Cotton futures prices have declined 30% since the beginning of 2020

Cotton futures prices have declined 30% since the beginning of 2020

The Trump Administration has set out details of a $19bn aid package to support American farmers and ranchers – including cotton farmers – hurt by the ongoing Covid-19 emergency.

The US Department of Agriculture (USDA) scheme – known as the Coronavirus Food Assistance Program (CFAP) – "will not only provide immediate relief for our farmers and ranchers, but it will also allow for the purchase and distribution of our agricultural abundance to help our fellow Americans in need," according to US Secretary of Agriculture, Sonny Perdue.

It will use the funding and authorities provided in the Coronavirus Aid, Relief, and Economic Security Act (CARES), the Families First Coronavirus Response Act (FFCRA), and other USDA existing authorities, and consists of two major elements.

The first is $16bn in direct payments to farmers and ranchers, based on actual losses for agricultural producers where prices and market supply chains have been affected by the pandemic. It will assist producers with additional adjustment and marketing costs resulting from lost demand and short-term oversupply for the 2020 marketing year caused by Covid-19.

The second part will see $3bn allocated for the purchase of fresh produce, dairy and meat by USDA which will be distributed to workers impacted by the closure of restaurants, hotels and other foodservice businesses due to the coronavirus crisis.

While further details regarding eligibility, rates, and other implementation have yet to be released, the American Farm Bureau Federation cites reports suggesting that of the $16bn provided for direct payments to producers, $3.9bn is for producers of row crops, such as cotton.

There is also confusion over what price series will be used for each commodity in the calculation of payments. 

The CFAP was announced shortly after a group of 21 Cotton Belt senators wrote to Secretary Perdue calling for assistance for "this critical industry."

The pointed out the US cotton industry has been particularly hard hit during the coronavirus crisis as demand has dropped.

"Since the beginning of 2020, cotton futures prices have declined 30%," the letter says. "As retail stores around the globe have shuttered, orders from US textile mills have dropped as much as 90% in the last month. 

"Cotton merchandisers and distributors are also facing additional costs for storage, interest, and other carrying costs as worldwide demand is significantly depressed."

The letter adds: "Cottonseed, a majority of which is used as a feed ration for dairy and beef cattle, is in a tenuous situation as its main customers – dairy and beef cattle producers – are also facing severe economic losses because of the ongoing public health crisis."

Analysts at Moody's Investors Service says the direct aid for US farmers and ranchers "will soften the blow from weak demand and depressed prices for many agriculture commodities."

The point out the US agricultural sector is grappling with multiple demand challenges. For example, the collapse in oil prices and fuel consumption worldwide has led to a sharp decline in demand for ethanol, which is derived from corn and accounts for more acres than any other US crop. 

In addition, lower foodservice demand driven by restaurant and other closures, including schools, has reduced margins for poultry, hogs and other products including milk, whose market prices are down on a year ago.