Cotton Farming

Cotton producers have several avenues available to them to market their cotton. With the volatile commodity markets we are witnessing today, cooperative pools have become even more attractive than in recent years. Inflation fears driven by the severely weakened U.S. dollar, record high oil prices and the bio-fuel boom have driven speculators to throw huge amounts of money into nearly every commodity market. As I am writing this article, cotton prices have also substantially increased since this time last year. Today, the December 2008 New York Futures contract is nearly 25 percent higher than the December 2007 contract was this time last year. This increase of 15 cents per pound has changed the way a producer must think about marketing his cotton. In today's environment, equity contracts that guarantee a producer a few cents over loan are no longer a viable option. Producers need to find a marketing plan that allows them to capture at least the government target price. Professionally managed cooperative pools are one alternative a producer should consider.

Producers should view cooperative pools as similar to mutual funds in the stock market in that these pools limit the price exposure an individual producer has to changes in the market. Selling your entire cotton crop at a fixed price on any given day, while obviously protecting your downside risk, also limits the potential to participate in any future price appreciation. Commodity pool operators diversify the timing of their sales the same way that mutual fund managers diversify the assets in which they invest the fund's money.

Rather than trying to pick one price at any give time, cooperative pools sell over a long period of time to many different customers. No trader has the ability to hit the high of any market each time he makes a trade, and with the high input costs in cotton production today, producers certainly cannot afford the risk of hitting the low. This is why I say that marketing through a cooperative is similar to buying mutual funds instead of individual stocks. This method of marketing has proven to be very successful over time.

At Staplcotn, we realize that some producers still prefer to have a larger impact on their selling price. That is why we, like other commodity pools, provide our producers with two options: the seasonal pool and the call pool. The difference in these pools lies in the responsibility of calling the futures market level at which the producer fixes his cotton. The seasonal pool allows management to call both the basis and the futures market. In the call pool, management is responsible only for the basis, and the individual producer calls the futures market.

As a member of either pool, there are three very important advantages.

• First, both the seasonal and call pool options rid the producer of the burden of marketing or “shopping” his physical bales of cotton with potential buyers. The level at which cotton is hedged is the most important factor in marketing cotton, and because a fixation order can be filled in a matter of moments, it takes the least amount of time.

• Second, under each pool the producer’s basis level is enhanced by the merchandising, futures spreading and logistics management performed by the cooperative. As a member of a cooperative that merchandises the cotton to the end user, if an enhancement to the basis is obtainable, the member is the beneficiary because he owns the company.

• Finally, the services provided by the cooperative, putting cotton in the loan for example, rid the producer of some of the burdensome paperwork which allows him to concentrate more on the principal aspects of his operation.

Making The Right Choice

Marketing under either pool option can generate success. Both types of pool members are equally concerned about the final results of their marketing plan, but the option they choose determines the extent to which they are involved in the results. The seasonal type member has just one decision to make: in which cooperative does he or she have the most trust and confidence. The call pool can also be an effective method for a producer, depending on his marketing experience.

Many producers today are in the unfamiliar position of having to market their current crops while thinking hard about what their plans are for the new crop. I would encourage producers to weigh marketing opportunities very carefully as we enter even more volatile times in commodity markets than we have seen in many years.

Need More Information?

Meredith Allen is vice president of marketing for Staplcotn Cooperative in Greenwood, Miss. For additional information, contact the company’s main office at (662) 453-6231 or send an email to the communications department at information@staplcotn.com.

- MARKETING - Cooperative Marketing
By Meredith Allen Staplcotn Cooperative Greenwood, Miss
Cotton producers have several avenues available to them to market their cotton. With the volatile commodity markets we are witnessing today, cooperative pools have become even more attractive than in recent years. Inflation fears driven by the severely weakened U.S. dollar, record high oil prices and the bio-fuel boom have driven speculators to throw huge amounts of money into nearly every commodity market. As I am writing this article, cotton prices have also substantially increased since this time last year. Today, the December 2008 New York Futures contract is nearly 25 percent higher than the December 2007 contract was this time last year. This increase of 15 cents per pound has changed the way a producer must think about marketing his cotton. In today's environment, equity contracts that guarantee a producer a few cents over loan are no longer a viable option. Producers need to find a marketing plan that allows them to capture at least the government target price. Professionally managed cooperative pools are one alternative a producer should consider. Producers should view cooperative pools as similar to mutual funds in the stock market in that these pools limit the price exposure an individual producer has to changes in the market. Selling your entire cotton crop at a fixed price on any given day, while obviously protecting your downside risk, also limits the potential to participate in any future price appreciation. Commodity pool operators diversify the timing of their sales the same way that mutual fund managers diversify the assets in which they invest the fund's money. Rather than trying to pick one price at any give time, cooperative pools sell over a long period of time to many different customers. No trader has the ability to hit the high of any market each time he makes a trade, and with the high input costs in cotton production today, producers certainly cannot afford the risk of hitting the low. This is why I say that marketing through a cooperative is similar to buying mutual funds instead of individual stocks. This method of marketing has proven to be very successful over time. At Staplcotn, we realize that some producers still prefer to have a larger impact on their selling price. That is why we, like other commodity pools, provide our producers with two options: the seasonal pool and the call pool. The difference in these pools lies in the responsibility of calling the futures market level at which the producer fixes his cotton. The seasonal pool allows management to call both the basis and the futures market. In the call pool, management is responsible only for the basis, and the individual producer calls the futures market. As a member of either pool, there are three very important advantages. • First, both the seasonal and call pool options rid the producer of the burden of marketing or “shopping” his physical bales of cotton with potential buyers. The level at which cotton is hedged is the most important factor in marketing cotton, and because a fixation order can be filled in a matter of moments, it takes the least amount of time. • Second, under each pool the producer’s basis level is enhanced by the merchandising, futures spreading and logistics management performed by the cooperative. As a member of a cooperative that merchandises the cotton to the end user, if an enhancement to the basis is obtainable, the member is the beneficiary because he owns the company. • Finally, the services provided by the cooperative, putting cotton in the loan for example, rid the producer of some of the burdensome paperwork which allows him to concentrate more on the principal aspects of his operation. Making The Right Choice Marketing under either pool option can generate success. Both types of pool members are equally concerned about the final results of their marketing plan, but the option they choose determines the extent to which they are involved in the results. The seasonal type member has just one decision to make: in which cooperative does he or she have the most trust and confidence. The call pool can also be an effective method for a producer, depending on his marketing experience. Many producers today are in the unfamiliar position of having to market their current crops while thinking hard about what their plans are for the new crop. I would encourage producers to weigh marketing opportunities very carefully as we enter even more volatile times in commodity markets than we have seen in many years. Need More Information? Meredith Allen is vice president of marketing for Staplcotn Cooperative in Greenwood, Miss. For additional information, contact the company’s main office at (662) 453-6231 or send an email to the communications department at information@staplcotn.com.

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