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In This Issue
Seed Decisions – Every Year Is Different
It’s Time To Make Crucial Decisions
Companies Unite On Weed Issue
California Farmers Want GPS Systems Protected
Consultants Conference Continues To Thrive
Under Armour, Cotton – A Special Partnership
California Farm Bureau Welcomes Trade Pacts
Managing Risk
Let's Get Back To Basics
Vilsack Issues Call For Young Farmers
Chinese Scientists Visit Georgia
U.S. Cotton Quality Continues To Improve
Landscape Has Changed For Varieties
Web Poll: Drought Affects Fall Burndown
Cotton's Agenda
Crop Insurance – An Important Tool
What Customers Want
Editor's Note
Specialist Speaking
Industry News
Cotton Ginners Marketplace
My Turn: In Search Of A ‘Normal Year’
ARCHIVES

Managing Risk

By Don Shurley
Univ. of Georgia
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For most farmers, the most frustrating part of the business is marketing – when to sell at what price and how to cope with uncertain and volatile prices. This year’s market is a prime example. When you think prices should go down, they go up. When you think prices are headed up, they go down.

This is why I have the utmost respect for farmers and farming as a business. I know of no other business that (1) has little or no control over the cost of inputs, (2) little or no control over output (production) once resources are committed and (3) little or no control over price received for production. The farmer can make decisions to control some of the “variability” in price received but has no control over the price “level.” Price “level” is determined by global supply and demand and other factors beyond the farmer’s control.

• During 2010 (prior to harvest, January through November) cotton futures prices (Dec10) ranged from a low of 72 cents to a high of $1.51. Thus far, for the 2011 crop, futures prices have ranged from 96 cents to $1.42. For the 2010 crop, many cotton producers contracted the majority of their crops prior to harvest below $1, then watched from the sidelines while cotton went to $2. For 2011, many producers likely contracted a large portion of their crops around $1 to $1.15 but did not want to contract too much too early thinking that prices might go even higher as in 2010-11. As it ends up, prices moved lower but are still in the $1.00 area at this writing.

• The economics on which prices move is itself highly uncertain. With 14.72 million acres planted, U.S. farmers could have made a crop of 22 million to 23 million bales this year. But drought and acreage abandonment kept the crop highly uncertain and actually supported the market despite good foreign crops. World demand for 2011-12, once projected at 119 million bales, has weakened and now stands at only 114.4 million bales. Given the short U.S. crop, if demand were better, prices would also be better. Likewise, given the deterioration in demand, if the U.S. crop had been closer to potential, prices would be lower.

• The risk landscape in cotton farming has changed dramatically. Prices of $1 were once unheard of and occurred once every 10 to 15 years. Now we’ve had $1-plus cotton two years in a row and become worried that price might drop below $1. We are accustomed to seeing prices in the 50s and 60s with an occasional run to the 70s. Historically, at those price levels, the marketing loan and LDP have offered a good safety net in the event that the producer, in hindsight, failed to price the crop at a better opportunity. Today, even “low” prices are well above the loan rate so the impact of marketing decisions is magnified and consequences of making a decision significant.

How To Handle Price Risks

Farmers handle price risk in different ways. There are various approaches and all have advantages and disadvantages. Some do what I call “price averaging” by contracting and selling a portion of the crop at various times throughout the year. Some use futures options to lock in a minimum price. Some participate in marketing pools or associations. Many farmers do a combination of these. Options have become expensive but can still work if used properly and in the right situations.

• We experienced firsthand the advantages and disadvantages of contracting this year when some producers chose to “buy out” their contracts due to drought and fear of not being able to make delivery. Risk can also be reduced through crop insurance using revenue rather than yield coverage. With a revenue guarantee, the producer might be more aggressive making contract decisions prior to harvest.

• In the next Farm Bill, the “safety net” DCP program may be eliminated or changed significantly. Most alternative programs on the table for consideration appear to be some form of supplemental revenue guarantee or this in combination with a greatly reduced DCP andloan program.

Whether such a program provides an adequate safety net depends on its structure – how baseline revenue is determined, how losses are determined and how payments are triggered.

Prices are volatile, uncertain and more difficult than ever to predict. This also makes planning and decision-making more difficult. To profit and successfully manage risk requires using all the tools available. A new Farm Bill safety net will have an impact on how the mix of tools will work.

Need More Information?

Don Shurley is professor and cotton economist with the University of Georgia. He can be reached via email at donshur@uga.edu or by phone at (229) 386-3512. Additional cotton information can be accessed at www.ugacotton.com or www.agecon.uga.edu.

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