The confluence of WTO issues and budget-cutting in Washington could end up exposing growers to more price risk in the future, creating a bigger role for grower price risk management.
Although it’s still uncertain as to when the next farm bill will be written, some pieces of it seem apparent already. “I would wager a bet that it’s going to be leaner, poorer and probably more de-coupled from production to make it more WTO compliant,” said John Robinson, Extension economist, Texas A&M University.
The economist is stressing that the opportunity to sharpen marketing skills in preparation for the reduction or loss of a safety net is of paramount importance.
According to Robinson, the results of a good marketing plan, as always, will depend on the kind of price year. “Right now, if cotton prices fall from the mid-50s, the government program is giving growers a safety net through the loan deficiency payment. If that gets whittled at, growers can create the same price floor, or higher — although at a cost — using fairly simple options.”
Doing so could also be key to another winter worry — getting financing. With a price floor in place using marketing tools, growers can show their bankers that they have a plan for whatever price scenarios occur.
The first thing you should do to hone your marketing skills is to have a very clear and detailed idea of your cost of production. “Otherwise, you’re shooting blind,” Robinson said.
The next step is to acquire a thorough, working understanding of basic hedging with futures and options, such as purchasing put options to put in a flexible floor, or fixing cash and purchasing call options. “These are the basic things you can do once you’ve figured out what your cost of production is.”
There are excellent opportunities to gain knowledge through Extension Service programs, state Farm Bureaus, etc. In addition, the New York Board of Trade and Cotton Incorporated are in the third year of hedging and options workshops around the Mid-South. Check them out. Robinson suggests going to a half-day to two-day workshop “where you can take a splash and get exposed to it.”
Robinson suggests that even if you’ve turned your marketing over to a pool, “you don’t have to remain unknowledgeable of what the pool manager is doing. And you could be doing your own marketing in addition to what the pool is doing.”