Trucks move cotton on an Altus Oklahoma gin yard Producers should have a good marketing plan in place to counter price movements

Trucks move cotton on an Altus, Oklahoma, gin yard. Producers should have a good marketing plan in place to counter price movements.

COTTON SPIN: What the election teaches about cotton marketing

How will election affect markets? I have spent quite a bit of time in the last six weeks thinking about the impact of the election on my family’s finances.

By the time this column hits the presses, I trust the U.S. presidential election will have been decided. (I dang sure hope it has been decided.)

I have spent quite a bit of time in the last six weeks thinking about the impact of the election on my family’s finances. Specifically, I have been wondering about the possibility of a negative stock market shock, presumably from a Trump election. I am not saying that a Trump election would be good or bad; rather, I’m saying that if it comes as a surprise to most Wall Street traders, it may result in a stock market sell-off, spurred by worries about potential trade wars and U.S. corporate earnings.   

The first principle of this election that resembles commodity markets is the uncertain outcome. Less than a week from the election, the polls are fairly tight. As I write this, I don’t know who will win the election. The outcome is ultimately uncertain. 

And regardless of who wins, I don’t ultimately know the impact on the stock market. That is also the eternal situation with commodity markets. The futures market today is like an election poll. A fancy statistical model of cotton prices is also like an election poll — it is a forecast. 

ONLY AS GOOD AS DATA

We can project an outcome and put a margin of error around it. But the forecast will be only as good as our model and our data, and it has the possibility of error.  

By the same token, any marketing plan must be based on the inherent uncertainty of commodity prices. We can make educated guesses, but nobody ultimately knows. 

My response to the risk of a potential stock market decline has been to move to the sidelines. I sold my stock and bond mutual fund holdings and parked the cash in money market funds. (Let me hasten to add, I am not recommending that anybody else do this.)  

I did this prior to the first presidential debate. My timing was based on the thought that an unexpectedly good debate performance by Trump might trigger the market weakness prior to the election. My plan is to move back after the election into a diversified stock/bond portfolio appropriate for my age and risk tolerances. I already have the brokerages, accounts, and allocations identified, so it will just be a matter of placing the orders.

A DETAILED PLAN

There are other risk management tactics I could have taken. I could have bought put options against my stock holdings. I could have shorted stocks. Those approaches have their advantages and disadvantages, too.

I am relating all this to make a point: A useful commodity marketing plan has to be detailed. It should clearly reflect which actions you will take; e.g., sell or hedge a certain quantity of cotton bales at a certain price and/or a certain date. It should consider the advantages and disadvantages of various risk management tactics, such as forward contracting, pooling, hedging, and hedging/cash marketing combinations. 

The 2016 cotton crop would likely have benefited from such a detailed plan. How many growers contracted or hedged cotton when the Dec ‘16 was above 75 cents? The late summer market rally was a possibility, but impossible to predict with certainty. Still, such an event could have been planned for.

A MATTER OF INSURANCE

I am clearly incurring some costs for my planned actions to my retirement accounts. There are transaction fees associated with selling and buying securities. There is also the potential opportunity cost of missing out on a rally in the markets for the brief period of time I plan to be on the sidelines. 

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I think I have counted those costs, and am willing to bear them as an insurance expense. Crop marketing plans are essentially a matter of insurance, and they have their costs, too.  Option premiums are a clear form of insurance cost. Bearing the opportunity cost of pooling or forward contracting is another form of insurance expense. 

A good marketing plan will anticipate these costs, so marketing choices are informed and intentional. 

For additional thoughts on these and other cotton marketing topics, please visit my weekly online newsletter at http://agrilife.org/cottonmarketing/

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