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Corn+Soybean Digest

Lock In Cotton Contracts Early

The warnings were there for growers to lock in a floor on at least some of their cotton. Too many anti-price forces were in the works to send December '04 futures tumbling toward the 52¢ loan level by harvest. Mike Henson took the advice and worked to get his cotton contracted — even if it meant working with a “land down under” company with operations in the U.S.

Henson, who farms near Ropesville, TX, placed some of his cotton in the Queensland Cotton Growers Pool, a new marketing alternative for some growers who like to leave the marketing decision to the merchant.

He hopes the pool, which markets mainly higher-quality export cotton year-round, will net 62-63¢/lb. for his crop. This strategy will enable him to worry less about pricing and concentrate more on keeping his weeds and insect pressure under control.

Henson is like many growers who either marketed a portion of their cotton in the spring, or booked all or a portion of it with one of the regional cotton marketing co-ops, such as Staplcotn of Greenwood, MS, Plains Cotton Cooperative Association of Lubbock, TX, or Queensland, an Australian company with U.S. offices in Fresno, CA.

Whether they marketed their crop using futures, options, forward contracts or huge marketing pools, these were moves that took to heart advice from cotton economists who saw early marketing strategies as winners for the 2004 crop.

Mississippi State University's O.A. Cleveland advised growers to price much of their crop at 65-67¢ early on. “Our approach to market planning is usually with the idea that both the U.S. and the world will harvest an average crop,” says Cleveland, also of “Realizing that an average world crop would lead to an increase in both U.S. and foreign carryover stocks, we had to expect that December futures would fall from the 65¢ level.”

David Reinbott, University of Missouri extension economist, adds that some growers' strategy was to buy call options if December '04 futures prices dropped below 60¢. “Many of the cotton farmers in Missouri use Staplcotn,” he says. “But some looked for additional marketing opportunities. If prices dropped below 60¢, buying a call option leaves them open to potential price rallies. They could take advantage of a higher price.”

Still there were, and continue to be, various forces that can push prices down, says Texas A&M's Carl Anderson. “The market environment for U.S. cotton has been restructured, subject to the complex and erratic forces of export demand,” he says. “Consequently, price risk for industry participants — producers, merchants, cooperatives and textile mill buyers — has been increased substantially.”

In late spring he encouraged producers to consider placing a floor under market prices in the mid-60¢ range using option strategies and/or forward contracts during price rallies. Those recommendations continue as harvesttime nears.

Henson's marketing program is simple — plant high-quality varieties that are demanded by his pool. In his case, it's FiberMax varieties, which have consistently yielded high-quality fiber that more and more mills here and abroad demand. The results are usually a 2-3¢ premium for the higher strength and higher staple-length varieties.

“I have used futures and options in the past,” says Henson, whose production is about two-thirds irrigated. “But being a good marketer for a large amount of cotton takes a lot of time and expertise. I decided I didn't have the time or the knowledge to do it right. So I place my cotton in a pool and let them do the marketing.”

The 83-year-old Queensland Cotton firm is interested in the Texas FiberMax varieties because the seed was developed in Australia. The quality characteristics are comparable to Australian cotton. Texas growers had access to the pool for 2004-05. About 75% of the price is paid upon delivery of the cotton. The remaining 25% is paid the following June.

Henson says the higher-quality cotton should generate the premium. Anderson agrees. “We do know that market demand for cotton quality of above our base grade 41 and 34 staple are strong and should pay a noticeable premium for the higher grades and longer staples,” says Anderson. “It appears that the market premiums should be higher than those in the CCC loan schedule.”

Dan Sullivan, Queensland vice president of marketing, says the company began offering pool contracts in Texas because of better cotton quality. “Our mills desire 31-3-35 and better and longer with a strength at 28 or higher (grams per tex). Mills also look for micronaire in the 3.5-4.9 range, with 3.7-4.2 as the most ideal range.”

Those quality numbers can be hard to obtain. That's why it usually merits a strong premium.

“Queensland Cotton is offering Texas growers both pool and cash marketing options,” says Sullivan.

Henson is using the pool, again leaving the marketing up to Queensland Cotton.

Other pools also seek high-quality cotton. At Staplcotn, the nation's oldest and largest cotton marketing program, farmers are trusting it to handle some 4 million bales for 2004, or at least 25% of the nation's overall crop. Meredith Allen, vice president of marketing, says growers chose either the “seasonal option” or the “call option.”

The seasonal option is one in which Staplcotn makes all marketing decisions.

In the call option, the grower reserves the right to call, or fix, a price based on the New York Cotton Exchange futures. The grower may call the price at any time he chooses, but it can't be later than May 31 following the crop year in which the cotton was planted.

Other pools operate similarly and the marketing strategies they use are among the most guarded secrets in all of agribusiness. PCCA handles 2.5-3 million bales annually. Like Staplcotn and Queensland, growers delivering high-strength cotton often receive a premium from the PCCA pool.

Sullivan says Queensland is not yet ready to move into the Delta area because of what he terms as “inefficient” warehousing. Sullivan says the U.S. cotton industry is taking some measures to improve these inefficiencies.

“Cotton can sit in a warehouse (in the Midsouth area) for up to eight weeks after it's been sold for shipment,” he says. “From a mill standpoint, we have to make sure our cotton is delivered on time every time. They don't want delays.”

Still, Queensland is “investigating opportunities” to expand its pools into the Delta region, since higher quality cotton is also being produced in the area.

A&M's Anderson says that even if growers market their cotton through a pool, there are still opportunities to use futures or options to enhance their marketing capabilities beyond any advantage they may receive from the pool.

In the case of possible market increases, growers can use call options to protect against the loss of any counter-cyclical payments that are based on the average price over the year, he says.

Cleveland adds that although early indications were for 14 million-plus cotton acres, the actual crop may well be unchanged from 2003's 13.45 million acres. High soybean prices caused some growers to switch from cotton to more beans, he says, which could account for possibly fewer acres.

But the final bearing on prices will depend on the crops produced in China, South America and other foreign countries. And Henson wants to make sure his price is a reasonable one that isn't hurt severely by any gluts of cotton worldwide.

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