December 2003 cotton futures have pushed toward the 60¢/lb or higher range recently, roughly one-third over what was seen two years ago. But with the virtual price guarantees offered in the new Farm Bill, some growers may be complacent about early pricing — or short on the time needed to determine when to make marketing moves.
“That is the reason I choose to work with a marketing pool,” says grower-ginner Wayne Tritt of Brownsville, TN. “I use its information and expertise to get my crop marketed in a more timely manner, whether it's with futures, options or mill contracts. The pool is in a better position to know than I am.”
Jason Sides, who farms with his father Harold and brother Brandon, near Dawn, TX, adds that, time and again, “marketing pools kick our butts when we try to market on our own.”
Tritt and Sides are like thousands of other growers who use marketing association pools to hopefully obtain a better price.
“We've seen a tremendous growth in the use of cotton marketing pools,” says Don Shurley, University of Georgia extension economist in Tifton. “The major growth has been in the past four or five years. More than one-third of our acreage is in one pool or another.”
Among the major marketing pools are Staple Cotton Cooperative Association, Greenwood, MS, and Plains Cotton Cooperative Association, Lubbock, TX. Both serve growers over a wide area. There are also smaller, yet ever-popular pools like the one used by Tritt: Beltwide Cotton Cooperative, headquartered in Montgomery, AL, and regional pools, like Sides' marketing arm, Windstar, Inc. in Edmonson, TX.
Tritt was among growers who helped bring a pool to his region in northwestern Tennessee. Formed in 1997, Beltwide has two pools in Texas, one in Tennessee and one for other southeastern states. Tritt saw the need for better marketing opportunities when Freedom to Farm forced growers to become more astute marketers.
“We needed a better way of marketing our crop,” says Tritt, who farms about 500 cotton acres. “We had worked with Weil Brothers-Cotton, Inc., (a 120-year-old international cotton merchant), which proposed a marketing pool for Tennessee. That pool became Beltwide. So far, it's been a good working relationship for us.”
What worries Tritt, however, is that he may miss an opportunity to capture additional cents per pound for his cotton. His yields run about 700 lbs of lint per acre. Under the new farm program, growers can receive counter-cyclical payments (CCP). With prices below the 52¢ loan rate, that amounts to 12-14¢ using the USDA Farm Service Agency formula of basing the CCP on the 72¢ target price, minus a 6¢ direct payment, minus the loan rate.
But if December 2003 futures prices push 60¢ or higher, and if the price remains high for months at a time, that CCP could be reduced or even lost. A grower's overall price would likely remain virtually the same because of the higher cash price. But that would-be-lost CCP could also be captured if the right triggers are pulled.
One strategy some marketers will use to protect the 2003-'04 CCP is to buy December '03 56-58¢ call options and sell 62-64¢ calls, says Texas A&M economist Carl Anderson. If prices averaged between those ranges, more profit could be taken that would normally have been lost, he says.
“I need a program like Beltwide that is looking ahead and has a clear projection of what to expect in the market,” says Tritt. “I expect it to make the marketing moves that will be to my advantage, no matter which way the market goes.”
Sides and his family farm about 2,300 irrigated cotton acres, and 1,600 dryland (none of the dryland survived the 2002 summer drought). “We normally have 50-75% of our cotton in the Windstar marketing association through our local gin,” says Sides. “In 2001, the pool (which works with five separate Windstar gins) probably produced an additional 7¢/lb price for us.
“We don't expect as much for the 2002 crop, which has seen a terrible marketing year,” Sides says. “But if you look at the average over 10 years, the pool nearly always gets us a better price. That's the goal of farming.”
Wally Darneille, who manages some of the Beltwide pools, says his associates “watch the market every day” to determine marketing moves. Futures prices, options prices, the adjusted world price (AWP), loan repayment rates, the Step 2 program and all other factors are monitored.
“When farmers sign up with our program, they turn their cotton over to us and we guarantee them the loan rate,” says Darneille. “We then market the cotton to hopefully generate additional equity for the growers. Weil Brothers literally puts its entire worldwide organization at its members disposal.”
David Camp, of the Staple marketing division, adds that there are many marketing factors that growers might not see until it's too late to lock in a price.
“There are multiple components to marketing,” he says. “We are not only trying to hedge the futures market, but when the AWP is under the loan rate, you have to maximize the loan deficiency payment, too. You have to decide when to redeem cotton in the loan, and maximize the AWP futures spread.”
Georgia economist Shurley says virtually all cotton marketing pools do a combination of many things that growers could do with their own cotton. “Pools are going to use a combination of mill contracts, futures and put and call options, the marketing loan and straight cash sales,” he says. “But they have several advantages over individual growers.
“By having a large amount of cotton available, they can go directly to a mill with a large lot of a specific quality cotton the mill is looking to buy. They may be able to obtain a more favorable quality basis price,” Shurley says. “That has always been the advantage of pool marketing.
“Pools also devote 100% of their time and effort to this. They have a track record of doing better than the average prices received by farmers,” he says.