facebook_pixel

Carefully Review Marketing Options to Protect the Bottom Line

From Cotton Grower Magazine – December 2015

Trends2016 Web    Examining some of the key trends that could impact cotton in 2016.

 

With cotton futures for December 2016 already trading in the same tired 60-68 cent range that the market has seen for the past year, how can a grower plan to protect his bottom line for next season’s crop?

Industry economists agree that it will take a combination of careful planting decisions and a thorough examination of marketing options. But even then, under current market conditions, it won’t be easy.

“From a grower’s standpoint, the first risk management question is ‘How much cotton should I grow?’” says Dr. John Robinson, Professor and Extension Economist with Texas A&M University. “That’s always a critical management decision. But it’s a bigger one this year, because the price outlook is so similar.”

Variety selection will also play a part, especially when the market rewards growers for high quality cotton.

“Any agronomist will say to start with a variety that has the genetics to make good quality,” adds Dr. Don Shurley, Professor Emeritus of Cotton Economics, University of Georgia. “Quality definitely factors into the pricing and the total picture.”

Shurley points out that when the market is in the 60s or lower, growers can rely on loan deficiency payments (LDP) and other options to help boost their overall price.

“You can take a low 60s futures market, and, with a good basis in quality and an LDP gain, end up with 70 cents,” he states. “That’s the total signal. When growers look to 2016, they may see a futures price that isn’t much different than what they’ve been struggling through. But there are other things that are going to be in play, and that’s what they should react to.”

Yet, there’s no denying the risk involved in dealing with today’s prices. “It’s a sub-profitable range, even for a low cost Texas grower,” says Robinson.

Shurley also points out that maybe it’s time to look for a different way to manage marketing risk.

“It’s quite clear that we’re in such a global market now, that things are so uncertain,” he says. “Maybe growers should do the best they can to manage to try to make a profit, yet not risk everything they’ve worked so hard to gain.

“There might be some advantage to contracting or protecting a certain portion of the crop with puts prior to harvest, simply for the sake of knowing that the cost of production is covered.”

Robinson notes that with futures currently at a sub-profitable level, it’s difficult to meaningfully hedge a price that would cover all production expenses. Plus, insurance prices are months away from being established. He is currently exploring a 65:58 put spread strategy as shallow loss protection against a decline in the potential insurance price (follow the strategy’s progress on Robinson’s Cotton Marketing Planner website.

“A 65 cent put on December 2016 has been costing a little over 5 cents a pound,” he explains. “A 65:58 put spread on December 2016 costs around 3.25 cents per pound. It’s a way to reduce costs while protecting the sliver of prices from where growers are now down to where the loan rate provides protection.”

The question facing growers is tough – is it worth spending 3.25 cents to protect against a possible 7 cent decline?

“If growers are going to plant cotton, that’s the type of thing they need to be thinking about,” says Robinson.

Topics:

Leave a Reply

Marketing Stories
Market Analysis

Cleveland: The Bull Will Continue Charging

January 12, 2018

Multiple market factors are at work, with demand continuing to lead the way to higher prices. That means the bull market will keep charging ahead.

Marketing

The Seam Adds Five New Board Members

January 16, 2018

The Seam has added five cotton industry leaders to its Board of Directors.

Promotion

L.L. Bean Ties Sustainability Efforts to Cotton LEADS

January 8, 2018

L.L. Bean has signed on as the newest partner of the Cotton LEADS program.

Market Analysis

Shurley: December Report Seals the Deal

December 19, 2017

Based on the December USDA Crop Production numbers, any notion of this 2017 crop getting below 21 million bales seems unlikely at this point.

Market Analysis

It’s a Wonderful Day in Cotton’s Neighborhood

December 15, 2017

With apologies to Mr. Rogers…it’s a wonderful day in the neighborhood, and the cotton market has been mine.

Market Analysis

With Prices Rallying, It’s Time for “Significant Action”

December 8, 2017

The long-awaited rally above 70 cents appeared to mature this week. For those not already priced at 75 cents, it could be time to take significant action.

Promotion

Three Named to Cotton Research and Promotion Hall of Fame

December 6, 2017

Dr. Hal Lewis, Sykes Martin and Dr. Bill Lyle are the newest members of the Cotton Research and Promotion Program Hall of Fame.

Around The Gin
Product News

Indigo Offers Premium for Indigo Cotton Production

January 9, 2018

Indigo Ag has announced a new program that offers significant price premiums for U.S. cotton growers who contract to grow Indigo Cotton.

