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Corn+Soybean Digest

Prop Up Profits

Once upon a time some cotton growers established an early, set-in-stone marketing plan that would hopefully generate profits at harvesttime and beyond. In reality, a predictable cotton market can read like the nursery rhyme Humpty Dumpty.

Year-round marketing is often needed to prop up profits that otherwise couldn't be put back together again.

Tom and Karen Coomes, Hollis, OK, are growers who watch the cotton market constantly, seeking creative ways to add to the bottom line. They lean toward put or call options to help secure additional profit potential. And they may shift their strategy at any time to generate more money from the crop.

“When I see opportunities, I try to take them,” Tom says. His early 2003 strategies included using call options to insure against the loss of potential government program payments in the event of major market upswings, to possibly lock in a higher floor price.

“For the cost of only 1/13 of the maximum counter-cyclical payment (CCP) and direct payment (about 20.4¢/lb. in the farm program), I was able to insure against lost payments, even if prices averaged above the average loan rate of about 52¢.”

His early year strategy involved buying out-of-the-money December '03 call options above 60¢/lb. priced about 1¢/lb. He took no chances, even when '03 marketing year projections were likely to end in the 52¢ range.

Since he planted more winter wheat in '02, when cotton prices were low, he didn't plant his entire cotton base this past spring. His call options strategy protected him against loss of the full 85% of base CCP if prices increased and cut into the government payment program.

“Cotton prices can turn around overnight for reasons that aren't always foreseeable or logical,” he says. In the event that December futures prices increased from the mid-50s into the 60s, Coomes was prepared to buy more calls options, or possibly puts, to set a floor price above the loan rate.

As an example of how December prices fluctuated in the spring and later in the fall, the futures price, from which options are based, peaked at more than 64¢ in late April. By early June it had taken nearly a 10¢ drop to 54¢. As fall approached, futures prices started back up and hovered near 80¢ in October.

Earlier in the year, Texas A&M cotton marketing specialist Carl Anderson anticipated a harvest price of about 52¢. That changed after China production numbers came in lower than expected.

Based on 1997-98 to 2001-02 averages and late October futures in the high 70s, the estimated price received for the 2003-04 crop is in the high 60s, Anderson now forecasts.

That was the type of marketing move Anderson feared when he encouraged growers to consider some sort of program to protect their CCPs if they didn't plant their entire cotton bases or lost their crops due to weather. Having call options in place would have produced excellent premiums for growers fearful of losing those government payments.

“Producers need to be watchful and take good opportunities for price protection when available,” says Don Shurley, University of Georgia cotton marketing specialist.

He says that, as the U.S. looked ahead to a 17- to 18-million-bale crop for '03, the world cotton market showed “signs of the jitters.”

O.A. Cleveland, Mississippi State University cotton marketing specialist, says that, along with world crop situations that impact prices, the pressure on prices from speculators and fund traders is greater now than it was a decade ago.

“Ten years ago, the cotton trade could control the market and, to some degree, run over the speculators. Not today,” Cleveland says. “On any day, the speculative funds can dictate cotton price activity and totally stampede the cotton trade.”

Anderson says growers should consider some early marketing for the '04 crop if December '04 futures remain above the low-60s range. “That's because we could see much more cotton planted for the coming year,” he says.

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