When world prices rise faster than domestic prices, cotton producers get squeezed out of their LDPs.
Such was the case this past year, explains Mark Lange, the Cotton Council's director of economic services.
In January of 2000, the nearby New York Cotton Exchange (NYCE) #2 contract traded at an average of 51.9/lb and the "A" index, an indicator of world price, averaged 44.3. Subtracting 14 from the "A" results in an adjusted world price of 30.3. The LDP (the loan rate minus adjusted world price) was 21.9/lb.
A year later, in January 2001, the NYCE #2 was trading at 60.1/lb and the "A" Index was averaging 65. The LDP was virtually eliminated (0.42).
When U.S. prices move in concert with world prices, as they do most years, producers receive a higher price when the LDP decreases, assuming a steady basis, says Lange.
"However, if the U.S. domestic market fails to rise penny for penny with international prices as measured by the "A" Index, then the LDP falls faster than the increase in U.S. cash prices," he says.
"This situation results in a decline in total cash value of cotton to the producer despite a general increase in market prices."