Set Business and Marketing Goals for Cotton – And Lock Them In
January 29, 2024 Some cotton folks have told us that the best thing about 2023 is that it wasn’t (exactly) like 2022. After a promising start, it was hot and dry again — worse in some places than others — but with a tad more acceptable ending.
So, in the midst of continuing price fluctuations and the corresponding crop decisions for 2024, we asked three leading cotton economists for their input and advice on planning and marketing for this year’s crop. Our panelists are (alphabetically):
- Dr. Darren Hudson, Combest Endowed Chair, Director of the International Center of Agricultural Competitiveness, and Interim Associate Dean of Research, Texas Tech University
- Dr. John Robinson, Professor and AgriLife Extension Cotton Marketing Specialist, Texas A&M University
- Dr. Aaron Smith, Associate Professor and Commodity Marketing Specialist, University of Tennessee.
Here’s what they had to say.
Current Market Status
Smith: “Until we see additional demand materialize, it’s going to be tough for cotton prices to break out of the trading range it’s been in recently — and if we’re going to see it move, it’s probably going to be later in the spring. We can’t fully discount a bit of tighter global economics. For now, the consensus seems to be that if there’s going to be a recession, it would be a reasonably mild one.
“Cotton is not a commodity where you can dip your toe in. If growers have the infrastructure and the machinery, they’re going to end up planting cotton. They’ll need to look at what crop insurance prices are and what level of protection they’re going to have as they go into the fields to plant. That’s really going to be key.”
Hudson: “I say farmers are juxtaposed between being perennial optimists and perennial pessimists at the same time. And if you look at the 2023 crop and market, we were at profitable levels in the mid-80s. Farmers weren’t making a ton of money at that level given the cost of production. But if they priced for the season, they might be okay. Those that who waited until the end of the year to price are going to feel the pinch.
“Right now, prices in the 70s are likely not going to cover the total cost of production. At this level, we’re going to lock in a relatively low insurance price, probably somewhere in the 75% to 78% range. There’s still potential for good farmers to plant a crop and take advantage of any rallies in terms of a pricing opportunity.
“The 2023 crop had its bright moments, but it’s soft. The 2024 market is starting out soft, so you’re planting and hoping for a rally as opposed to planting into some strength with higher prices.”
Robinson: “The thing about 2023 was that it was a disappointing year in the sense that people were hoping they would do really good to help make up for the drought disaster of 2022. Well, 2023 wasn’t that make-up year. It started dry and then we had water — maybe too much water. Then we had extreme heat and just a lot of weird and tough conditions. I think farmers had their hopes up for good production because of the rain that came in April and May. It was sort of like a kick in the gut. It was disappointing.”
Cotton Acres for 2024
Hudson: “Based on historical results, the corn/cotton ratio would say about 10.8 million cotton acres in 2024. The problem is the ratio doesn’t capture the current lower price levels for both commodities. The ratio would say it’s more favorable to cotton this year than it was last year. But my gut tells me at 77 cents, we’re not going to get 10.8 to 11 million acres. It wouldn’t shock me if we ended up in May with 9.8 million acres planted, the market goes up, and we see a rally that would give opportunities for people who planned excitement to price it. But that’s three-dimensional chess. The market is only responding to the information it has.”
Smith: “What ends up happening with crop insurance and what happens with soil moisture, especially in Texas, is really going to dictate what gets planted and what doesn’t. It’s also important to know where wheat plantings are going to be in that region to help get an indication of if farmers plan to take it to harvest or not.”
Advice to Growers for 2024
Robinson: “I would maintain some really simple hedging examples. There’s the option of selling your crop — either forward cash selling or selling a recap right after harvest — and then buying call options to still participate in a rising market. Those call options have been less expensive because of the lack of volatility due to the sideways trading that we’ve been in. The premiums on those calls are cheaper than in previous years. If what’s keeping growers from selling is fear of losing out on higher prices later, they can pay for the right to participate in those prices. It’s probably cheaper to do that with call options in our world than it is paying for storage.”
Smith: “I do like the opportunity to take either a position in the futures market or take a call option. One thing I really like at this time of the year in terms of new crop is bridging that price risk gap between now and when we’re looking at buying inputs at one price level, and then laying off some of that risk in the futures market.
“Consider carrying some option protection at least until the crop insurance price is determined. That allows you to mitigate the risk for the worst-case scenario and hope for the best. If you’re buying inputs at one price and you have another commodity price, you want to avoid having those inputs rise or having that commodity price fall. You can buy a good option and do an offset in terms of the premium cost.
“For simplicity, use a straight put option on the December 2024 contract, carry that until crop insurance prices are determined, and then exit and recoup a big chunk of that premium. The big thing I always encourage producers to consider is it’s not what that upfront premium cost is. It’s how much of that upfront cost can you potentially end up recouping when you go into the February-March period.”
Hudson: “Growers need to get a good handle on their cost of production and understand the implications of the choices they’re making at the margin. They also need to have a plan to market their cotton and stick to it.
“In the broader sense, protect your business first and play marketing games second. The risk management strategy should be about protecting your business against events that impact the market, and the way to protect your business is to have downside risk protection. Don’t make decisions that run counter to the longevity of your business. Always protect the business first.”
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