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Corn+Soybean Digest

Marketing Cotton In Reverse

Marketing the 2001 cotton crop has been every bit as fun as hoeing weeds.

Except for a couple of weeks of 60¢-plus per pound pricing opportunities in late '00 and early this year, nothing but futures prices in the 50¢ — and even 40¢ — range have been seen. Cash prices have been in the mid-30¢ range much of the year.

How depressing is that? Not even 15-20¢-plus loan deficiency payments can make up for losses when the cost of production is 60-65¢ for many growers.

But growers like Harlan Mefford of Eldorado, OK, felt the need to protect against a lost LDP. Mefford is among some growers who took an obscure approach to marketing their '01 cotton. His strategy is aimed not at making a profit, but at cutting his losses.

With a projected cost of about $500/acre to grow an irrigated crop yielding 800-1,000 lbs of lint, or about 2 bales/acre, Mefford cut back dramatically on his overall production, planting more forage crops instead. He only planted cotton on 30-40% of his regular cotton acres, then used a full irrigation program to pump up his yield.

His marketing plan included buying 50¢/lb December cotton call options for 3-3 ½¢/lb. That was in mid-spring, when futures prices were in the 49-50¢ range. He bought the calls in an attempt to protect the LDP on that production. After all, there was still a chance for a weather rally, which would have meant a higher price but lower LDP.

But prices dropped by up to 10¢ in late spring and early summer, a time when cotton traditionally sees spikes and pricing opportunities. “We didn't think the futures price could get much worse,” says Mefford. “But it did, dropping toward 40¢. I wish I had waited before buying those 50¢ calls. But with this year's situation, it seems there is no strategy that has worked.”

If the doldrums situation continued into harvest, Mefford considered rolling the December calls into March '02.

Larry Jones of MarkeTTrakker, an agrimarketing consulting firm in Floydada, TX, was also looking at purchasing March or May '02 calls for his clients.

“We've had to market in reverse,” he says. “We are waiting on the market to bottom out in the 35-40¢ range for December.

“We will go with at-the-money calls (for a cost of about 3¢). That would probably give us our best chance to protect the LDP with a futures price increase. And going out to March or May will allow more time for the market to make changes for the better.”

A 20¢ LDP, which was certainly apparent when cash prices hit the low 30s in early and mid-summer, is big money. Considering that could account for 25% or more of a grower's overall income, securing the LDP from a market price increase could be critical.

For example, if cash prices remained at, say, 32¢ at harvest, that would mean a 20¢ LDP on the 52¢ loan rate, depending on the quality of cotton. Add to that a potential AMTA payment of about 7¢, and the overall price is about 60¢. If the cash price increased, the LDP would decrease. Those precious cents-per-pound would be lost without having the LDP protected.

Rick Holder operates with a cut-your-loss strategy. He's president of Stockman's Bank in Gould, OK, and works with Mefford and other growers on their marketing. Mefford took advantage of early marketing opportunities for his '00 crop and hedged it for 63¢. “There just haven't been opportunities to take that approach in 2001,” says Holder. He says some growers used a 2001 strategy that saw them reduce inputs substantially by reducing irrigation and other inputs. Some even decided against planting cotton and fallowed out their land.

“The way we figured it, going with a full irrigated schedule to produce a two-bale crop would result losses of up to $200/acre with prices approaching 30¢,” says Holder. “But the cost of the call options would be $30-35/acre. By not planting, they will likely lose less money with this type strategy. If prices happen to go up, they would gain from an increase in the value of the call.”

Even though the forecast is for continued market pressure for next year, Mefford and others are hoping for any type of rally into the 65-70¢ range. “I will definitely look at futures or put options to lock in a price at that level,” he says. “We need some sort of a rally to help take some of the sting out of this year.”

Jones, whose grower clients are eager for the chance to secure a good price, says he will recommend that they take price protection when futures approach 65¢ or better. “We just have to get prices up above the loan level before it is advantageous for our clients to do “nay” marketing,” he says.

The Global Feel For Cotton

What about global markets? Don Ethridge, Texas Tech University economist, says cotton prices will likely remain low due to the high value of the U.S. dollar. “It is hurting our ability to export cotton,” he says, “and it is causing us to import more foreign textiles. That hurts farmers as well as our domestic textile industry. But, unfortunately, lowering the value of the dollar would probably mean a weakening of the overall U.S. economy.”

He adds that increased world production in Brazil, Australia and other regions means additional supply and pressure on prices.

O.A. Cleveland, cotton marketing specialist at Mississippi State University, says this increase in world production goes against the grain. “The seven-month decline in cotton prices failed to force the very typical decline in foreign plantings,” says Cleveland.

Some cotton economists, including Cleveland, feel December futures could drop to an incredible 35¢. That spells a cash market in the upper 20¢ range for many growers. Again, an unheard-of price. There are many factors that could keep a thumb on prices, he says.

“Lower world prices, coupled with an abundance of both U.S. and foreign cotton supplies, would appear to keep the heat on any attempt to rally December futures much above 45¢ during the current production season,” says Cleveland. “Add to that U.S. crop prospects that have the crop within grasp of the 19- to 20-million-bale range, and '02 carryover supplies look even more burdensome.”

He, too, points out that the ever-declining domestic textile industry forces U.S. cotton to compete directly with foreign cotton for textile usage in foreign markets. “This is virtually impossible given the strength of the dollar compared to the value of local currencies in respective textile spinning countries,” says Cleveland.

Bollgard Cotton Registration Renewed

The U.S. Environmental Protection Agency renewed Monsanto's bollgard insect-protected cotton for another five years. The registration continues key stewardship practices and refinements to the existing insect resistance management program.

“We are pleased that the EPA has re-registered Bollgard cotton without any significant change in the insect resistance management plans as recommended by the industry,” says Hollis Isbell, National Cotton Council leader and an Alabama grower.

Monsanto research indicates that Bollgard has a 7% yield advantage while requiring 2.5 times fewer insecticide applications than conventional cotton. According to the National Agricultural Statistics Service, farmers have used 2 million fewer pounds of insecticide since Bt cotton was introduced.

Key elements of the renewed registration include: 1) A review in 2004 to determine its effectiveness; 2) An annual third-party survey to measure understanding and compliance with resistance management requirements; 3) Continued grower use of community refuges rather than growers planting unprotected cotton in their fields.

Tracking Devices May Be Reality

Here's one possible side effect of the Sept. 11 attacks: Ag pilots may be required to install transponders on aircraft so that air traffic controllers can track their movements just as they do passenger planes and other private aircraft.

Owen Taylor, Soybean Digest's southern correspondent, reports that a couple of ag pilots said in late September that they already had ordered the devices in anticipation of the requirement.

Cotton Science Journal Is Online

An online publication dedicated to the understanding of cotton science offers growers pertinent crop production information and advice.

The Journal of Cotton Science is published by the Cotton Foundation four times a year.

The latest issue features an economic analysis of starter fertilizer, additives and growth regulators in cotton production.

Other articles focus on: arthropod management, breeding and genetics, economics and marketing, engineering and ginning, molecular biology and technical issues.

Visit to view the publication.

Beltwide Cotton Conference Slated

“Technology — The Common Thread” is the theme for the upcoming 2002 Beltwide Cotton Conferences, set for Jan. 8-12 at the Marriott Marquis and Hyatt Regency in Atlanta, GA.

The annual conference will feature discussions on biotechnology, cotton improvement, cultural practices, fiber quality, global competition, marketing and new technologies.

For more information, visit the National Cotton Council's Web site at or call 901-274-9030.

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