Coby Gilbreath doesn't normally market his cotton more than a year ahead. But with domestic and world situations pointing to lower 1999 cotton prices, a price rally last summer was one he couldn't pass on.

He locked in a 68 cent/lb price on 25% of his projected '99 crop two months before he stripped his '98 crop.

"We started marketing much earlier than normal," says Gilbreath, who farms with his brother Matt at Dimmit, TX. "But there were already 'Asian flu' symptoms (economic shortfalls) in ag markets. We decided to at least lock in a price on part of our crop."

Now he wonders if he should have priced more, especially since forecasts don't predict a major rise in benchmark December futures. They were lingering just above 60 cents in early February, with cash markets mostly at about 50 cents.

Further price pressure is expected due to weak foreign demand, high domestic supplies, and projections for another big crop this year.

Gilbreath normally takes a three-phase marketing approach. He estimates per-acre production of either one, 1 1/2 or two bales.

"With the potential for hail-out, drought or other problems, we're not too aggressive in contracting in the event we can't deliver all we expect to yield," he says. "If we market 100% based on one bale, I know we're three-quarters marketed on 1 1/2 and half marketed on two bales. It's hard to hedge more than that."

He plans to market the remainder of the '99 crop when a rally occurs.

"We may have to lock in something below our breakeven point (about 63 cents)," says Gilbreath. "If the bleak outlook continues, we might take a two-for-one route. We'll sell two call options to lower the cost of every put option we buy."

Calls can also provide insurance against a price rally on contracted cotton, says Carl Anderson, Texas A&M University extension economist.

"Calls in the 65-66 cent range, based off December futures or March 2000 futures, would be good," he says.

He adds that seasoned marketers, such as Gilbreath, "might want to buy 62-64 cent puts and sell 68-70 cent calls. That strategy lowers the cost of protection and provides the opportunity to capture a higher price up to the call strike price."

Anderson says farmers should establish a floor price between now and May.

"If futures are 65-70 cents, they should buy at-the-money or out-of-the-money put options, forward contract with the gin or futures, or buy a call option if there is any potential for a price increase."

Richard Drachenberg of Drachenberg Trading in Lubbock, TX, also urges growers to jump on price rallies this spring.

"Anytime December futures approach 65 cents, growers should start a scale-up program of buying puts," the consultant-broker says. "They should attempt to cover about 50% of their anticipated production.

"Then, after the crop is up and growing, from May 15 to July 4, take advantage of any weather-related price rally to lock in further protection. They should consider buying puts in the 66-70 cent range if the rally occurs, and put a floor under the remaining production."

O.A. Cleveland, a Mississippi State University cotton marketing economist, advises even buying December 59-60 cent puts, then coming back with calls between April and June. The calls, he says, may depend on if and when Congress reactivates the government Step 2 program, dropped in December after funds ran out. Prices dropped by up to 7 cents when the program ended.

Step 2 provided a subsidy to domestic mills and merchants to keep U.S. cotton competitive with lower-priced, highly subsidized foreign fiber.

"Without government policy action, the U.S. faces a foreign subsidized crop that will increase in market share," Cleveland explains.

Unfortunately, for many growers there are few viable economic alternatives to cotton. Corn and bean prices are also depressed.

"We may see more cotton acres in '99 than the 13.4 million we had in '98," says Anderson. "We could easily have a 17- to 18-million-bale crop. Without any kind of government assistance, like Step 2, we may not be able to use more than 14.5 to 15 million."

That and other factors could cause futures prices to hit the 50-55 cent level, meaning cash prices in the 40s. So the farm price would be the loan rate, about 52 cents.

That would again make the loan deficiency payment (LDP), or the difference between the loan rate and the average world price (AWP) possibly the biggest check growers will see in the bleak forecast, says Anderson. The LDP was in the 10-11 cent range in early February.

"By all means, if growers contract their cotton, they should make sure they can receive the LDP," he says.

Another alternative for Gilbreath and many others in the Cotton Belt is participation in a marketing pool program like one offered by Plains Cotton Cooperative Association (PCCA) in Lubbock. Producer cotton is marketed periodically by the co-op when good opportunities arise.

Growers can earn additional payments by being co-op members, says PCCA's John Johnson.

"Our members participating in PCCA's mill option program received an average of $11.11/bale annually from denim mill earnings allocated during the past five crop years ('93-'97)," he says.

That's about 2.2 cents/lb in addition to the price they received for their lint cotton.

"We put back an additional $40/bale with the benefits we received from the co-op pool and denim mill," says Gilbreath.

"That co-op system works, whether you do any marketing on your own or not."