Cotton Marketing 101

Most cotton growers are very knowledgeable when it comes to growing and harvesting a crop. They have years of experience, often passed down through generations, and Extension agents, crop consultants and others can fill in the gap.

Using the cotton futures market, farmers can lock in prices (or at least price ranges) and indemnify their investments against falling prices. At the 2007 Beltwide Cotton Conferences in New Orleans, Texas A&M agriculture economics professor John Robinson gave an introduction to marketing that outlined some of the basic definitions and principles of cotton and commodities marketing. The following are excerpts from his lecture:

Standardized Forward Contracts, Futures Markets and Price Discovery

If you are a grower, you are probably familiar with what a forward contract is. It is just where someone comes to you, and you hammer out a deal. You are going to deliver a certain amount of cotton, of a certain grade, to a certain location, and I am going to give you this price for it – all at some point of time in future. But what a simple standardized forward contract doesn’t provide, it doesn’t provide any information to anyone else as far as what cotton is worth in general.

Futures markets began simply to attempt to standardize cotton for those forward contracts. So when people started hammering out futures contracts, they were talking about the same quantity, the same delivery location, the same base quality – so they really allow people to trade “oranges to oranges.”

This may seem simple, but it has major benefits. If everybody knows what the going value of a certain standardized set of cotton is, then you have the benefit of price discovery – people know what cotton at a certain level is worth. So you can make your business decisions, you can decide whether to plant more cotton, you can decide whether to invest in a gin or to buy more equipment. That is the price discovery benefit of futures markets.

Who’s In the Game

Growers, co-ops and merchants all participate in the market – they are all hedging their risk. They are what we called “long” in cotton, because they own cotton and they want the price to remain high to protect their investments. “Long” means you are buying futures contracts; “short” means you are selling futures contracts.

Investor speculator groups also participate in the market. That includes small investors as well as large investors and hedge funds. The value of these groups is that they provide a lot of volume for the farmers who simply want the market to reach a certain level so they can get in and cover their risk and get out.

Contracts – Sign (Not Really) on the Dotted Line

In the cotton exchange, they trade two basic types of contracts: futures contracts and then options on futures contracts, which are derivatives of futures contracts. A future is an obligatory contract; an option is a right, but not an obligation.

An option is more like an option on your house. When you were buying your house or your property, you probably paid some money for the right to consider the deal you were offering that seller. You wanted a little time to consider it, so you paid for an option. You paid for a little time to consider buying that house at a certain price, but that option contract did not obligate you to buy that house.

Leave a Reply

Marketing Stories
Market Analysis

Plexus: Look for Tight, Long-Term Trading Range

May 22, 2015

The market has encountered both strong support and resistance to keep prices confined to narrow trading ranges for both July and December cotton.

Promotion

Organizers Gearing Up for Celebrate Cotton Game at Texas Tech

May 12, 2015

It’s not uncommon for universities to recognize the importance of agriculture. It is uncommon, however, for one to go to great lengths to highlight the importance of a single crop.

Market Analysis

Market Up and Down, But Not Down and Out

May 11, 2015

With some exceptions, cotton prices spent time backing and filling the entire week. Yet the market is still attempting to flex its arms and muscles a bit to the top side.

OA Cleveland
Market Analysis

Is the Cotton Market Showing Longer Legs?

May 1, 2015

The stars seemed to align for the cotton market this past week, as prices moved to highs not seen in almost nine months.

Promotion

CCI to Host Pakistani Tour of U.S. Cotton Industry

April 30, 2015

Executives from 11 Pakistani textile companies will tour the U.S. Cotton Belt May 3-9 as part of the COTTON USA Pakistan Special Trade Mission.

Market Analysis

Shurley on Cotton: So Far, Prices Fail To Advance

April 28, 2015

To date, there has been little, if any, incentive for producers to do much with regard to pricing this year’s crop.

Market Analysis

Cotton Inc. Resets Risk Management Seminar in Maricopa for May 19

April 28, 2015

May 19 is the new date for Cotton Incorporated’s Cotton Price Risk Management Seminar in Maricopa, AZ.

Around The Gin
Product News

Deltapine NPE Program Begins Eighth Year of On-Farm Variety Evaluation

April 28, 2015

Nearly 200 farmers will be part of the Deltapine New Product Evaluator program this year to help evaluate cotton variety candidates for the Deltapine Class of 16.

Product News

EPA Approves Enlist Duo Herbicide for Use in Additional States

April 2, 2015

The EPA has approved Enlist Duo herbicide for use in nine additional states, including four in the Cotton Belt.

