Cotton Slides to New Contract Lows

Broad-based selloff hit stocks and commodity prices fell. Invalid assumptions on U.S. cotton policies made in report, Cotton Council says.

Cotton futures closed in the red Tuesday, posting new contract lows as a broad-based selloff hit Wall Street and commodity prices fell amid continuing uncertainty over ChinaΆs slowdown and the timing of a Federal Reserve interest-rate hike.

Benchmark December settled down 79 points to 60 cents, near the low of its 101-point trading range from up eight points at 60.87 to down 93 points at 59.86 cents. It posted its third new contract low in a row.

Thinly traded October, facing first notice day on Thursday, closed down 102 points to 58.73 cents, while March finished down 74 points to 59.89 cents and December 2016 settled down 37 points to 60.72 cents.

Volume slowed to an estimated 21,900 lots from 25,479 lots the prior session when spreads accounted for 6,704 lots or 26%, EFP 203 lots and EFS five lots. Options volume totaled 2,854 calls and 6,342 puts.

On the policy front, numerous invalid assumptions are made by The International Centre for Trade and Sustainable Developments in its report on the 2014 farm bill and its effects on the world market, says the National Cotton Council.

The ICTSD paper, released last week at a conference in Geneva, includes a focus on crop insurance, including the Stacked Income Protection Plan (STAX). It says cotton policies in the 2014 farm law cause significant impacts on the world market.

Gary Adams, NCC president-CEO, said in a report the paper is misleading and “does not capture the realities of todayΆs cotton market or global cotton policies,” adding that U.S. cotton growers “respond to market signals, not government programs, when making planting decisions.”

The ICTSD paper misrepresented the marketing loan program by failing to incorporate modifications included in the 2014 farm law, Adams said. Under low price scenarios, he said, the report does not allow the marketing loan rate to adjust lower as dictated in current legislation.

The report exaggerates crop insurance usage and inflates crop insurance benefits, Adams said. For example, for the 2015 crop year, about 25% of the cotton acreage is covered with a STAX policy, far below the ICTSDΆs 100% assumption.

The paper also calculates expected net indemnities of $734 million for STAX (with a 70-cent per pound futures price), which is 2.4 times larger than the Congressional Budget OfficeΆs estimate of $300 million.

Adams said the report attempts to dismiss findings of a World Trade Organization panel that rejected BrazilΆs effort to assign production and price effects to the presence of crop insurance products.

The paper overstates changes in crop insurance products, he said, when in reality premium subsidy rates for individual coverage policies did not change between the 2008 and 2014 farm bills.

The NCC contrasted the ICTSD report with a 2014 Congressional Research Service analysis that said “total indemnity payments under both STAX and any other cotton-specific crop insurance are prohibited from exceeding the value of the insured crop, thus further minimizing any potential production incentive.”

Another evaluation of the 2014 farm lawΆs cotton provisions by the United Nations Conference on Trade and Development concluded that “the incentives to produce cotton in the United States will be weaker than they were during previous decades.”

That report also found that “expenditures under STAX are estimated at about one-eighth of the cotton subsidies paid under the 2002 farm bill and about one-third of the subsidies paid under the 2008 farm bill.”

U.S. all-cotton plantings this year are estimated by USDA at 8.56 million acres, smallest since the payment-in-kind program of 1983, and the upland crop forecast of 12.977 million bales is down 17.5% from the 2014 output and 2.4 million bales below the five-year average.

Futures open interest gained 360 lots Monday to 180,775, with DecemberΆs up 113 lots to 119,930 and MarchΆs down 170 lots to 45,489. Cert stocks declined 1,098 bales to 49,184.