Dean Church, PCCA’s vice president of grower services.

“The sale of equities does not necessarily relieve the producer of the obligation, according to USDA’s interpretation of the rules,” Church adds. “Under some agreements, such as the PCCA Deferred Sales Option Agreement, the buyer agrees to pay all charges associated with forfeiture, therefore, relieving the producer of the obligation. However an equity sold via the CCC-605 still obligates the producer for all forfeiture charges.”

Prior to the 2006 crop year, producers only had to pay receiving and storage charges accrued prior to the date of loan entry on cotton that forfeited. Now, however, they will have to pay the compression charge that can range from $9 to $10 per bale if the cotton is forfeited.

For the 2005 crop, 50,313 bales have been forfeited in Kansas, Oklahoma and Texas. This number could increase since not all of the 2005 crop has been sold, and current cotton prices could lead to increased forfeiture of 2006-crop cotton.

“If prices and equities remain low, the potential for forfeiture can increase,” says Charley Triplett, PCCA’s manager of grower services. “Conversely, if the equity goes up, farmers price expectations can increase to an unachievable price.” Grady Martin, PCCA’s director of sales, says forfeitures can affect marketing pools as well as individual producers.

“PCCA management and Plains Cotton Growers are working to educate USDA administrators as to the effects of their decision,” Martin says. Steve Verett, executive vice president of Plains Cotton Growers, says they are working specifically with USDA’s Farm Service Agency (FSA) personnel.

“We are making a case to FSA to go back to the original way the loan program was administered,” Verett explains. “Hopefully, the compression charge will follow the bale.

Meanwhile, PCCA’s marketing staff is working hard to avoid loan forfeitures by increasing sales into the export market as well as to domestic textile mills and merchant customers. PCCA President and CEO Wally Darneille, Lonnie Winters, vice president of marketing, and Carlos Garcia, export sales manager, recently attended the Sourcing USA Summit in Arizona that also was attended by hundreds of cotton buyers from around the world.

“It was a cost-effective way to meet face-to-face with current and potential customers for our members cotton,” Winters says. “We made some sales during the Summit and set the stage for additional sales.” Martin said PCCA tries to avoid forfeiting cotton, but members can also help out.

“The best advice I have for non-pool farmers is to offer their cotton for sale near the actual market value for the cotton,” Martin says, “and they must be willing to accept a reasonable counter-offer.”