Amarillo, Texas
March 24, 2005
Uncertainty beyond the normal
planting questions makes management strategies for cotton
farmers more important this year.
The World Trade Organization
has challenged key provisions of the farm program as not being
in compliance with the agency's guidelines for international
trade. Currently, two out of three bales of U.S. cotton are
exported and are subject to these guidelines.
President Bush has proposed cuts in the budget deficit and
reductions to the U.S. farm program safety net.
Each could knock several cents off the price of cotton, said Dr.
Carl Anderson, a recently retired Regents Fellow, professor and
Texas Cooperative
Extension cotton marketing economist in College Station.
Anderson advises producers to get a marketing plan in place now.
"We're using all of the policy and supply/demand uncertainties
to substantiate and point out that future crop producers need to
use marketing strategies to enhance their income, because we see
the farm program payments being more limited than they are
today," Anderson said.
Anderson spoke here at a one-day Advanced Topic Series course on
"Developing This Year's Marketing Plan-Cotton," sponsored by
Extension.
"What we talk about is maximizing income under the farm
program," he said. "We emphasize the importance of understanding
the markets, keeping up with them and knowing when there are
opportunities to pick up some extra income."
Dr. Steve Amosson, Extension economist in Amarillo, said that's
particularly important in the northern Panhandle, where cotton
has started growing in acreage, but the producers are at square
one on the learning curve.
"We're starting to get a lot of requests for basic outlook and
marketing information on cotton," Amosson said. "Most of these
producers are new, and until you understand cotton, it's
difficult to develop a marketing plan."
Time is growing short for making those plans. Like most crops,
the best prices for cotton are before planting or soon after,
Amosson said. That means decisions need to be made in the next
45 days or so, he said.
Anderson said last year some producers reaped the benefits of
advanced planning. They were able to set a price floor at 60
cents on the December 2004 futures last March. Those futures
dropped to 44 cents by August, but those who had locked in the
floor price of 60 cents, using a put option, had price
insurance.
In 2003, the situation was the opposite. The price was low.
Anderson said when the price gets around 40 cents, producers
should buy calls to "hedge" the counter-cyclical payment.
"We no longer just hedge against lower prices. We hedge against
lower government payments, because the price goes up and the
payment goes down," he said.
With December futures typically ranging from 39 cents a pound to
70 cents a pound, buying price insurance makes sense, Anderson
said. It provides an opportunity for income in addition to the
farm program payment.
This year, prices are in the middle – in the 50- to 60-cent
range – for December futures, but they could easily drop into
the 40-cent range, Anderson said. Producers should work on
putting on some price floors at 52 cents or higher, which could
very possibly yield 6 to 10 cents net gain given the expected
price at harvest, he said.
"It's standard procedure when you buy a nice new car, you take
out insurance and hope you'll never need it. It's quite
comfortable to have it," he said. "With cotton, you spend 2
cents and get back about 8 cents net. Anyone who can get 5 cents
out of this market will have been successful."
While many producers use a pool to market their cotton, the
economists said the producers of the future are aware of the
opportunity to use the futures market, and are learning when to
implement the pricing strategies.
"The key is not to wait until you see the top of the market,
because it's already gone by the time you see it," Anderson
said. "We just want to find a favorable pricing opportunity." |