Product News

New 2015 CROPLAN Cotton Varieties Feature Bollgard II XtendFlex Technology

March 19, 2015

WinField is adding Monsanto’s new Bollgard II XtendFlex cotton trait to two new CROPLAN cotton varieties for 2015.

Precision Technology

New Features for TeeJet Aeros 9040 Field Computer

March 18, 2015

TeeJet has added new features to its Aeros 9040 Field Computer for 2015.

Precision Technology

TeeJet Launches New DynaJet Flex Nozzle Control System

March 17, 2015

The new DynaJet Flex 7120 nozzle control system from TeeJet Technologies helps growers manage spray quality across a variety of operating speeds and application rates.

Product News

New Cheminova Chemistry to Help Control Herbicide Resistant Weeds

February 23, 2015

Cheminova plans to register pethoxamid, a new herbicide active ingredient, to help growers manage herbicide-resistant weeds.

Product News

Brake Herbicide Receives Section 18 Approvals in Six States

February 18, 2015

Brake Herbicide has received Section 18 emergency use exemptions for control of glyphosate-resistant Palmer amaranth in six cotton producing states.

Precision Technology

TeeJet Matrix 430 Provides Simple, Easy-to-Use Guidance

February 18, 2015

TeeJet Technologies’ new Matrix 430 GNSS guidance system is ideal for a wide range of field applications.

Latest News
Market Analysis

Plexus: Look for Tight, Long-Term Trading Range

May 22, 2015

The market has encountered both strong support and resistance to keep prices confined to narrow trading ranges for both July and December cotton.

Market Analysis

Despite Bearish Reports, Cotton Continues to Hold the Higher Ground

May 16, 2015

The cotton market continues to defy the onslaught of bearish shots across its bow.

Market Analysis

Shurley on Cotton: No Surprises in May USDA Numbers, Sideways Market Continues

May 13, 2015

USDA’s May WASDE report contains the first U.S. and World estimates for the 2015 crop year, and the numbers are about as expected – some better than expected.

Promotion

Organizers Gearing Up for Celebrate Cotton Game at Texas Tech

May 12, 2015

It’s not uncommon for universities to recognize the importance of agriculture. It is uncommon, however, for one to go to great lengths to highlight the importance of a single crop.

Market Analysis

Market Up and Down, But Not Down and Out

May 11, 2015

With some exceptions, cotton prices spent time backing and filling the entire week. Yet the market is still attempting to flex its arms and muscles a bit to the top side.

Market Analysis

Is the Cotton Market Showing Longer Legs?

May 1, 2015

The stars seemed to align for the cotton market this past week, as prices moved to highs not seen in almost nine months.

Promotion

CCI to Host Pakistani Tour of U.S. Cotton Industry

April 30, 2015

Executives from 11 Pakistani textile companies will tour the U.S. Cotton Belt May 3-9 as part of the COTTON USA Pakistan Special Trade Mission.

Market Analysis

Shurley on Cotton: So Far, Prices Fail To Advance

April 28, 2015

To date, there has been little, if any, incentive for producers to do much with regard to pricing this year’s crop.

Market Analysis

Cotton Inc. Resets Risk Management Seminar in Maricopa for May 19

April 28, 2015

May 19 is the new date for Cotton Incorporated’s Cotton Price Risk Management Seminar in Maricopa, AZ.

Market Analysis

Market Bumps Upward as the Weather Watch Begins

April 27, 2015

The cotton market jumped higher this week, finding price support from the litany of pre-plant weather problems around the globe.

Market Analysis

Market Lows Remain Higher, Even With Recent Price Dip

April 20, 2015

Cotton futures gave up three weeks of gains last week as the market lost some 200 points. Yet the market continues to see higher and higher lows, which generally points to an uptrend.

Promotion

Cotton Incorporated Launches New Television Commercials

April 17, 2015

Cotton Incorporated’s newest advertising program hopes to remind consumers “Cotton. It’s Your Favorite for a Reason.”

International

COTTON USA Kicks Off New Global Advertising Campaign

April 10, 2015

COTTON USA is rolling out a new global advertising campaign – “I Love My Cotton” – to help inspire consumer demand and spread the benefits of U.S. cotton to markets throughout the world.

Market Analysis

Shurley on Cotton: Prices Heading Toward “Testing Ground”

April 10, 2015

Now that old crop has clearly broken through 65 cent ceiling, there is belief that prices will continue to trek higher toward a new “testing ground.”

Promotion

Real Stories from Real People Highlight New Cotton Commercials

April 8, 2015

Look for a new approach to cotton promotion when Cotton Incorporated’s new national television commercials debut in mid-April.