South Plains Cotton Update

In a June 19, 2009 article by Jim Wiesemeyer, titled "Farmers Aren't Aching for ACRE," it was stated that some farmers were opting to "take the equivalent of the 20% reduction in direct payments and put that toward a higher level of coverage under Revenue Assurance or other revenue-based crop insurance product." In other words, taking the "cost" of ACRE participation, which is 20% of the farm?s direct payment, and spending that money on a higher level of revenue insurance coverage. I decided to take a look at that concept for a typical South Plains corn farm. Granted there is nothing typical about a farm in the Texas South Plains with nothing but corn base, but we have to make some wild assumptions to make the comparison.

I started with an actual Bailey county farm that had corn base with a direct payment yield of 135 bushels and a counter-cyclical yield of 172 bushels. This producer has continued to improve production over time and now has an APH yield of 225 bushels based on the past 10 years of production. His 5-year Olympic average is 222 bushels. The farm has 179.1 acres of corn base and is currently planting 180 acres of corn each year. A 20% reduction in direct payments would cost the producer $6.27 per planted acre of corn. Coincidentally, the increased premium to go from 65% CRC to 70% CRC is $7.21/acre, or going from $23.98 to $31.19 per acre. For the 2009 crop, with a spring price of $4.04/bu, the guarantee would increase from $591.05 to $636.30 or $45.25/acre.

Looking at the work done by Dr. Art Barnaby of Kansas State last year shows that irrigated corn in Texas would have only triggered an ACRE payment in 3 of the last 21 years, or 14% of the time. Furthermore, in the years in which it did trigger, the payment averaged $30.51/ac. The farm would trigger an ACRE payment 90% of the time with the addition of the 65% insurance premium to the farm benchmark. Therefore, the overall probability of receiving a payment is 14% times 90%, or 13%.

The question remains, is it better to "lock" the farm into ACRE for four years or "buy up" revenue coverage for the farm. The choices appear to be somewhat similar at first glance. Pay $6.27/acre for what has historically been a 13% chance of getting a $30.51/acre payment or pay $7.21/acre for $45.25/acre increased guarantee that the farm will receive in the event of a loss, no matter what happens statewide. It is also interesting to note that if the farm had bought 70% CRC coverage over the last 9 years that it was available in Bailey county, it would have triggered a loss 1 time (11% of the time) for an indemnity of $41.02. At the 65% coverage level there would never have been an indemnity.

In conclusion, it doesn't make any sense to lock your farm up for at least the next 4 years into a program that has a 13% chance of receiving a $30.51 payment at a cost of $6.27 per acre, when you could retain complete flexibility and have an 11% chance of receiving a $41.02 indemnity at a cost of $7.21 per acre. Not to mention the fact that this particular farm, like virtually every other farm in the Southern High Plains, has more than half its base acres in cotton. And USDA is wondering why farmers aren?t flocking to their local FSA offices to sign up.

I've been on the road in the South Plains District a lot more the past two weeks, so maybe now I have something to bring to the discussion of what the cotton crop looks like. We are just one week of cooler temperatures and widespread rainfall away from having a large number of good to excellent cotton acres or another week of triple digit temperatures and double digit wind speeds away from having a lot of poor to very poor cotton. Thankfully the forecast is for cooler, and maybe wetter, weather this next week. County agents reports for the South Plains nearly mirror the statewide cotton condition report on Monday with 13% very poor, 22% poor, 35% fair, 22% good and 7% excellent.

Comments last week at the Plains Cotton Advisory meeting were that about half the dryland crop (about 500,000 acres) was failed due to drought and that looks about right. Most of failed acreage appears to be planted to milo and a small percentage to blackeye peas. There also appears to be an awful lot of very small dryland cotton south of Lubbock. Timely rains and a long fall could make for a good crop there also. Good rains followed by hot, dry windy weather puts a strain on irrigation systems, but so far I haven't seen many irrigated acres in dire straights yet.

Other weather reports from around the world look like India has been catching up on rainfall and the floods in China will probably have little negative impact on cotton acreage. Don't count on a small world crop to bail this market out of the large carryover that has been accumulated over the past couple of years. According to the latest WASDE report, the world stocks-to-use ratio will be 51% for the 2009-10 marketing year. At least that is down from the 56% for the year that is almost over.