Product News

New Bayer Varieties Focus on High Yield, Adaptability

January 5, 2018

Bayer releases five new FiberMax and Stoneville varieties for introduction in 2018.

Product News

New PhytoGen TRiO Guards Cottonseed Investment

January 3, 2018

New PhytoGen TRiO seed treatment helps provide early season protection for young cottonseed from diseases, insects and nematodes.

Product News

Americot Adds Seven to Sales, Research Teams

December 20, 2017

Americot has added seven new sales and research associates to the company’s staff across the Cotton Belt.

Product News

Seven New Varieties in Deltapine Class of 18

December 11, 2017

Seven new varieties – including five Bollgard 3 XtendFlex offerings – join the Deltapine product lineup as the Class of 18.

Product News

Special Roundup Ready PLUS Incentives for Arkansas

December 7, 2017

Monsanto is offering a special Roundup Ready PLUS Crop Management Solutions platform in Arkansas for 2018 for growers planting XtendFlex cotton and Roundup Ready 2 Xtend soybean varieties.

Product News

Monsanto Sets 2018 Crop Protection Incentives

December 5, 2017

Monsanto will provide multiple tools, resources and products to help cotton and soybean growers maximize weed control in 2018.

Product News

Praxidyn’s Mixmate Named a 2018 AE50 Award Winner

November 27, 2017

The American Society of Agricultural and Biological Engineers has recognized Praxidyn's Mixmate portable ag chemical blending and recordkeeping system with a 2018 AE50 award.

Latest News
Marketing

The Seam Adds Five New Board Members

January 16, 2018

The Seam has added five cotton industry leaders to its Board of Directors.

Market Analysis

Cleveland: The Bull Will Continue Charging

January 12, 2018

Multiple market factors are at work, with demand continuing to lead the way to higher prices. That means the bull market will keep charging ahead.

Promotion

L.L. Bean Ties Sustainability Efforts to Cotton LEADS

January 8, 2018

L.L. Bean has signed on as the newest partner of the Cotton LEADS program.

Market Analysis

Cleveland: Don’t Ignore the Gift Horse. Feed the Market!

January 7, 2018

Don’t get caught looking a gift horse in the mouth. Cotton prices are at a profitable level for growers, and the market is asking to be fed.

Market Analysis

Shurley: New Year Cotton Policy Update

January 5, 2018

Recent legislative action in Congress could potentially bring cotton back under Title I commodity protection. Dr. Don Shurley explains the details.

Market Analysis

Shurley: December Report Seals the Deal

December 19, 2017

Based on the December USDA Crop Production numbers, any notion of this 2017 crop getting below 21 million bales seems unlikely at this point.

Market Analysis

It’s a Wonderful Day in Cotton’s Neighborhood

December 15, 2017

With apologies to Mr. Rogers…it’s a wonderful day in the neighborhood, and the cotton market has been mine.

Market Analysis

With Prices Rallying, It’s Time for “Significant Action”

December 8, 2017

The long-awaited rally above 70 cents appeared to mature this week. For those not already priced at 75 cents, it could be time to take significant action.

Promotion

Three Named to Cotton Research and Promotion Hall of Fame

December 6, 2017

Dr. Hal Lewis, Sykes Martin and Dr. Bill Lyle are the newest members of the Cotton Research and Promotion Program Hall of Fame.

Market Analysis

Prices Push Above 70 Cents as Demand Remains High

December 2, 2017

Driven by tightening world stocks and led by an ever-increasing world consumption, cotton prices continue to move higher.

Promotion

Walmart Joins Cotton LEADS Program

November 30, 2017

Walmart is the newest member of the Cotton LEADS program.

Market Analysis

Shurley: Demand Is Key to Price Strength and Stability

November 21, 2017

Demand is the key to cotton's future. We still have a way to go, but the outlook has certainly improved.

Market Analysis

U.S. Sales Booming to Meet Bullish Demand

November 17, 2017

Cotton appears to be caught in a battle between supply and supply. And that keeps prices well positioned to stay where they are.

Market Analysis

Increased Cotton Demand Moving the Market

November 11, 2017

A bullish supply demand report for November proves that demand moves markets. And demand for cotton has resurfaced.

Market Analysis

Cleveland: Yields, Quality, Consumption Still Rising

November 4, 2017

Reports of high yields, premium quality and growing consumption are keeping prices at the higher end of the trading range.