Project Summaries

12-113TX  Project Manager: J. M. Reeves


John R.C. Robinson, Texas A&M University

Agricultural commodity markets have seen unprecedented price volatility since 2007. One effect of the extreme daily and seasonal movements of cotton prices is a greater risk of margin calls for commercial hedgers. Margin risk essentially increases the cost of marketing from costlier option premiums, increased basis for forward contract offerings, or simply fewer forward contract opportunities for growers. In short, the opportunities for forward pricing have become fewer and/or more expensive. This situation has only been made worse since 2010 where disputes over contract sanctity have apparently reduced the offerings of acreage contracts for dryland producers.

This report examines cash marketing choices by southwestern cotton producers in 2010. Producer marketing behavior was modeled in a multinomial logit framework as a discrete choice among forward contracting with a merchant; post-harvest cash contracting with a merchant; contracting with a merchant pool; or contracting with a cooperative pool. The most important determinants of cotton cash marketing choices were prior participation in cooperative pools, beliefs about the value of pre-harvest pricing, beliefs about the performance of merchant pools, willingness to accept lower prices to reduce risk, and several socio-economic variables.

This research provides an updated snapshot of marketing patterns among southwestern cotton growers. Marketing through seasonal pools remains a popular method, accounting for over almost two thirds of respondents in this study. The relatively low level of hedging measured in this study confirms results from other studies. So either for reasons of risk and/or general management preference, cotton growers appears more willing to outsource their price risk management. The exceptions to this were associated with having more risk tolerant attitudes, and this increased the likelihood of their marketing through merchants or merchant pools. This research also demonstrates the influence of tradition on grower marketing choices as past pool participation was a significant predictor of future pool participation.

The judgment of which marketing outlet performed the best was clear for 2010: the spectacular and late-season rally proved more beneficial to those with open cotton who sold in the post-harvest spot market. However, such an event provides little guidance for the futures since it is dependent on the always uncertain price outlook. Thus this study indirectly highlights the wisdom of sequential marketing through the year to average across the possible outcomes of higher prices either early (benefiting from forward pricing) or late.


Project Year: 2012

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