That’s why, even with prices up from a year ago, management specialists recommend setting a firm floor under marketing plans.
Jose Pena, Texas Extension economist at Uvalde, says much uncertainty accompanies markets as farmer begins the 2003 season.
“While most commodity prices are stronger than last year because of tighter supplies, prices have declined from peaks hit last fall,” Pena says. “They could decline even further.”
He says corn price bids hit a high in September of around $3 per bushel. A mid-March, dip hit $2.30 to 2.34. Cotton prices, after falling into the high 20 cents per pound range in 2001, have gradually climbed back, currently at 59 cents to 61 cents per pound.
“Reduction in U.S. carryover stocks from extremely high levels two years ago, has influenced market movements,” Pena says. “The world situation also continues bullish as world stocks declined. The ‘A’ index, which sets the Adjusted World Price (AWP) used to calculate loan deficiency payments (LDPs), is currently slightly higher than 60 cents, the highest in two years.”
Improved markets also could encourage increased acreage for cotton, corn, and sorghum, depending on planting-time weather. A good crop could mean increased carryover stocks for 2003/04. “Planting intentions and weather conditions this spring and summer could play a critical role in agricultural commodity markets,” Pena says.
A good planting season and favorable weather, coupled with low carryover stocks, could mean a volatile marketing year. “Currently, late plantings cause some concern for Texas corn and sorghum producers who were hindered by wet conditions for traditional planting dates. Dry growing conditions and early onslaught of high temperature this spring could jeopardize crop yields.”
Pena says high energy prices, which will affect tillage, irrigation, fertility and other cropping practices, mandate that farmers develop a pricing strategy to manage risk, protect cash prices and improve income.
He says hedging and forward contracts should be part of overall marketing strategies. “Farmers should use crop insurance to protect against production losses.”
He says growers should establish a base price at current levels “by going short (selling a contract and/or buying a put option to establish a floor at the strike price (less premium, commission and the time value of money).”
He reminds growers that as prices move past the loan rate, counter cyclical payments decrease by a like amount. “As national prices rise above the loan rate, counter-cyclical payments cease. Also, if farmers plant the crop and prices decline below loan, counter-cyclical payments cover only 85 percent of the base yield.”
Pena says a harvest-time cotton price for base loan quality cotton in south Texas is usually 6 to 7 cents per pound below December futures. “Currently a simple strategy of using put options could set a floor cash price of about 50 cents, after premium and expected basis. That’s a 59 cents put at a 2.5-cent premium and an average basis of minus 6.5 cents.
“Some would argue that this transaction would be irrelevant since the farm bill protects to the loan rate, 52 cents a pound. While the protection is true, keep in mind that this transaction would protect a drop in the cash price.”
He says the marketing loan program protects the loan rate, but total revenue would be lower without the protection if local cash prices drop below the loan rate. “It’s especially relevant to cotton producers concerned about a severe drop in prices because of another large crop.”