While eating lunch one afternoon during the 2004 Beltwide Cotton Conference in San Antonio, California producers Bob Hull and Jack Seiler talked about a marketing seminar they attended earlier that week. Friends and business partners since the early 1990’s, they discussed marketing options for their cotton crops, both for their individual farming operations with more than 4,000 acres each and for the co-owned Bojax Cattle Company, a 600-acre farm venture. Applying what they learned during marketing seminars and consulting with their Calcot marketing representative, they used spot fixation and sold futures contracts to capture two years worth of price on their crop. In the end, they successfully marketed a large portion of their crop for 68 cents per pound during a time when prices wavered in the 50s and even dropped into the mid-40s.
For their successful marketing strategies, Hull and Seiler are winners of the 2006 Cotton Marketers of the Year Award, sponsored by the New York Board of Trade and Cotton Grower Magazine. They were honored in November 2006 on the trading floor of the New York Board of Trade and received their awards during the 2007 Beltwide Cotton Conferences in New Orleans.
Knowing Your Costs
Before considering a marketing strategy, Hull and Seiler say there is one constant that must be taken into consideration – fixed costs. An accurate assessment of costs gives growers a base line to make marketing decisions. By knowing their break-even price, growers can use marketing tools to fix a price range that guarantees profits.
“From a business side, to me, a good farmer needs to know what his costs are. When he understands what his costs are, he can market his crop and accept a price. But if he doesn’t know what his costs are, he is in bad shape,” Seiler said. “You have a line in the sand so to speak. Your cash position is huge because you have spent the $1,000 an acre to get the crop there, and that is your per-acre cash position.”
Hull said that basic premise guided their marketing decisions and allowed them to be comfortable with locking in a price. The market may go up, but it could go down. If they could lock in their price, they could at least rest assured in a profitable crop.
“That was the key for us when we were making marketing decisions. We sat down and said it takes us 1,600 pounds at 58 cents for us to break even – and that’s a pretty good-sized crop and quite a bit of money. But we thought that would pay for our equipment, it would pay for our land, it would pay for our overhead and it would pay for our salaries out of the farm,” Hull said. “So if you can find the place where you can say that, it gives you a chance to start making marketing decisions because now you know what you have to do to make a profit.”
Thinking Like a Businessman
As farming operations grow in size, producers continually face more economic choices regarding their farms. Marketing decisions, inputs choices and whether or not to irrigate are just a few of the issues growers must weigh during a crop year. To balance those options and end up in the black, Hull, who has a master’s degree in business from the University of Massachusetts, recommends that farmers make decisions from a business perspective.
“In order for farmers to be better farmers, they need to be better businessmen, because farming is a lot more competitive than it was when I grew up on a 700-acre farm. That used to be a pretty good-sized farm. Now I farm 2,800 acres on my own and 600 acres with Jack, and I have another farm that is a 1500-acre partnership. It is crazy,” Hull said. “That is a lot of farming for one person to be involved with. But it is not unusual, and you can’t run a business of that size without being better businessmen.”
Seiler realized the importance of good agribusiness planning and decision-making when he began dabbling with options. He had studied the market and was primed to take a position. Moving at the right time, he took a call position – the rest was history.
“I’m comfortable growing a crop, but it was a baptism by fire when I took my first call position. But the market ran up, and when the check arrived, I was elated and ready to cautiously do it again.”
Searching for Resources
Knowing what to do is often easier than knowing how to do it. And so it often is in the world of business. In many areas, farmers have a wealth of information to help them plant and harvest a crop. Production conferences, university studies, crop consultants and a host of other organizations help growers get the most usable cotton to the gin. But on the business side, resources and advice are sometimes limited.
“It easier to get good help in farming than it is to get good help in business. The university will come out and give you advice on farming, and the chemical companies will come out and give you advice in farming. If you go to your PCA, he will say, yeah you need to spray this, and this is what you need to do. You need to use this many units of this – all of these sorts of things,” Hull said.
“But if you go to a CPA and ask for some help, he will say you could do this or that, but won’t offer very much real help. If you go to the banker, they will loan you the money, but they won’t tell you that you should do this or you shouldn’t do this.”
With A Little Help From Friends
Good help may be easier to get on the production side, but Hull and Seiler found a wealth of information available from two friends of the cotton industry. They credit Calcot Cotton Marketing Service and the National Cotton Council’s Beltwide Cotton Conferences as two primary resources for their marketing needs. Both producers market their cotton through the California-based cooperative and say the organization has provided valuable resources.
“Calcot has a variety of marketing options, including the ability for us to call our own price and fix our own basis,” Hull said. “They give you the tools, but you make the decisions – you get just enough rope to hang yourself.”
To keep that rope short, Hull and Seiler attend Beltwide every year to stay abreast of the latest marketing news and information. By learning from market experts such as Carl Anderson and O.A. Cleveland, Seiler said he became more confident in his marketing decisions.
“I don’t know why everyone doesn’t attend the Beltwide Conferences. There are rooms full of people sharing their experiences, as well as the latest and greatest of what is coming up in the next year,” Seiler said.
“I grew a lot of alfalfa in the early years, and alfalfa just didn’t offer these kind of tools, the future option deals. I attended the conferences to understand how it worked, and how it could benefit me. I went to the economic sessions and tried to pick up on the buzz words: strike price, out of the money call, and so on. It took me a long time, but now I have a better understanding of the futures and options market and how it can benefit the grower.”
The Marketer’s Tool Box
Using two tools offered by Calcot – the seasonal pool and spot fixation – Hull and Seiler were primed to take an advantageous position in the market. During that lunch in San Antonio, they made a decision that would later reap major rewards on their crops.
“We were able to market our 2005 cotton by using spot fixation. We were able to capture two years worth of price at lunch one day on a huge part of our crop,” Hull said. “We didn’t know if the price was going to go up, but we knew what our cash position was, and we were able to capture a 68 cent price on a major portion of our crop because we knew that 58 cents would make us money.”
The marketing strategy proved brilliant. Demand began to flatten, while production and stocks continued to rise. Price fell during the next two crop periods into the 50s, at one point dropping into the 40s. Throughout the rollercoaster ride, Hull and Seiler had their crops locked in at a profitable price.
As the producers look to the future, they aren’t sure what marketing decisions they will make. But a few things are certain. They will continue to listen to Calcot and at the Beltwide. And of course, to each other.
“Why are there two marketers of the year?” Seiler said. “Because it took two of us to do this. We are a team. And it took both of us to have the confidence to make this happen.”