USDA Considers Details on Certificates

October 20, 1999

Officials at USDA are considering how to implement two provisions in the agricultural appropriations bill dealing with generic commodity certificates. The bill calls for marketing certificates to be used under the cotton Step 2 program and also the use of generic certificates by farmers, a provision that may be left to the Secretary's discretion.

There's some confusion, at least among commodity groups, whether the Secretary has the discretion or not. "There is language in the bill you could use to argue the Secretary does have discretionary authority," says Kent Lanclos, National Cotton Council economist. "We don't know if the Secretary will take that interpretation or not."

For the Step 2 cotton marketing certificates, however, no such question exists. "The bill does not appear to leave any discretionary authority to the Secretary," says Lanclos. Instead, the option lies with the cotton merchant, exporter, miller or whomever receives the Step 2 payment, he adds.

A cotton exporter typically receives a Step 2 cash payment for the cotton exported. However, under the appropriations bill, that exporter can request the funds be in the form of a marketing certificate.

"We expect there will be a secondary market created where merchants or others trade the certificates among themselves," says Lanclos. With the level of marketing loan gains available now, it's expected that many growers, cotton and other commodity producers, will face payment limitation problems.

"Given where prices are, for a lot of people, the option would be to forfeit their commodities under loan to the government," Lanclos says. "The certificates allow merchants to buy that cotton from a grower and redeem it and get it out of loan without the loan gain counting against the grower."

When a cotton grower, for example, has reached the payment limitation, he or she cannot redeem cotton at the adjusted world price, which now is 34 cents a pound, far less than the base loan rate of about 52 cents. Market prices are around 44-45 cents a pound. Without the certificates option, a payment-limited grower would have to pay back the loan at 52 cents, only to face a market that is yielding only 44-45 cents, "not a transaction you would want to do," Lanclos notes.

The second part of the bill dealing with certificates is broader, applying to all commodities that are placed under loan. A grower may take a marketing loan gain in the form of a generic certificate, then enter the secondary market with it and collect the money paid by the secondary market. The buyer could then use the certificate to buy commodities that otherwise would be forfeited, says Lanclos. "The intent is that the certificate will be used to redeem the commodity held under loan," he says.

Meetings have been held between USDA officials and representatives of various commodity groups in an effort to develop rules for the two types of certificates. Lanclos says the NCC is in favor of both types, but other commodity groups appear more reluctant to support the generic certificate approach USDA may take.

It's expected that USDA will issue details on the use of certificates soon after President Clinton signs the ag appropriations bill into law.