Suspension of some $3 billion worth of federal loans due to the U.S. government shutdown has forced cotton farmers to turn to commercial banks for aid, boosting their costs and further complicating the upcoming harvest in the world's largest cotton exporter.
The two-week shutdown struck farmers at the start of the 2013/2014 harvest, hampering their access to crucial government loans used to smooth out seasonal financial pressures through the harvest, market participants said.
The added cost of commercial loans is only the latest obstacle for U.S. cotton growers, who are bracing for a lower-quality crop that sprung late this year, increased competition from a bumper crop in India, the world's No. 2 cotton producer, and a 5 percent sequester cut to federal loans.
"It's a colossal headache," said Darren Hudson, an agricultural economics expert and the Larry Combest Endowed Chair of Agricultural Competitiveness at Texas Tech University.
"They got hit upside the head with this shutdown and have millions of dollars worth of capital they have to come up with to pay these farmers."
The United States is set to produce an estimated 12.9 million 480-lb bales in the 2013/14 year that started on August 1. Based on the December cotton price of about 83 cents per lb, that crop is worth about $5.2 billion.
The farmer worries at the start of the shutdown almost two weeks ago have hardened into serious challenges as the harvest begins in earnest and politicians in Washington struggle to break a stalemate over the government's budget.
Cotton cooperatives, responsible for financing half of the country's fiber, use federal funds to pay farmer members for their cotton. Once they sell the fiber, the cooperative pays back the loan.
In turn, the growers need to cash to finance the day-to-day running of their farms ahead of the harvest.
The shutdown has left cooperatives scrambling to find other financing and forced them to turn to commercial banks to fund their entire operations, rather than supplement the loans.
"We've used government loans for cash flow for years," said Jeff Thompson, executive vice president for Autauga Quality Cotton Association, a cotton co-operative in Alabama.
Since the shutdown, Thompson has tapped existing credit lines to replace the missing loans and ensure farmers get paid on time even though banks charge higher interest rates.
"It will simply be a cost of operating this year," he added.
Co-operatives polled by Reuters would not specify the terms of their bank loans, but they were more costly than the federal funding which provides farmers with 52 cents per lb of cotton sold.
Faced with steeper interest rates from banks, some cooperatives must sell their cotton as quickly as possible.
This year, Thompson said the bank lending rates were not high enough to dent Autauga's operations.
But, if the shutdown drags on, some cooperatives may be forced to burn through their credit, causing fears that next year's terms might not be so favorable.
In the meantime, growers are watching the government shutdown with frustration, said Mike Quinn, president of the Carolinas Cotton Growers Cooperative.
He represents farmers in Virginia, Georgia, North and South Carolina.
"This year the cotton crop is later than normal and with the loan program being subject to sequestration, it's (yet) another thing that agricultural markets need to deal with," he said.