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Corn+Soybean Digest

Pocketing Profits

Marketing cotton shouldn't be a wishy-washy endeavor, even if there's a government guarantee of about 57¢/lb.

Don Marble, who farms near South Plains, TX, is a cotton marketer who takes the bull by the horns and throws down a profit whenever he can.

His area's cotton basis is about 7¢ under December futures. Planting several thousand cotton acres annually, Marble takes marketing seriously. Having used New York Cotton Exchange (NYCE) futures and options for about 20 years, he has learned not to leave money on the table when it can be pocketed.

He primarily uses various options combinations, including one of puts and calls to protect his floor and cover any potential loss in government counter-cyclical payments (CCPs). He is especially cautious when considering complex options trades, like bull call spreads.

Carl Anderson, Texas A&M cotton marketing specialist, says bull call spreads are among the complex tools used to protect CCP and take advantage of upswings in the market. In an ever-changing world, he says, cotton prices can shoot up at any time. And bull call spread positions can sometimes help growers take advantage of the rise in price long before harvest.

“A bull call spread is accomplished by buying a call at a lower price, then selling a call at a higher price,” says Anderson.

For example, if December '03 futures are in the 56-58¢/lb. range, a grower could buy a December 58¢ call for about 3.5¢, then sell a December 64¢ call for about 1.5¢. That provides a 58-64¢ window for a cost of about 2¢, less any negative basis.

Marble probably watches the market as closely as any producer. He began putting his '03 cotton marketing plan in place early. With an '03 cotton market that has seen futures prices rise 25¢ higher than they did in parts of '02, he seized opportunities to pocket some of those stronger prices even before planting.

Like anyone using commodity markets to hedge a crop, his ventures haven't all worked. But he believes it's essential to keep your feet in the fire to make a good marketing program work.

While there were some who believed in early '03 that a huge cotton carryover and greater world production would force prices to the 50¢ level at harvest, Marble was concerned about locking in price increases. Call options were put in place.

“Early on, I bought December 60¢ call options for 2¢ (when prices were in the low 50s),” he says. “In addition, when the market increased in April, I bought out-of-the-money December 57¢ puts for 1¢ to protect against a downshift in the market. When the futures price moved down from 60¢, the value of those puts increased by close to 3¢.”

He pulled out of the put positions and took the profit. The calls remained in place in the event of higher markets as the crop year continued. It was a smart move.

“The market moved up toward 80¢,” says Marble. “I used my marketing plan and took an 8¢ profit out of the calls after an up-and-down market during the summer. If I had stayed with the idea of protecting the CCP, I could have received as much as 22.5¢. But the 8¢ profit looked good at the time.”

His '02 marketing plan included a December 52¢-call option that cost him ½¢/lb. when the market was at its low point. After the market increased, he sold the calls for 5½¢/lb. of extra income.

“When you get to a situation where you've made some good money by using options, you'd better take it if you see there's any chance for it to erode. It took me a long time to figure that out,” Marble says.

One wrench thrown into the cotton market last spring was the SARS scare, particularly in China, a huge player as both a cotton producer and buyer of U.S. cotton. After rallying to a contract high of nearly 63¢, December '03 futures prices sunk to the 57¢ range. Marble followed the market every step of the way down.

“The psychological effect of SARS on the market caught us all off guard,” he says. “That's why you have to constantly watch the market to see what's going on.”

Anderson, who authored the NYCE overview of cotton marketing tools and alternatives, was among those slightly bearish about the '03 crop, due to the sluggish economy.

While prices remain high, he stresses the need for growers to implement marketing plans to protect good prices. “The market can go up or down in just a few seconds,” he says. “Most growers try to take the easy way out by planting cotton and taking the direct payment and 52¢ loan rate (which totals about 57¢). But there will continue to be opportunities to take additional profit out of the market through options, contracts or using marketing pools.”

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