 Cost
Expectations |
A marketing plan is a contingency plan of actions that you will take in various possible, but ultimately uncertain, market situations. Developing and implementing a marketing plan begins with an estimate of expected production costs. Without
accurate farm-specific cost information, it is impossible to set meaningful pricing
goals to cover your production costs. Texas cotton growers have a number of available
sources of information and programs to help them figure
their production costs as accurately and completely as possible.
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| 2008/09 Fundamental Analysis and Forecast |
The cotton supply/demand picture for 2008/09 remains framed by USDA's September 12 World Agricultural Supply/Demand Estimates (WASDE) report (click here for an Excel display of the USDA numbers). The September report forecasted an all cotton U.S. yield of 849 lb and production of 13.85 million bales -- an increase in yield and production over the previous month's forecast. U.S. exports were lowered from 15 million to 14.5 million statistical bales. The bottom line of the September report is a forecast of 4.9 million bales of 2008/09 ending stocks. This is a 300,000 bale increase over last month's forecast but still significantly smaller ending stocks compared to the previous year. This implies two opposing fundamental effects. In the near term we might expect a negative supply/demand effect as suggested by past upward revisions in monthly stocks-to-use forecasts. We have already seen a dramatic decline in cotton futures, beaten down by outside market forces reacting to the financial crisis. Assuming the banking system and stock/bond/commodity markets get out of crisis mode, and the real economy grinds back from recession or reduced growth levels, the longer term outlook for cotton would still suggest higher prices based on lower ending stocks -- certainly back into the 60s and low 70s. That would jibe with longer term forecasts of higher world prices, e.g., the International Cotton Advisory Committee's forecast of a 79 cent season average A-Index for 2008/09. (As before, this in turn implies a small LDP payment rate.)
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| 2008/09 Caveats |
Demand Uncertainty. The two main elements of demand for U.S. cotton are domestic mill use (recently level after long-term down trend) and exports. The latter is generally more important as it represents 70% to 80% of total use of U.S. cotton. The week ending September 25 showed relatively weak export sales of 111,900 running bales of all cotton (i.e., upland and pima combined). Actual export shipments of 235,200 running bales were below the weekly level needed to meet USDA's project export level for 2008/09. If we don't see huge export sales in response to the recent low prices, I would expect USDA to further lower their projected export target. It remains to be seen how the current crisis in the financial markets will affect the general economy, which in turn would reduce consumption of cotton-based goods.
Supply Uncertainty. The September USDA report's increase (i.e., from the August report) in forecasted U.S. yield and production was based on field surveying in major cotton producing states from the last week of August through the first week of September. This is the same time frame in which Hanna and Gustav drenched the eastern U.S. cotton growing regions. It remains a question how much the field survey process incorporated potential yield losses from those storm events. Monthly revisions to USDA cotton forecasts are a common thing. Recent history shows about an average 8% adjustment in USDA's U.S. cotton August production projection over the succeeding months. Over the last ten years, this includes 5% to 10% downward revisions in dry years when "small crops got smaller", as well as 10% to 15% upward revisions when "big crops got bigger". We will see what, if any, supply revisions are made by USDA in their October 10 report.
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| Technical Analysis and Nearby Futures Prices |
Technical analysis involves predicting price movements based on earlier price patterns, calculated support/resistance levels, moving averages, retracements, and other indicators. Technical analysis may have implications for hedgers even though their market entry/exit isn't as frequent as professional traders.
Near Term Price Trends. Cotton futures continued to decline during the week ending October 3. As of this writing (Monday morning) Dec08 was trading below 55 cents, with the U.S. dollar trading higher and the stock market falling. Other agricultural futures fell last week as well, being driven lower by continued liquidation in the fund sector.
Spechedge Numbers. Since June of 2007 the net position of speculative traders that swing either long or short (i.e., hedge funds and small speculators) has been net long. Over these twelve months there have been three major price rallies, mostly attributed to this speculative buying on top of index fund buying (which isn't reflected in the spechedge chart). However, from February's peak of 7,245,800 bales worth of net long futures positions, the net speculative long position (reflecting the "Customers Only" category) dropped to net short in August, and then has maintained a modest net long position for almost two months. At the same time, net long position of index funds has shrunk considerably, so overall there is a major drop in buying from the fund sector.
Certificated Stocks. Certificated (i.e., deliverable) stocks declined to 1.36 million bales as of October 3. This includes 127,034 bales in Galveston which remains suspended from normal futures delivery activities due to physical complications from Hurricane Ike. (Houston was returned to normal status last week). This means literally that no cotton can be delivered or taken delivery of at the Galveston location, and that no delivery notices can be issued either.
To review, certificated stocks represent merchant inventory that is in position to be delivered against short futures contract positions. A high level of certificated stocks enhances the possibility of delivery (which ordinarily would reinforce the economic linkage between futures and cash markets, i.e., by driving futures prices down towards cash prices).
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| Marketing
Strategies |
A marketing plan is a price contingency plan of actions that
a grower/hedger will take in various possible, but ultimately uncertain,
future market situations. The only thing that is certain is what you can pay right now to reduce your risk. It is basically an insurance question. A marketing plan can include many elements,
probably in combination with each other. These could include basic
tactics like forward contracting, selling
at harvest, marketing pools, and the USDA loan program. Hedging with futures and options can complement or substitute for these basic tactics.
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| Historical Examples Emphasizing The Flexibility of Options Strategies |
Recent history
provides five examples of how different price patterns can be
approached with the flexibility offered by options strategies.
The first is December 2003 whose unexpected
late-season price surge highlights the need for upside price flexibility
in your marketing strategy. The second example highlights the need
for a price floor when you have a reasonable expectation of a major
price decline, as in early December 2004. The
third and fourth examples are from December 2005 and December 2006 when
prices traded in a narrow band below most growers' costs of production.
In this situation, insuring a meaningful price floor using put
options would have been more expensive, so various spread strategies
could have been employed to finance the core put option strategy.
The last example is December 2007 when more volatile and higher prices provided more opportunities to set a flexible floor using options.
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| Educational
Resources |
| The Texas AgriLife Extension Service offers a number of resources on marketing
and risk management. The pre-plant educational meetings offered
by county extension agents often include market outlook information.
Extension agricultural economists regularly conduct half-day or
one-day trainings introducing the topic of hedging with futures
and options -- to have one in your area, contact your county agent.
In addition, Extension Economists periodically offer Master
Marketer workshops, which involve 64 hours of training aimed
at developing a comprehensive marketing plan. The next Master Marketer workshop will start in February 2009 in the San Angelo area. Additional one or
two-day Advanced
Topic Series workshops are offered annually to supplement Master
Marketer. Extension economists and county agents are involved in
a number of marketing
clubs which provide growers an opportunity for more regular
interaction and discussion about marketing. We facilitate the monthly Ag
Market Network activity which connects growers and marketing
clubs with panels of knowledgeable analysts. To support all these
efforts, we also have an extensive on-line
library of short articles about various topics related to marketing
and risk management. A good, comprehensive and cotton-focused on-line
bulletin about the cotton futures market is available courtesy
of my colleague Blake Bennett and Cotton Incorporated. A paper about Texas cotton transportation and logistics compares current cotton flow data with information from the 1980s and 1990s. Lastly, with permission from the good folks at Cotton Outlook, I am reprinting here a descriptive, background article entitled Trends and Prospects for Texas Cotton. |
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