What's your vocation? It's a question you might want to ask yourself if you're considering marketing cotton in 2002.
“You need to have a marketing plan — if you're a producer, then marketing is not your vocation. Your job is to grow cotton, and leave the marketing to professionals,” advises Keith Brown, a marketing consultant with Brown & Company of Albany, Ga.
Brown was one of three panelists, including Smitty Lamb of Hohenberg Brothers and Stan McMikle of StaplCotn, to give their views on the cotton market and marketing strategies at this winter's Georgia Cotton Production Workshop in Tifton.
For the most part, says Brown, the market is strictly emotions. “Supply and demand numbers are a viable part of marketing. But ultimately, psychology and emotions play a role in all phases of marketing,” he says.
Several years ago, he continues, USDA conducted a study in which they compared the marketing habits of Indiana swine producers — a husband and wife team versus a husband alone. In the husband and wife team, the husband handled production of the corn and swine while his wife handled the marketing. In the other case, the husband handled both production and marketing.
“The husband and wife team beat the husband alone three to one as far as net return to income. The husband alone did a poor job of marketing because he was tied emotionally to the raising of hogs and corn. If hogs were 30 or 65 cents per pound, he loved them so much he couldn't sell them. When you're tied emotionally to the market, you lose good reasoning and you lose your ability to function,” says Brown.
Cotton prices, he says, have gone from a high of $1 per pound down to 28 cents per pound, and it has been an emotional roller coaster for many farmers. “We must get away from the emotional business of marketing,” says Brown.
Growers need to do a better job of marketing, he says, and the rising cost of farming alone should be enough reason to do so. Since 1965, he adds, farming input costs have risen 422 percent while the average farming income has risen only 38 percent.
“LDP's and POP payments are great, but they are the gifts of a benevolent government. We could be in for some tough times if we ever get a government that believes it can do better by buying its food and fiber from overseas,” says Brown.
Growers must get into a “comfort zone” for marketing, he says. “You must detach yourself from emotionalism. You must get out of the business of holding and hoping.”
Cotton producers, he says, need a well thought-out, customized marketing plan. “The main thing is to do something — don't do nothing. Write down a marketing plan before the growing season begins. The market will move up and down, and you have to be in a position to look at those swings as opportunities rather than fearing them.”
There are different types of risks throughout the season, says Brown. “When you're planting in the spring, you have a risk of declining prices. Under that risk, you need to utilize put options and put a floor in the market. When you sell cotton in the fall, the risk is that cotton markets will move higher as you go through the winter and into early spring. You might need to hedge that risk and buy call options. We suggest puts in the spring and calls in the fall.”
At planting time, he says, growers need to maximize profits and minimize anxiety.
“Think about how anxious you were this past year as the market kept going down. I suggest that growers buy put options on the December futures in early spring and ride them to expiration.”
Growers can't predict or control the market so they shouldn't become consumed by such thinking, notes Brown. “If you limit your risks, the market will take care of the rest. If you position yourself so that you have a specific, defined risk in the market, you won't be emotional about marketing decisions, and you'll be in a position to be successful.
“Think about the risks at planting and protect that to the downside, either with cash contracts — if appropriate — or with put options. At harvest time, we need to minimize our risks and maximize our comfort. We can sell the cotton and turn around and buy a call option. The price of the call option won't be any more than it'll cost to store that cotton.”
Cotton producers may see a few “spikes and downslides” in the market in 2002, but they probably shouldn't expect any “breakouts,” says Stan McMikle of StaplCotn.
StaplCotn, he explains, is the oldest and largest cotton marketing association in America. This past year, it marketed about 20 percent of the U.S. cotton crop.
“We are a farmer-owned marketing cooperative that cooperatively pools cotton together. We have a professional management staff that watches the cotton market over the full marketing season and tries to get a better-than-average price over the entire season. We're a capitalized company, so you don't have to worry about the possibility of not getting your money,” says McMikle.
This past year, he says, the United States had a 20-million bale crop going after an eight-million bale U.S. cotton market. “The export market has been very good. Some of the export mills have bought cotton all the way out to the 2003 season. This 30-cent cotton has done a pretty good job of filling up the pipeline,” he says.
Many U.S. textile mills, he adds, still are using cotton from 2000. “When business slowed, a one-year's supply of cotton turned into 14 to 16 months worth of cotton.”
The new government farm program will set the stage “for the United States to plant cotton again,” says McMikle.
“The government is going to fund U.S. growers. If cotton goes to 30 cents, the government is saying that it still will support growers, and we'll go to war. And, as in any war, there will be casualties. The casualties here in the United States will be the high-cost producers. If you can't be a low-cost producer, you'll be out of business.”
The market, he says, will tell U.S. growers they need to produce 15 to 17 million bales of cotton in each of the next three to four years rather than 20 million bales.
“Economics will get rid of that extra three million bales, and I don't believe it'll come out of the Southeast. It'll come out of California and Texas and, because of the insurance program, some of it will come out of the Mississippi Delta. Georgia acreage may decline slightly, but not by much. There just aren't many alternatives to cotton.”
For 2002, McMikle advises growers either to become part of a marketing cooperative or to hire a marketing consultant.
“In the past 15 years, we've seen a 20-cent gyration between the high and low each year in the market. If you can capture the upper-third of that, it's a lot of profit potential for you as a producer.”
If you decide to do your own marketing, write down a marketing plan, he advises. “Don't fly by the seat of your pants and don't hold and hope. Don't look at the government loan as a place to sell your crop. Use the government loan as a marketing tool.”
For 2002, growers need to focus on planting varieties with good fiber characteristics, especially considering the poor demand situation, says McMikle. “U.S. textile mills are demanding quality. They won't pay more for it. But if you don't have good fiber, they won't buy it.”
McMikle also advises growers to communicate with their lenders. “Your lender is one of the best partners you have. Lenders make a good, objective sounding board for you, and they can help you to be successful.”
U.S. cotton acreage will be down only slightly in 2002, predicts Smitty Lamb of Hohenberg Brothers, a Memphis-based cotton merchant. “A conservative estimate for 2002 is that we'll harvest 19 million bales. If we harvest 19 million bales, we'll be adding at least one million bales to carryout. That is, if we can export 10 million bales and consume eight million bales here in the United States,” says Lamb.
Fundamentally, the U.S. cotton situation is “bearish,” he says. “I don't see how cotton can trade out of the range of about 32 to 40 cents per pound. Of course, something could happen to cause cotton to trade out of that range, but there's nothing on the horizon,” he says.
Before planting the 2002 crop, growers need to decide if they'll be marketing the crop themselves or if they're going to let somebody do it for them, says Lamb.
“If you're going to market it yourself, I would have a portion of the cotton forward contracted with a basis locked in. Talk to someone who can help you minimize your risks. I would advise taking a serious look at some of the pools, cooperatives and marketing associations. There are a lot of these in the Southeast. Make sure you know how these groups operate, and make sure you know the terms of how you'll be paid,” says Lamb.