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Volatility forcing additional market risk control

The bedrock stability of America's domestic textile industry for the U.S. cotton producer has all but vanished, tossing the annual economic fate of American cotton bales into the unstable global marketplace, according to two of the nation's leading cotton economists.

Carl Anderson, Texas A&M University Extension economist for cotton marketing and Mechel Paggi, director of the Center for Agriculture Business, California State University, Fresno told about 100 people at a cotton marketing and risk management workshop in Visalia, Calif., recently that cotton marketing has forever changed.

U.S. cotton's economic fate will be in the export market where uncertainty and stiff competition are the rule.

American cotton exports are expected to total more than 13 million bales this season, almost double exports of just four seasons back. Exports will represent an unprecedented 71 percent of the 2003/04 U.S. crop.

Domestic mill use will be only about 6 million bales, plummeting from more than 10 million bales five years ago. Both Paggi and Anderson were unsure U.S. exports could continue at a 12-13 million level against foreign grown competition. Paggi preferred to use a range of 9 million to 11 million bales annually to reflect export sales.

Domestic mill use

Paggi and Anderson were certain that domestic mill use would only at best stabilize at current levels and could decline even more as imports take an increasingly bigger share of a 22-million-bale equivalent U.S. cotton market.

Ironically, the U.S. is a deficit cotton producer but domestic textile mills have little chance to capture more market share against competitors like China where wages are $70 to $80 per month.

“I have not given up on the domestic textile industry, but I cannot lay out a plan that would get it back to 10 million bales,” added Anderson.

The U.S. cotton industry will not fade away like the textile industry, but cotton growers will experience more market volatility marketing their crop in the foreseeable future than in recent years. However, volatility creates some opportunities to capture profitable prices, said Anderson. However, timing and marketing strategies using advance contracting, futures and options will be everything in grabbing those profits.

Riverdale, Calif., cotton producer Dan Errotabere and many others at the workshop did not hear anything particularly new about using futures and options to manage risks. However, Errotabere said the workshop was another wake up call that marketing must take equal importance with producing the crop. The workshop was co-sponsored by The CSUF ag business center, University of California Cooperative Extension, Cotton Incorporated, California State Support Committee, California Cotton Growers and Ginners Association and Western Cotton Shippers Association.

Cannot be passive

“You can no longer afford to be passive in marketing,” said Errotabere former president of the California Cotton Growers Association. Developing a marketing strategy and devoting only an hour a day to following that strategy will become a wise investment in the future, he said.

“It does not take a lot of time to manage a marketing strategy, but it takes a commitment,” he said.

“The only thing disappointing about this workshop is that there should have been a lot more people here,” said Errotabere.

Errotabere's neighbor, Fresno County, Calif., cotton producer Mark Borba and a key producer in organizing the workshop said the safety net federal farm program that protects farmers against wild market swings may not be there in the future.

Borba would not be surprised to learn that Congress has deemed the federal farm program unaffordable, at least for producers who farm on a California scale.

With no safety net, Borba said it would become imperative for California cotton producers to mitigate risks by developing a marketing strategy using futures and options much like what has been created by Anderson in Texas.

Develops program

Anderson has developed a master marketing program where producers learn how to use the futures market and options as risk insurance and profit-making opportunities. Not wild speculation, but futures and options purchases that can add to the bottom line with minimal risks.

Anderson said there can be a $100 per bale spread between the high and low prices in a futures contract life span. Growers should strategize to capture the top third of that price swing using options. Never, he added, try to capture only the top because that will result in failure in the long haul.

“It is not that complex — it is based on common sense” gleaned largely from world cotton production and consumption, Anderson said.

Anderson said financial rewards for preparing a marketing plan are much greater now than in the past. And the new farm bill, he said, “offers more pricing opportunities than ever before. This is a perfect farm bill for adding income” with minimal risk.

California growers spend $500 or more per acre to produce the crop. To reduce risks and possibly add profit represents using options represents only pennies per acre in comparison, said Anderson.

Ideal candidates

He said California producers are ideal candidates for using options as risk insurance because they are more business oriented than producers from other areas of the belt and because production is more stable in irrigated cotton.

“Markets are not going to give you anything,” said Anderson “You have to take pricing opportunities from the market.”

Producers need to understand what makes commodity markets go up and down and then develop year-round plans to price their commodities favorably, he added.

Some of the other changes in the U.S. marketing system include the movement toward price for quality. California, said Anderson, has long benefited in price for quality. The rest of the belt is beginning to learn that.

There also will growing working alliances between producers and mill operators to improve communications. Plus, gins will be forced to more gently handle fiber to maintain quality and turnout. “This has not been a problem in California, but it is elsewhere in the Cotton Belt,” said Anderson.

Anderson offered several alternatives on how to use hedging and using options to create added income. In conjunction with the CSUF ag business center, in March courses will be offered for farmers to use their own operations to put some of these techniques into practice.

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