Virginia Cotton:

2 Marketing Strategies

By Johnny Parker, Agronomist

Commonwealth Gin, Windsor, Virginia

November 17, 2008 - The lower this market goes, the more positive I feel.  I know this sounds crazy, but to me the no-mans land for cotton is around 60 cent.  NO POP, NO Counter Cyclical, No CRC, just 60 cent.  'Cotton should be more valuable than hay.'   Therefore, the lower it goes, the closer it is to the bottom and hence, the less downsider risk we have.  Since the POP payment keeps rising, we really are protected at this point by this 'safty net.'  In addition, the lower it goes, the more likely it is to bounce back. 

Option 1  is the Loan.  This is probably the safest, but it will be hard to beat a price in the low 60's during the first 20 cent of a rally.  The obvious reason is that market gains are offset by losses of the LDP value.  You can hedge your LDP if you are in the loan with a call option that should be bought at the bottom of the market when the POP would max out.  Storage costs are minor.  In a volatile market, the gain/loss of the market is much more money than storage costs. 

The second option has more potential reward but is also more risky.  That is POPPING the cotton and price after a rally.   If the market rallies, then Popping the cotton and pricing late will have a better payoff, but is more risky because POPping the cotton opens you up to downside risk. 

If the market eventually goes up over the next several months, then option 2 will be better.  Farmers that need cash quickly are more likely to use the loan for cash flow.