Producers placing their cotton in the CCC loan this fall may notice a new line on the Cotton A-5 Statement of Eligibility and Information Worksheet that they sign at their county Farm Service Agency office.

Line 21, which says, “Do you agree that any agent you authorize to redeem this loan may use the automated EAD redemption process?” looks fairly innocuous, but it could mean more money in growers’ pockets, according to those familiar with USDA’s new electronic loan redemption service.

Checking yes on Line 21 authorizes a cotton buyer who purchases a grower’s equity to redeem cotton under Form A loans electronically through USDA’s Centralized Cotton Redemption program. Growers could begin checking the box on Line 21 on Oct. 1. (You can also sign up using the CCC Cotton A Form Producers Note and Security Agreement.)

CCR is a program whose time has come, says Gene Rosera, cotton program manager for USDA’s Farm Service Agency in Washington, who has been heading up the electronic loan redemption effort.

“Most of the impetus for the project has come from merchants and our own office here at the Farm Service Agency,” said Rosera. “But we think it will have benefits for growers, as well.”

CCR applies specifically to Form A loans made when farmers individually place their cotton in the CCC non-recourse loan program. Form A loans make up about 20 percent of the CCC loan volume with Form G loans or loans handled by cooperatives or private loan servicing agencies accounting for the balance.

Theoretically, a grower returns to the county FSA office and redeems his cotton from the CCC loan when he sells it, but, in reality, that rarely happens.

Few will redeem

“Few producers are going to redeem their CCC loans,” says Rosera. “Most of the time, the grower will sell his cotton to a merchant and the merchant will redeem the cotton, using a CCC Form 605 that identifies him as the producer’s agent.”

In the past, that meant that each time a merchant bought loan cotton from a producer he had to send his CCC 605 or option to purchase, a bale list and a check to the county office where the producer placed the cotton in the loan. During harvest, merchants might wait up to two weeks to gain title to the cotton, depending on the county office backlog.

The process has become even more complicated now that mills have the ability to blend many different types of cotton to produce yarn.

“A mill may specify the types of cotton it wants, and the merchant will pick and choose from the cotton that’s available to him,” said Rosera. “So he may redeem cotton from 20 to 30 loans, and he may have to go to 20 different county offices to redeem it.

“That process generates a lot of paperwork and, when all these loan redemption requests are coming in at the same time, it also increases the risk of errors. You are probably aware that a number of offices have eliminated their temporary workers, and there are plans to close some county offices.”

More recently, merchants have been able to fax the options to purchase and bale lists and do wire transfers of funds to county offices. But FSA employees must still find the bales in loan documents, match the loan payoffs to the loan agreements and release the bales to merchants.

Under the new Internet-based CCR program, merchants enter the bale ID numbers of the cotton they have purchased into the Centralized Certificate Redemption system through a USDA Web site and redeem them with a wire transfer to the Farm Service Agency.

Simplifies process

“Instead of 10 bales in 10 locations, they can send one request and one wire transfer,” says Rosera.

His office worked with EWR, Inc., the company that provides electronic warehouse receipts for the cotton industry and the National Cotton Council to develop the Central Cotton Redemption program.

With the old system, merchants had to plan ahead because they couldn’t be sure when they would actually own the cotton. “Some have had to wait up to two weeks for the redemption process to be completed,” Rosera noted. “Under the new process, they may get the bales the next day or even the same day.”

How will this help producers? The biggest benefit may be a stronger basis, says Kevin Brinkley, vice president for business development and marketing at The Seam, the electronic marketing platform based in Memphis, Tenn.

“Because of the logistical problems of physically moving CCC Form 605s and money, merchants have had to have their redemption orders to county FSA offices early in the day or even the day before they intended to redeem the cotton,” he said. “They might be redeeming cotton at a county office three states away and have to courier the documents.”

Because merchants couldn’t anticipate that redemptions would be completed as planned, they might protect their positions by increasing the basis – the difference between the New York futures price and the cash price offered to growers – by 100 to 200 points.

“With the new CCR system, the marketing window for loan cotton has opened up by several hours,” he notes. “If the futures market rises or the adjusted world price changes, they can factor that into their redemption plans.

“It should add up to more money in producers’ pockets because of the stronger basis.”

“We have an 11.57-cent loan deficiency today (Oct. 6), but that will change to 10.37 cents tomorrow,” said Phil Burnett, president and CEO of The Seam. “That can make a $5 to $6 per bale difference, which can be huge in this market.

“So having yourself in a position to take advantage of situations like these is crucial.”

The CCR program does not cost producers any money, and the producer maintains all of the rights and protections on loan options that are currently in place, says Brinkley.

“The producer still uses the CCC-605 to transfer his loan option to the buyer. However, the buyer simply files it at his office as a record of the transaction. The producer, buyer and USDA will instead use the electronic warehouse receipt provider to verify that the person or the entity has the right to redeem the bales.”

The cotton industry has tried electronic loan redemptions before but was unsuccessful because of a variety of problems, said Rosera.

Long-term project

“This has been a long-term project, going back to when I first got here five years ago,” said Rosera. “We actually started testing it in January of 2004 and made it available for a portion of last year’s crop. This year it is available Beltwide.”

The program also offers potential savings to the taxpayer.

“Instead of spending all days doing loan redemptions, the county office staff may now spend part of the day making load deficiency payments or disaster payments or any of the myriad other responsibilities they have,” said Rosera. “That reduces stress, particularly in the fall, and lowers the chances of errors in those areas.”

FSA also believes that the CCR model could be applied to peanuts and other crops where loan redemptions can be heavy at times. “It is certainly proving to be a plus for cotton merchants and our offices.”

e-mail:flaws@primediabusiness.com