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Don’t Hate the Futures. Hate the Fundamentals.

By Sterling T. Terrell

From Cotton Grower Magazine – November 2014

 

If you don’t know Dave Ramsey, he is a public financial advisor known popularly as a bestselling author, radio host, and public speaker. I love Dave Ramsey. He is a good guy. He has great family values and a no-nonsense guide to personal finance (although I do not follow exactly his investing philosophy).

Ramsey summarizes his basic plan in what he calls, “Seven Baby Steps,” as follows: Start a $1,000 emergency fund; Pay off all debt using the debt snowball (smallest balances first); Save three to six months of expenses; Invest 15 percent household income in Roth IRA’s and pre-tax retirement; Save for children’s college; Pay off your home early; And finally, build wealth and give.

The point of all of those steps, however, is not really about building wealth or money. It’s about freedom. Debt weighs you down. Wealth, on the other hand, gives you options.

Having options in every aspect of life is a wonderful feeling. Being backed into a corner is not.

With that simple principle in mind, what marketing options do cotton producers have?

We are all fairly familiar with them. There’s cash sale, joining a co-op or marketing pool, forward contracts, futures contracts, and options?

There are some among us who actually dislike some of these options. My advice is to them is simple. No matter what the price of cotton is, don’t blame speculators, hedgers, or futures in general by saying “I wish we didn’t have a futures market for cotton. We would all be better off.”

That theory simply doesn’t hold water. What if futures contracts, and options on them, didn’t exist?

Well, first of all, there would be two fewer marketing options – along with the fact that forward contracts would not have a public and transparent price on which to be based. (For Example: 300 off Dec, 31-3-36 or better, no remarks). Come harvest, the cotton price would, seemingly, fall out of the air – like the price of pecans or peanuts, among others, does today.

The disappearing of a futures market has in fact happened before, albeit with a different commodity. In that instance, prices fell and struggling producers lobbied to get rid of the futures market. They even passed a law on it that still stands today!

In the U.S., starting in 1958 and continuing to this very day, it is illegal to trade futures on… onions!

U.S. Code>Title 7>Chapter 1> § 13-1 states:

(a) No contract for the sale of motion picture box office receipts (or any index, measure, value, or data related to such receipts) or onions for future delivery shall be made on or subject to the rules of any board of trade in the United States. The terms used in this section shall have the same meaning as when used in this chapter.

(b) Any person who shall violate the provisions of this section shall be deemed guilty of a misdemeanor and upon conviction thereof be fined not more than $5,000.

Academics such as Professor David Jacks of Simon Fraser University have shown evidence that a futures market for a given commodity actually causes lower price volatility in that commodity.

If the futures markets give us more marketing options, a basis for forward contracts, and lower volatility, don’t get down on them. That price you see is simply a result of the buying and selling between people at mutually agreed upon prices using the rules that governments have set before them.

Be upset at the fundamentals – but don’t kill the market that is the messenger.

You would be worse off without it.

 

Sterling Terrell is an independent cotton analyst and frequent contributor to Cotton Grower.

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