AMTA payments and LDPs could again be a big part of your profitability picture in 2001. But according to a Texas agricultural economist, your marketing plan could be a difference-maker, too.
Since 1996, U.S. cotton producers have dealt with instability of income and international competition. But growers have to dig in and compete, according to Carl Anderson, an ag economist with the Texas Agricultural Extension Service. “I've heard many farmers say that those people up in New York just push us around. Farmers may not be able to control the price level, but let me remind you that producers control when and how they price. That is your decision.”
Charts clearly show that pricing opportunities exist every year, the economist said. “Looking back over the last 15 years, cotton futures have a range of 15-17 cents during the year. The producer's goal should be to market the crop within the top third of that range. For example, if there is a 15-cent range, from 55 cents to 70 cents, we want to price between 65 cents and 70 cents. Watch for those types of opportunities during the year.”
A good marketing plan also calls for resisting greed, according to Anderson. He recalls a group of farmers sitting in a Lubbock area restaurant in September 1980. “These farmers were talking about the price of cotton, which had reached 96 cents. You know what they were talking about? Pricing their cotton when it got to a dollar. You know what the price got to? 96.9 cents. They missed 96 cents waiting on a dollar. Price your cotton when we see an opportunity and we can make cash flow.”
Experiences like this prompted Anderson to step up his education efforts, including introducing Texas growers to the Master Marketer Program and in recent years the Marketing Club Network. The latter broadcasts monthly market updates through teleconferences. These programs work together to increase knowledge of marketing and to help producers keep up with market dynamics.
It pays to increase your marketing understanding. According to a recent survey, graduates of the Master Marketer program reported an average increase of $32,000 in net income from applying principles they've learned.
Anderson says before you get serious about a marketing plan, you should consider doing a whole farm analysis to make yourself aware of any inefficiencies in your farming operation.
“Some farmers with multiple farming operations can find out which farms are making money and which ones are losing money. Many farmers who have done this just don't realize that their better producing farms were subsidizing some of the less productive farms.”
Some graduates of Anderson's Master Marketer program have learned to price commodities 12 to 18 months in advance. The returns can be significant. “During 1999, the futures price slid from 72 cents to 52 cents,” Anderson said. “One of our Master Marketers bought a 66-cent put option in November 1998 for 2.08 cents. In November 1999, the put value was 15.33 cents and he sold for a net of 13.25 cents. He added a 19.37-cent LDP and a 42-cent price. He received a 74.62-cent price before AMTA payments. This is what it's all about.”
Anderson added that 1999 was an almost perfect year for the put option strategy because the price fell steadily all season. “In 2000, we had a flat market, but I had Master Marketers who put their cotton in a pool and made 6 cents on that market.
Options don't always offer a reward. Many times, they're just good insurance. Another strategy is to buy a put option and sell a call, according to Anderson. “In 2000, you could have bought a 62-cent, out-of-the-money cotton put on May 15 for 2.69 cents while selling a 68-cent call on the same day for 2.08 cents, for a net cost of 0.61 cents.
“Both the put and the call turned out worthless, but when you sold the call you got 2 cents of somebody else's money to offset the cost of your put. We didn't make much money, but we had a safety net between 62 and 68 cents.”
Anderson adds this word of warning. “You have to know the market yourself. Study it.” And you should completely familiarize yourself with the pros and cons of these marketing tools.