PCG EMAIL SERVICES: SOUTHEASTFARMPRESS.COM - Cotton cash market, premiums and LDP might be best bet again in 2016
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Tue Dec 29 14:43:13 CST 2015
SOUTHEASTFARMPRESS.COM - Cotton cash market, premiums and LDP might be best bet again in 2016
Dec 23, 2015
By Don Shurley, University of Georgia
2015 has certainly been a challenging year. But the marketing year is less than half over, and there may yet be better opportunities down the road. Most growers were looking for and holding out for 70 cents on December 2015 futures – close, but never got the '7' in front.
Given the way the Marketing Loan and LDP works, waiting it out was a good strategy. And most growers understand how and why this works. Additionally, it was expected that the cash/spot market would pay premiums for high quality that contracting often does not. Given the likelihood of an LDP and quality premiums, downside risk was limited, and the opportunity cost of doing nothing was about 70 cents or even better anyway.
Looking ahead to the 2016 crop, a similar mindset will likely be needed. There are no guarantees that one marketing approach will work better than others – it's all about a balance between price and risk management. Know the pros and cons and evaluate your alternatives carefully. Prior to harvest, this typically includes Put Options, various types of contracting, or doing nothing. Growers may also wish to consider participating in a marketing association.
With each alternative, it's critical to know when you do and when you don't have "beneficial interest" regarding receiving any LDP, and also whether or not you will be rewarded for high quality fiber.
March 2016 futures are currently around 63.5 cents. December 2016 is between 64 and 65 cents. I have a sense that many growers have already taken the LDP and have either sold the crop or nevertheless holding it in storage. Otherwise, the crop has gone to the Loan where the grower will redeem and receive any MLG or take a merchant equity.
At present, the outlook for 2016 is much the same as for the 2015 crop. With December 2016 again in the 60s, this may not convince farmers to plant much cotton. But 2016 corn and soybean prices are not as attractive relative to cotton as this year. Also, let's not forget that at least a half million acres intended for cotton in Texas was abandoned or switched to another crop due to rain and delayed planting. Also, the large shift to peanuts in Georgia may not be repeated to that magnitude due to crop rotation constraints.
There are no guarantees that a strong basis and quality premiums will hold for 2016. Assuming they do and again knowing the benefits of LDPs and depending on weather – U.S. cotton acreage and production could increase in 2016. This will place emphasis on demand growth for improved price direction.
(Don Shurley is Professor Emeritus of Cotton Economics, Department of Agricultural and Applied Economics, University of Georgia.)
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