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

Mother Nature Now in Charge of the Market

July 24, 2016

At this point in the crop production year, be assured that Mother Nature will still have the major say with respect to cotton prices.

Market Analysis

Watching Bulls, Bears and Fundamentals

July 11, 2016

Fundamentals rule in the long run, but technicals provide the roadmap. Just be sure to keep an eye on the bulls and bears.

Market Analysis

Cleveland: A Fun Week of Bulls, Bears and Brexit

July 5, 2016

The cotton market experienced a fun, exciting week as trading focused on strong bullish and bearish fundamentals – and little to no impact from Brexit.

Market Analysis

Shurley: Acreage Numbers Could Challenge Range-Bound Prices

July 1, 2016

In light of the June 30 USDA acres planted numbers, it would have to be considered good news if cotton’s “range bound” prices can remain at or above 64 cents.

Market Analysis

Market Fundamentals Positive, but Not Yet Bullish

June 20, 2016

July prices are still bumping into resistance. But there are enough positive fundamentals in the market to provide a bit of bullish hope.

Market Analysis

Shurley on Cotton: Thoughts Ahead of the Acreage Report

June 16, 2016

There’s usually speculation on the June USDA Acreage number and how it might compare to the March Prospective Plantings number. So far, it's all quiet.

Market Analysis

Commodity and Mill Actions Pushing Cotton Higher

June 10, 2016

It was a pretty good week for cotton, as fund money continued to flow to all commodities, and mills began to ease their price expectations higher.

Around The Gin
Product News

Indigo Launches Water Efficiency Product for Cotton

July 26, 2016

Boston-based research firm Indigo has launched its first commercial product – Indigo Cotton – which helps improve the cotton plant’s water use efficiency.

Product News

Enlist Technology Provides Tolerance to Three Key Herbicides

July 13, 2016

The Enlist weed control system will give growers the ability to use three modes of action postemergence in both cotton and soybeans.

Product News

Providing Upland Varieties with Acala-like Quality

July 13, 2016

PhytoGen offers growers several upland cotton varieties with Acala-like fiber quality for added premiums and higher profitability.

Product News

PhytoGen Names Winners in Best Yielder Club Sweepstakes

June 29, 2016

A North Carolina cotton grower was named grand prize winner in the 2016 PhytoGen Best Yielder Club sweepstakes.

Product News

Monsanto Donates Research Center to Local Foundation

June 27, 2016

Monsanto Company has donated its 150-acre Leland Agronomy Center to The B.F. Smith Foundation, a nonprofit organization in the Mississippi Delta.

Product News

Record Yields Set by 2015 FiberMax One Ton Club

May 4, 2016

The 127 members who qualified for the FiberMax One Ton Club pushed cotton yields and quality to higher levels in 2015.

Product News

Meister Media Worldwide Website Relaunches With New Resources

April 22, 2016

Meister Media Worldwide — publisher of Cotton Grower magazine – has relaunched its corporate website, highlighting information and services available from one of agriculture’s leading media companies.

Product News

ReinCloud Promises Remote Control

April 18, 2016

New software set to combine irrigation management and data collection – all in the palm of your hand.

Latest News
Market Analysis

Mother Nature Now in Charge of the Market

July 24, 2016

At this point in the crop production year, be assured that Mother Nature will still have the major say with respect to cotton prices.

Market Analysis

Cleveland: USDA Turns the Bulls Loose

July 18, 2016

Say it again: Technicals are the leading indicator of fundamentals; they kept telling us higher prices were coming.

Market Analysis

Shurley on Cotton: It’s Christmas in July!

July 13, 2016

The calendar says July. But for cotton growers, it may as well be “Merry Christmas.”

Market Analysis

Watching Bulls, Bears and Fundamentals

July 11, 2016

Fundamentals rule in the long run, but technicals provide the roadmap. Just be sure to keep an eye on the bulls and bears.

Market Analysis

Cleveland: A Fun Week of Bulls, Bears and Brexit

July 5, 2016

The cotton market experienced a fun, exciting week as trading focused on strong bullish and bearish fundamentals – and little to no impact from Brexit.

Market Analysis

Shurley: Acreage Numbers Could Challenge Range-Bound Prices

July 1, 2016

In light of the June 30 USDA acres planted numbers, it would have to be considered good news if cotton’s “range bound” prices can remain at or above 64 cents.

Market Analysis

Market Fundamentals Positive, but Not Yet Bullish

June 20, 2016

July prices are still bumping into resistance. But there are enough positive fundamentals in the market to provide a bit of bullish hope.

Market Analysis

Shurley on Cotton: Thoughts Ahead of the Acreage Report

June 16, 2016

There’s usually speculation on the June USDA Acreage number and how it might compare to the March Prospective Plantings number. So far, it's all quiet.

Market Analysis

Commodity and Mill Actions Pushing Cotton Higher

June 10, 2016

It was a pretty good week for cotton, as fund money continued to flow to all commodities, and mills began to ease their price expectations higher.

Market Analysis

Mills, Speculators and Weather Driving Cotton Prices

June 7, 2016

Mother Nature’s recent whims are driving new money into cotton, as mills come to grips with rising prices and price fixations, which fuel buying by hedge fund long speculators.

Market Analysis

Shurley on Cotton: A Watchful Summer Lies Ahead

June 7, 2016

As planting season ends and summer approaches, the challenge for growers will be if, and when, to take price protection – and, if so, how to do it.

Promotion

Cotton Inc Debunks Food Babe Cotton Claims

May 31, 2016

Cotton Incorporated recently took on the Food Babe to debunk her unfounded statements about cotton and cottonseed. Forbes magazine applauded those efforts.

Market Analysis

Strange Mix of Positive Signs for the Market

May 31, 2016

Speculative funds, issues in India, U.S. plantings and strong sales have put the cotton market in a positive mood.

Market Analysis

Planting Progress, China’s Reserve Auctions Driving Market

May 23, 2016

Cotton futures had a few triple digit days this past week. Yet, thanks to a combination of influences, the bulls carried the week – if only slightly.

Market Analysis

Shurley on Cotton: Prices Get a Much Needed Bounce

May 19, 2016

April was a good month for cotton prices. So far, May hasn’t been, but prices seem to be attempting a slight recovery.