Now that we have a price for cotton that is about 14 cents above break-even with average yields, we have to consider strategies that protect us. The most common strategy that is implemented is simply booking cotton.
I like getting a bale per acre locked in over 4 or 5 intervals during periods of uncertainty – typically March through August. Then do nothing until the New Year.
I like to price on the rallies or one contract every 2 months to create an average of the market or better. Some operations need to be more aggressive or less aggressive depending on their particular cash flow needs.
Typically the second strategy to discuss is buying Put options. This allows a price floor base on the Strike price. To protect average yielding cotton (2 bales) at the current market of 74 cents would take $50/acre. Nobody is going to do that compared to a contract.
To cut the price you go ‘out of the money’ (that just means drop your strike price to something affordable). Today, a 67 cent put costs $18/acre.
I might consider a few puts, but it would be my third or fourth strategy after contracts and STAX.
STAX also fits into the price protection strategies as well as a safety net.
- Compared to Puts, for 2017, we think STAX is going to act like a 67 cent put for around $4 per acre per 5% increment unless the market changes a bunch in the next two weeks.The idea is to let STAX pick up where your Insurance stops to get you up to 90% coverage.STAX beats a Put by also offering Yield protection as well as price for less money than the Put costs.
- The way it beats CC is that: 1) There are no payment limits with STAX so it is full protection, 2) The yield is the county average rather than 650 pound yield the CC payment had.3) It pays 90% rather than 85%.4) The price follows the February market and remains a known.The CC payment would top out around 72 cents.
I know… we have to let this thing marinate because it is still pretty new. Our mistake has been treating STAX like insurance. Although insurance will still be a component for most, it is different than insurance.
Hypothetical results for this tool have it triggering a payment for 5 of the last 7 years. It has actually only been in existence for 2 years triggering both years in IOW & Suffolk and once in Southampton adding about $50/acre per 5% increment for a cost of less than $4 (nothing has a better return on investment).
IF it does not trigger in 2017, then that means we are going to be making some good money and probably over $700 gross with average or better yields. If it does trigger, it will hold cotton county revenue above $624 to $690 depending on the county.
Your additional revenue still has to factor your insurance, other marketing decisions, and ultimate yield.