As cotton producers prepare to market what appears to be an abundant 2004 crop, they can't help but think about 2003 and other years when prices rose after they didn't have cotton to sell.
Most remember December 2003 cotton futures peaking at 82 cents when the crop had been harvested last October. In 1994-95, futures rose above a dollar in late December and January — again when growers had sold their cotton.
So producers may be tempted — especially with current prices — to take the loan deficiency payment early and hang on to their crop or use the CCC loan and see what happens.
Those growers should grit their teeth, take the LDP and sell their crop or put it in the loan, according to Don Shurley, Extension marketing specialist with the University of Georgia. If they feel like gambling on prices, buy an out-of-the-money call option.
“Holding cotton in storage has become increasingly risky and often unprofitable,” said Shurley, one of several speakers at the Southern Region Agricultural Outlook Conference in Atlanta, Sept. 27-29.
In the past four years, he noted, cotton prices have declined during the storage period (October through July) in two of the four years and have risen enough to reward storage in one of the four.
2003-04 would have been a particularly frustrating year to hold cotton with the U.S. monthly average price received falling from October's 70 cents to 45 cents in July when China began canceling purchases of U.S. cotton.
Prices rose from 27 cents to 40 cents during the 2001-02 storage season, which would have offset holding costs, but few growers want to experience another year of prices with a 3 in front.
Shurley agreed growers are reluctant to buy an out-of-the-money option that will be worthless if prices fail to rise. “So you might be out 2 or 3 cents per pound,” he said. “I'd rather see someone invest 2 to 3 cents in a call option than to have cotton in a warehouse. That's especially true if you take the LDP because then you have to pay storage.”
If the current relationship between New York cotton futures and the A Index holds (about 7 cents per pound), growers in the Southeast should be able to receive 57 cents per pound through a combination of LDP and cash sales or loan plus equity transfers for base grade and staple.
“Cotton is fortunate that the LDP is tied to the world market, and the A Index and New York futures tend to move together,” he said. “We don't see that with other commodities.”
An audience member noted that if growers had purchased a 60-cent put option last spring, with a 12-cent LDP they would now be looking at 72-cent cotton.
“That's true,” said Shurley, “but our growers aren't used to doing too much in April on marketing. That's something we're working on — to help them look at their options then.”