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Making the Right Marketing Decision

By John Johnson

Marketing decisions became much more complex in September 2014 for producers who do not deliver their cotton to a marketing pool. That was when the adjusted world price (AWP) fell below the CCC base loan rate of 52 cents per pound for the first time since November 2009.

The AWP is calculated weekly by USDA based on CFR Far East quotations, adjusted to reflect quality differentials and an “average cost to market.” The quality adjustment is derived from the loan difference between Middling 1-3/32″ and Strict Low Middling 1-1/16″. The “average cost to market” is determined by using values provided to USDA by cotton shippers, and the department has fixed the cost at 16.39 cents until further notice. The AWP is announced each Thursday at 3:00 p.m. CDT, and becomes effective at midnight that night and is effective through the following Thursday.

When the AWP falls below the 52-cent loan rate, it creates a Marketing Loan Gain (MLG) or Loan Deficiency Payment (LDP). The initial MLG/LDP in September was 2.73 cents and grew to 5.88 cents the week of Nov. 24. With this scenario, non-pool farmers have two choices if they are using the marketing assistance loan program.

One choice would be to place their cotton in the CCC loan program and sell the loan equities, and the resulting equity check to the producer takes into consideration the forgiven principal (MLG), interest and storage. The other option would be to sell at the market price and receive an LDP. Either choice would give the producer about the same financial performance assuming the trades occur in the same week and at the same sale price. Marketing the loan equities does result in a better final result due to the additional forgiveness in storage charges. This, however, can be problematic.

Both MLGs and LDPs are subject to the $125,000 payment limit under the 2014 Farm Bill. When producers sell loan cotton for an equity, they lose control over when the cotton is redeemed from the loan and at what AWP level. Thus, they have no way of knowing or controlling their payment limit.

Producers who choose to sell their cotton without using the loan and receive the LDP prior to transferring title to the cotton can better control when to collect the LDP and at what price level to better manage the payment limit, but they forgo the benefit of the forgiven storage if they had marketed their loan equities. Making the right decision requires day-to-day monitoring of a number of market factors; however, producers can avoid such complexities by signing into PCCA’s marketing pool and let the pool manage the loan and LDP benefits. The month of March is the sign-in period for the 2015 West Texas/Oklahoma/Kansas pool. It should be noted that payments received under the Farm Bill’s ARC and PLC programs for other commodities also count against the payment limit.

Another complication is the adjusted gross income (AGI) means test in the Farm Bill. To be eligible for MLGs/LDPs, the AGI of a person, legal entity, or member of a legal entity must not exceed an average of $900,000 annually during 2010, 2011, and 2012.

For producers participating in PCCA’s marketing pools, the cooperative’s marketing staff tracks trends in the market and AWP in order to maximize benefits for the members. Since the marketing pool makes these decisions on their behalf, pool members are then free to spend more time producing and harvesting their crops.”