Carefully Review Marketing Options to Protect the Bottom Line
From Cotton Grower Magazine – December 2015
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.