RISK ASSESSED MARKETING
DR. G. A. “ART” BARNABY, JR.
PHONE: 785-532-1515
FAX: 785-532-6925
WEB Page http://www.agecon.ksu.edu/risk/
E-MAIL: abarnaby@agecon.ksu.edu
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Copyright 2001. All rights reserved by author.
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Disclaimer: This web page is designed to aid farmers with their marketing and risk management decisions. The risk of loss in trading futures, options, forward contracts, and hedge-to-arrive can be substantial and no warranty is given or implied by the author or any other party. Each farmer must consider whether such marketing strategies are appropriate for his or her situation. This web page does not represent the views of Kansas State University. 
Disclosure:  Dr. Barnaby’s research was the basis for the privately developed Crop Revenue Coverage.

CRC WILL USE THE COTTON FUTURES PRICE TO SET THE BASE PRICE[1]

 

There is currently a rumor floating in the Southwestern United States that CRC will set the price election for cotton based off of the FSA cotton loan rate of 51.92 cents.  This is simply not true.  The use of the loan rate to set the CRC price election would require the company to file new procedures and it would require the contract to be re-rated.  No such filing has taken place and if that change were implemented now it would require the Risk Management Agency (RMA) to suspend a number of rules on filing requirements.  Currently, the December cotton contract is trading at about 41 cents or 10 to 12 cents below the loan rate.  Cotton, like all of the other CRC contracts, are based upon the futures markets.  Because the future=s markets are trading below the loan rate, the CRC guarantee will be based on an expected price that is below the loan rate. 

 

Currently the cotton price election is set at 50 cents on the MPCI contract.  It is possible that RMA will set the price selection for the MPCI contract at the loan rate of 51.92 cents.  This was done on the 2001 soybean crop where the market was trading below the loan rate at planting time and USDA set the soybean price selection at $5.26 or the national marketing loan rate.  The CRC contract was set at $4.67 based off the November futures contact.

 

Currently, the cotton CRC base price is expected to be 40 to 42 cents versus the 50 cent MPCI price election.  The higher price election will increase the premium cost on the MPCI contract relative to the CRC contract.  The higher price election does not necessarily mean MPCI will generate higher indemnity payments.  If cotton prices fall, it will require smaller yield losses to trigger the CRC contract and the CRC payment could be larger than MPCI.  If the harvest price is above 50 cents, then the CRC payments would be larger than MPCI.  If prices do not change, then the MPCI payments will be larger than CRC payments. 

[1]Prepared by G. A. (Art) Barnaby, Jr., Professor, Department of Agricultural Economics, K-State Research and Extension, Kansas State University, Manhattan, KS 66506, January 4, 2002, Phone 785-532-1515, e-mail - abarnaby@agecon.ksu.edu.

 

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