Protect Your Profits: Calculate Costs Now and Watch the Market Closely
December 20, 2013 As 2014 begins, it’s clear that cotton growers will be looking for cost-cutting efficiencies to help them remain productive and profitable, regardless of acreage and/or market prices. Our Cotton Grower editors recently outlined five topics to help growers protect their profits. Topic number one: Plan ahead and pay close attention to the market.
Following a year of challenging production, delayed harvest, market ups and downs, and the siren song of other crops, what’s a grower to do when planning for 2014?
Ask the experts, and they simply say, “Wait and see.”
“I think that 2014 will be similar to 2013,” said O.A. Cleveland, professor emeritus of agricultural economics at Mississippi State University. “With basic fundamentals and everything else being equal, I could see prices being marginally lower, with an absolute high somewhere in the mid-80s.
“I do not see volatility,” he added. “But I am not quite as optimistic on prices as we were in 2013. But understand, of course, that Mother Nature could turn it all upside down.”
There’s no question that other commodities will continue to challenge cotton for space on the farm. Cleveland expects some softening of corn and wheat prices for 2014, but considers soybeans to be cotton’s biggest threat.
“Whereas we’ve lost some cotton acreage to corn, potentially we could gain some of that back,” stated Cleveland. “Beans are going to be bidding for those acres just as hard as cotton, and they are going to have a price advantage again. Unfortunately, there’s just no other way to slice it.”
But that doesn’t mean cotton’s outlook for 2014 is hopeless. There are still parts of the country where cotton will always be the primary crop. And, as Cleveland pointed out, quality cotton will always find a home – and a premium price.
“Right now, West Texas quality cotton is getting as much as 400-to-500 points more than futures,” he said. “Typically, that basis is 500-to-600 points off futures. That’s a 10-cent turnaround totally based on the demand for quality cotton.”
So, with cotton prices currently ranging from the mid-70s to mid-80s, how should growers proceed with their plans for 2014?
“When you look back to last January and February, we had December futures in the upper-70s,” said Don Shurley, University of Georgia cotton economist. “That’s essentially where we are now when we start talking about marketing.
“Coming off the year we had, growers had opportunities to price cotton in the upper-80s, and I’m sure some farmers took advantage of that. But looking at prices in the 70s, I believe farmers are going to take a sit-back-and-wait attitude.
“Most farmers are not going to be inclined to do anything with regards to marketing unless they absolutely feel like nothing better is coming along,” he stated. “They’re going to be willing to take a risk, wait and hope to at least get something with an eight in front of it before it’s all over.
“I think the downside risk is probably around 75 cents, maybe a bit lower. And I think 85 cents is probably the top side, at least the way we look at it right now.”
Shurley suggests that growers take some time to calculate their anticipated cost of production and compare it to where the market is. That should provide them with initial guidelines regarding how much risk they can take and what their likely profit margin will be. He believes that 80 cents is the trigger point for growers to actively start pricing bale contracts.
“In the Southeast, our basis tends to be pretty good on contracts – typically 150-to-200 points under December,” he explained. “If we could get December at 82 cents, it would give our growers an opportunity to get bale contracts net 80 cents to them.
“That’s the way I looked at it last year, and I think that’s where a lot of growers started. I don’t view it any differently this year.”
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