USDA’s Commodity Credit Corp. is proposing to limit monthly storage payments on cotton in the CCC loan to $2.15 per bale to reduce incentives for warehouses to hold cotton rather than ship it on a timely basis.
In a carefully worded notice in the May 26 Federal Register, the CCC said it has concluded that “providing unrestricted storage credits may have a negative impact on both the maintenance of bale quality and on the flow of cotton pledged under the CCC loan program.”
The storage payment proposal is one of several changes the Commodity Credit Corp. wants to make in the rules for storage, handling and ginning requirements for cotton marketing assistance loan collateral.
Included in those are new certification requirements that cotton not be “false-packed” or “water-packed” during the ginning process, allowing temporary outside storage of cotton in specific locations due to unavoidable circumstances and permitting re-concentration of cotton in warehouses.
The Federal Register notice said CCC is also proposing to stop paying storage on loan cotton stored outside.
USDA says tariff rates established by CCC-approved warehouses vary considerably, ranging from $2 to $5 per bale per month with the highest rates occurring in California and Arizona and the lowest in Texas.
For the 2005 crop, the average warehouse tariff rate, weighted by quantity of loan bales, is $2.61 per bale per month, it said. About 52 percent of 2005-crop loan cotton was placed into storage where the tariff rate averages $2.15 per bale per month or less.
In recent years, the CCC has provided storage credits so that as storage charges accrue on un-sold cotton, the cost of the cotton and the charges does not become uncompetitive relative to the adjusted world price level.
“However, if the tariff charges levied by the warehouses are especially profitable,” the Federal Register notice said, “the credits provided by CCC will induce producers and ginners to ship their cotton to locations that maximize their storage returns or warehouse rebates.
“In these cases, the warehouse may be chosen without regard to whether the cotton will be stored inside, or because it is at a location that provides timely load-out when requested by a merchant.”
Merchants have complained about the quality of cotton being stored outside for extended periods in areas of west Texas where the harvest has exceeded the available inside storage in the last two seasons. They’ve also voiced concerns about delays in the delivery of cotton from some warehouses.
USDA officials said outside storage was unavoidable in Texas where production grew from an estimated 4.37 million bales in 2003 to 7.78 million bales or 78 percent in 2004. The harvest rose another 6 percent to 8.25 million bales in 2005.
“The available approved cotton storage capacity has not kept pace with those production increases, and the result has been that loan cotton was stored outside for extended periods both years,” the notice said.
“In the end, CCC has strived to provide a balance between the practical needs for storing back-to-back bumper crops with the need for reasonable crop protection to protect the quality and reputation of U.S. cotton for domestic and export buyers.”
The proposed rule also says that when CCC determines that cotton must be stored outside, it must be protected through additional packaging, dunnage, security and insurance coverage.
The Corporation said it is also proposing to amend the Ginner Agreement and Certification so that, effective with the 2006 crop, ginners must certify that the bale meets the quality requirements for loan eligibility rules that the bale must be in good condition and not false-packed, water pack, maxed-packed, re-ginned or repacked.
The new requirement was included after the CCC determined that cotton produced at two Mid-South gins during the 2005-06 marketing season was water-damaged and, thus, ineligible as collateral for a loan.
It’s not uncommon for cotton gins to dry excessively moist seed cotton or to add moisture if seed cotton falls below the 6 percent to 7 percent moisture content that is considered optimal for ginning, using humidified air, liquid water sprays or a combination of both systems.
In the case of the two gins, the CCC said, the water-damage was discovered after the cotton was accepted by the agency as loan collateral, and some cotton merchants had been designated as agents for the cotton. Other cotton from the gins had already been sold.
In the comments the CCC has received on the issue, one national organization said that cotton lint exposed to direct liquid water spray should not be eligible to be used as collateral for CCC loans. “Others have commented that direct liquid spray equipment has been used by many gins without damaging the cotton.”
The proposed rule says bales must weigh at least 325 pounds and be packaged in materials which meet the specifications of the Joint Cotton Industry Bale Packaging Committee.
It also said the CCC proposes to amend its regulations to allow the transfer of 2006 and subsequent transfer under loan from one CCC-approved warehouse to another CCC-approved warehouse to reduce the risk of quality deterioration, relieve regional storage congestion and facilitate more efficient marketing.
The transfer must be requested by the producer or producer’s agent and approved by the receiving warehouse. The producer or the requestor will be responsible for all costs associated with relocating loan cotton.
“The changes in domestic cotton marketing caused by strong export market demand have altered domestic cotton marketing channels and, as a result, have created more urgency to move cotton efficiently through marketing channels,” the Federal Register notice said.
“The nine-month loan term for marketing assistance loans, coupled with crediting the repayment of the loan for accrued storage charges, may create incentives to maintain the upland cotton in the loan program and adversely delay marketings.”
The notice sets up a 30-day comment period for the proposed rule. Comments should be e-mailed to [email protected] or mailed to Director, Price Support Division, Farm Service Agency, United States Department of Agriculture (USDA), Rm.4095-S, 1400 Independence Ave, S.W., Washington, DC 20250-0512 by June 26.