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Corn+Soybean Digest

Lock In An Early Price

The table is set for higher cotton prices this year. But the main course is still in the oven as growers ponder when to serve the salad and satisfy part of their marketing appetite for profits.

Brad Heffington is one grower who sees a hearty meal in the future. However, he has orders in place to market at least 25% of his '04 crop before planting.

"I think it will be important to get a good portion of your crop hedged this spring if you can," says the Littlefield, TX, producer. "I have orders in to buy out-of-the-money put options to protect against a major price drop. And we're working on forward contracts to lock in a solid basis, while at the same time being flexible on when we can name the futures price to secure the contract."

Heffington pays close attention to both domestic and world cotton statistics in making his marketing decisions. Even though forecasts are for world and domestic production to increase, China's enormous cotton demands are helping maintain some bullish sentiment.

If there are any serious weather problems for China, other parts of Asia, South America or the U.S., prices could easily climb in the mid-70¢ range or higher. But if weather cooperates, some see a potential for December futures prices near 50¢, or below the government loan rate.

Don Shurley, University of Georgia cotton marketing specialist in Tifton, suggests that growers be aggressive in getting some of their '04 crop marketed early.

"I have encouraged growers to begin contracting when they can get 65¢ (with basis at -3.5-4¢ December) with the opportunity to buy it back with calls if prices increase," he says. "Growers need to try to eliminate some risk and take some price protection on at least a portion of their crop. Along with forward contracts, they might also look at put options for some price protection."

Jackie Smith, Texas A&M marketing specialist in Lubbock, says growers should look at purchasing "a 60¢ or 62¢ December '04 put for 1-2¢" for simple price protection.

"If a good crop comes in worldwide, 50¢ cotton futures are certainly not out of the question. This would likely result in a 43¢ cash price (at -7¢ basis)," says Smith. "A 60¢ put could be purchased for less than 2¢ if December '04 futures move back near 70¢, providing a floor price of 50-52¢."

O.A. Cleveland, Mississippi State University cotton economist, leans toward early marketing using straight futures to hedge in a high 60¢ range.

"If the U.S. has an 18-million-bale crop, as projected by the National Cotton Council (NCC), and the world crop is average, then decreases in December futures could range from the low 60s to high 50s," he says. "If possible, it may be wise to lock in at least 10% of your crop early."

Heffington is prepared for whichever direction the market takes. "We want to lock in puts in the 63¢ level on about 25% of our crop when futures are at 70¢ (assuming a -7¢ basis)," he says. "We would then measure the technicals for supply and demand at and after planting. If we have a normal crop (domestically and worldwide), prices will probably drop."

His ultimate goal is to secure forward contracts with an above average basis. "That 63¢ floor price would help prevent a major loss," Heffington says. "At the same time, if the December market breaks 70¢ and approaches 75-80¢, we'll probably lock in 100% of our crop with forward contracts. You're looking at a good profit at those types of prices."

He monitors numerous market reporting services to track production and usage trends worldwide.

Cleveland remains more bullish than bearish in his forecasts. "The big question is if we will see some impressive sales to China," he says. "If so, that's going to carry December with it. It will give us a challenge of 70¢ in December, even with a 32-35 million bale carryover, which is right in line with what China can use in one year."

In its early February report, the International Cotton Advisory Committee indicated that, with normal weather, "production in China (mainland) is expected to reach a 20-year high of 6.2 million tons, up 1.3 million tons or 27% from the final official estimate of the '03-'04 crop released in January.

World production is projected to reach a record of 22 million tons in '04-'05, up 1.9 million tons, or 9% from this season."

The NCC has forecast U.S. plantings at 14.76 million acres this year, up about 9% from '03. If yields are normal, that would translate into about an 18.5-million-bale crop -- an increase of 300,000 bales over '03.

Nonetheless, Cleveland says, "the balance in world supply/demand clearly indicates cotton futures are too cheaply priced at 70¢. If the July ('04 contract) and subsequent new contracts come under pressure, and/or collapse, that can't occur until the market is comfortable that the Northern Hemisphere crop is in the ground and good growth progress is perceived.

"Thus, cotton growers have additional time for December to challenge the 70¢ level, with decent prospects to trade into the low 70s," he says.

The NCC estimates that U.S. raw cotton exports will be about 13.2 million bales for the '03-'04 marketing year, about 72% of the domestic '03 crop.

"U.S. cotton continues to meet price competition and will maintain its current trade share, despite extremely competitive conditions in the world market," says Gary Adams, NCC vice president, economics and policy analysis. "Customers for U.S. exports have changed slightly the past few years. China became a significant buyer of U.S. raw cotton during the '02 and '03 marketing years."

Total U.S. imports of cotton goods were estimated at a 9% gain to 19.3 million-bale equivalents in '03. But the NCC projects these imports will increase to 20.5 million bales in '04. Although imports continued to increase in '03, an estimated 7.4 million-bale equivalent, or 38.1%, contained cotton grown in the U.S.

NCC economists expect the world crop to push 102.3 million bales in '04, up by 10.1 million bales from '03. China will account for more than half the recovery, assuming better yields and increased area.

Carl Anderson, Texas A&M economist in College Station, says that "provided world production exceeds 100 million bales, December '04 futures prices could decrease to the low 50¢ level.

"For '04-'05 cotton, I'm suggesting growers purchase December '04 put strikes in the range of 60-64¢ for a 1.5-2.5¢ premium," he says. "Current market support is fragile and depends on if China buys more U.S. cotton. To stimulate the market higher, China needs to buy more than the 3.2 million bales it had purchased by Feb. 1."

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