Marketing experts at a recent teleconference stressed an important point to cotton producers — no matter how low cotton prices go, you can always improve your price received by taking advantage of small moves in the market.
“There is still too much cotton in the world for any significant rally,” said Texas A&M University Extension economist Carl Anderson, during a Sept. 14 teleconference sponsored by the Ag Market Network.
But incremental market movements up and down is likely and producers, especially those with marketing expertise, can add a few cents to their bottom line if they know when and how to make a move.
Even if you don't have a lot of experience in marketing, Anderson says you need to need to quickly figure out what you're going to do.
“When you get this crop harvested, and the green card in your hand, you need to have a plan and think it through very carefully,” Anderson. “This is a time when knowing your marketing alternatives is more important than ever.”
Some of Anderson's observations:
“Holding cotton for very long is not a very good option. That means you pay storage and if the price declines, we all know how hard that is on the cash flow,” Anderson said. “So even at these low prices, we discourage holding cotton and taking the LDP without price protection.
“If you are holding cotton and we get a price rally back to 39-40 cents, consider buying a put option.” A put option is the right to sell cotton at a specified price. Its value increases as prices decline.
Selling cotton and taking the LDP removes the storage problem and fixes the price. “A very viable alternative,” noted Anderson, “but you have to compare the price you receive for the cotton, plus the LDP and how much above loan, if any, that might be.”
If you take that strategy, Anderson advises producers to consider strategies that would take advantage of any significant rally between now and next July. “You can buy a call option or do a ‘buy a call/sell a call spread.’ That's a viable opportunity that only a few people will have an opportunity to work and get a price plus an LDP that is equal to or is above loan rate.”
Anderson stresses that any strategies involving puts or calls, “are only for those with an understanding of how the futures markets and options markets work.”
Putting cotton in the loan is a viable alternative, Anderson said. “But equities may not equal the LDP. Once you put cotton in the loan, you definitely have the loan value. But equities are going to follow the market. What happens with U.S. exports are going to be a big part of what drives equities.
“If you put cotton in the loan, you could look at buying a call and working to protect the LDP under loan. Again, that can be expensive.”
Anderson noted that a large number of growers have opted for putting cotton in a pool. “It's a good decision. You get a price according to the pool average.
“The discouraging part is that farmers put cotton in a pool and don't think beyond that. I think you still need to watch the market and if there are any extreme moves, and we expect this market to be very volatile, you need to understand the technical conditions and work with options to enhance your pool income.”
According to some technical analysts, the market may rally at some point in the next two months, then sell off in late October and early November. Here's a closer look at how marketers could take advantage of such a movement, from Pat McClatchy, executive director, Ag Market Network.
“Some analysts have said prices could go down to 30 cents. Others say 33-35 cents. We don't know,” said McClatchy. “But we do know that this market is still negative. It's possible that it could bounce a little. We could see a little rally. Maybe 1 to 2.5 cents.”
If the prices moves up from current levels of around 36-37 cents to 39-40 cents, “You could buy December 40-cent puts for about 185 points,” McClatchy said. “If the market moves down to 35 cents, the put will be worth at least 500 points. You paid 185 points, so you net 315 points. If we go to 33 cents, these options will be worth 700 points.
“The question is, ‘is it going to go to 39-40 cents. It could. We want to be ready for it in case it does for those people who want to do something.
“The next question is, if it goes there are we going to see a sell off. I think there's a good chance we're going to see lower levels and 33-35 cents is within reason.”
Of course, there's also the chance that prices may move up and stay there, but the good thing about options is that you can't lose any more than the cost of the premium, noted McClatchy. “If you bought a 40-cent put and the market went to 50 cents, you would lose the 185 points. But that's it. That's all you would lose.”
Another strategy is to sell your crop, then buy it back on calls. “Let's say July futures reach 37-39 cents,” McClatchy said. “We buy July 39-cent calls for about 300 points. That's cheap and the reason why it's cheap is that volatility has gotten low. When that happens, premiums get cheaper.
“It's not unreasonable to think that during the winter, we could see a 10-cent rally in cotton prices. If the price of cotton goes to 49 cents, your net would be 700 points — 1,000 points minus the premium of 300 points.
The bottom line? “It's possible, as bad as things are, to add to the price received for your cotton crop, McClatchy said. (Charts explaining the strategies are available through Rosenthal-Collins at 888-795-8071).