|04-551 Project Manager: J. M. Reeves|
MAXIMIZING INCOME UNDER THE NEW FARM PROGRAM
Carl Anderson, Texas A&M University
The provisions of the Food, Conservation, and Energy Act of 2008 were designed to maintain market-oriented features of past programs. Because market price levels affect most of the program payments, producers need to become skillful market observers and rely greatly on pricing and "hedging" strategies to enhance income from the marketplace.
Farm program benefits and income are influenced more by market direction and marketing decisions than under previous farm programs. In response to expected market price changes caused by uncertain economic and financial crises, the producer needs to prepare and implement a marketing plan that includes "hedging" strategies to offset price changes that reduce income or to benefit from sustained price rallies. Cotton producers may increase income and add substantially to government payments received by "hedging" their loan deficiency payment (LDP) or marketing loan gain (MLG) and counter-cyclical payment (CCP).
The preparation and use of marketing plans proved financially rewarding for producers for the 2012/13 crop. Price risk management strategies using either purchasing and/or selling options alone and in combination with futures were effective to earn producers 10 to 15 cents more from the market during the 12 months of 2012. December 2012 futures were about 25 cents per pound higher from February to June than at harvest time in October and November. The effective use of puts and calls enhanced income substantially.
The expected level of carryover stocks in the U.S. and rest of the world each season drives the market price up or down and LDP/MLG and CCP in the opposite direction. Producers that decide to plant all or plant none of their cotton program base acres to cotton, and expect to receive the maximum CCP, the decision to "hedge" against a potential average price received above 52 cents is a significant factor for maintaining cash flow. Also, when the base acreage is not planted, there would be no cotton production and subsequent sales available to offset payment reductions. The cost of pricing strategies versus the risk protection and expected returns needs to be carefully evaluated and implemented when price levels are favorable for desired results.
Monthly, weekly, and daily supply/demand and price reports are tabulated, summarized, analyzed, and placed into an electronic file for retrieval. During 2012, 13 cotton market newsletters were prepared, discussing market developments and possible price management strategies for producers. The newsletter is electronically distributed to marketing clubs, news media, cotton leaders, producer meetings, and posted on the Cotton Incorporated Web site, http://www.cottoninc.com/fiber/AgriculturalDisciplines/AgriculturalEconomics/Cotton-Price-Information/Cotton-Market-Comments-Anderson/.
|Project Year: 2012|
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