On the demand side of things, USDA revised the export forecast for the marketing year that is nearly over to 13.3 million bales. Shipments of 237,100 this week should be sufficient to keep up the pace needed. The reporting week included the Independence Day holiday, so there should be no problem shipping the 257,000 bales needed each week for the next 3 weeks. Sales on the other hand have been rather slow at only 133,000 for the week. That is why the export forecast for 2009-10 is only 10.2 million bales.

Cotton futures in New York continued their steady rise, but are having trouble posting a close above 64 cents. Options premiums are at a point where those who are familiar with spreads might want to consider getting in right now. A bear put spread, purchasing a 63 cent December put and selling a 58 cent put in the same month would have a net cost of 2.20-2.25 cents per pound. If prices continue to rise, you can buy back the 58 put and have a relatively cheap 63 put as downside price protection. If prices fall back the lower end of the trading range that we have seen this season, then you can take the 5 cent gain minus the 2.25 cent cost and add to the loan value received for the cotton and possibly balance the budget this year.

For more information on cotton marketing be sure to check out Dr. John Robinson's weekly cotton marketing newsletter by clicking on Market Outlook under the Resources drop down list from the Extension Ag Eco website agecoext.tamu.edu. Also, to listen to recordings of the Ag Market Network conference calls, as well as weekly commentary from Mike Stevens, go to AgMarketNetwork.net. The Ag Market Network will be live from New York next Friday at 7:30.

Remember to tune in every Thursday at 1:30 p.m. for the South Plains Cotton Market Update live on Ag Talk on Fox Talk 950.

Listening to the Ag Market Network Special Edition this Friday from the ICE in New York, you would think the West Texas crop was down and out. In the words of Mark Twain, "The reports of my death have been greatly exaggerated." At the bi-weekly meeting of the Plains Cotton Advisory Group you would have heard comments that would make you believe the High Plains is on its way to having one of the top 5 largest crops in history. The wide variety of crop conditions in the area makes for such speculation, with such divergent conclusions. One thing is for certain, anyone in the cotton business out here that you ask will tell you that there is more cotton standing in the Texas High Plains today than on this same day last year.

Reports of damage from wind, sand, hail and heat have more than been offset by the benefit of a general 1 to 2 inch rain across most of the area. The few thousand acres lost in these events are devastating to the individual producers affected by them, but they are minimal compared to the positive impact of an inch or two of rain on more than 3 million acres. It is safe to say that every inch of rain that generally covers the cotton growing area of the High Plains is worth about $50,000,000 to cotton farmers' bottom lines. Not to mention what it does for corn and grain sorghum production.

Pest pressure in the area is generally light. With timely rains, weeds are still the number one pest to be controlled. Although not widespread, southwest cotton rust has appeared in the region. While not normally a threat in the area, its appearance this early in the growing season is cause for at least some attention. I even found an infected leaf on a plant here at the research station in Lubbock today. We continued to look, but didn't find another before giving up.

At the Plains Cotton Advisory group meeting this morning we had an international group of visitors with a good perspective on the crop and market conditions from around the world. Crops from around the globe appear to be in fair to good condition, with some decline in acreage and production much like we are expecting in the U.S. Our international visitors were unanimous in stating that recent prices in the mid 60-cent range had made U.S. cotton too expensive and it would take a December futures price in the 57-59 cent range to entice new sales. The big issue remains demand as it relates to worldwide economic recovery. The slower the recovery, the worse for cotton fiber demand. Interestingly, the cotton chart this year has nearly mirrored the S&P 500 until this week when cotton dropped off significantly while the S&P remained steady. I don't think it is any coincidence since potential cotton demand is highly dependent on economic recovery and consumer confidence.

The release of 400,000 metric tons (1.8 million bales) of import quota by the Chinese was good news, but much of that cotton is already in Asian warehouses on consignment waiting to be delivered to mills, so it won't increase export sales by much. Export sales for the week ending July 16th were rather weak at 70,200 bales, but shipments were adequate to meet the USDA estimate of 13.3 million bales at 266,000 running bales. Primary destinations were Turkey, China, Indonesia, Mexico, Vietnam and Thailand.

For more information on cotton marketing be sure to check out Dr. John Robinson's weekly cotton marketing newsletter by clicking on Market Outlook under the Resources drop down list from the Extension Ag Eco website agecoext.tamu.edu. Also, to listen to recordings of the Ag Market Network conference calls, as well as weekly commentary from Mike Stevens, go to AgMarketNetwork.net.

Remember to tune in every Thursday at 1:30 p.m. for the South Plains Cotton Market Update live on Ag Talk on Fox Talk 950.