Market strategy critical for cotton

Uncertainty beyond the normal planting questions makes management strategies for cotton farmers more important this year.

The World Trade Organization has challenged key provisions of the farm program as not being in compliance with the agency's guidelines for international trade. Currently, two out of three bales of U.S. cotton are exported and are subject to these guidelines.

President Bush has proposed cuts in the budget deficit and reductions to the U.S. farm program safety net.

Each of those actions could knock several cents off the price of cotton, said Carl Anderson, a recently retired Regents Fellow, professor and Texas Cooperative Extension cotton marketing economist in College Station.

Anderson advises that producers get a marketing plan in place now.

“We're using all of the policy and supply/demand uncertainties to substantiate and point out that in the future producers need to use marketing strategies to enhance incomes, because we see farm program payments being more limited than they are today,” Anderson said.

Anderson spoke recently in Amarillo at a one-day Advanced Topic Series course on “Developing This Year's Marketing Plan-Cotton,” sponsored by Extension.

“We talk about maximizing income under the farm program,” he said. “We emphasize the importance of understanding the markets, keeping up with them and knowing when there are opportunities to pick up some extra income.”

Northern Panhandle

Steve Amosson, Extension economist in Amarillo, said that's particularly important in the northern Panhandle, where cotton acreage is increasing, but producers are at square one on the learning curve.

“We're starting to get a lot of requests for basic outlook and marketing information on cotton,” Amosson said. “Most of these producers are new, and until you understand cotton, it's difficult to develop a marketing plan.”

Time is growing short for making those plans. Like most crops, the best prices for cotton are before planting or soon after, Amosson said.

That means decisions need to be made in the next 45 days or so, he said.

Anderson said last year some producers reaped the benefits of advanced planning. They were able to set a price floor at 60 cents on the December 2004 futures last March. Those futures dropped to 44 cents by August, but those who had locked in the floor price of 60 cents, using a put option, had price insurance.

In 2003, the situation was the opposite. The price was low. Anderson said when the price gets around 40 cents, producers should buy calls to “hedge” the counter-cyclical payment.

Price insurance

“We no longer just hedge against lower prices. We hedge against lower government payments, because the price goes up and the payment goes down,” he said.

With December futures typically ranging from 39 cents a pound to 70 cents a pound, buying price insurance makes sense, Anderson said. It provides an opportunity for income in addition to the farm program payment.

This year, prices are in the middle — in the 50- to 60-cent range — for December futures, but they could easily drop into the 40-cent range, Anderson said. Producers should work on putting on some price floors at 52 cents or higher, which could yield a 6 cents to 10 cents net gain, given the expected price at harvest, he said.

“It's standard procedure when you buy a nice new car, you take out insurance and hope you'll never need it. It's quite comfortable to have it,” he said. “With cotton, you spend 2 cents and get back about 8 cents net. Anyone who can get 5 cents out of this market will have been successful.”

While many producers use a pool to market their cotton, the economists said producers of the future need to be aware of the opportunity to use the futures market and are learning when to implement pricing strategies.

“The key is not to wait until you see the top of the market, because it's already gone by the time you see it,” Anderson said. “We just want to find a favorable pricing opportunity.”

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