Sterling Terrell

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The Best Cotton Marketing Strategy

The Best Cotton Marketing Strategy

I am often asked what the best cotton marketing strategy is.

So what did I do?

I went and looked at the data – so you don’t have to.

Here’s what I found.

First, I looked at four different options.

#1. – 1/3 Cotton Marketing

After the crop is planted, one-third of the crop is fixed at three different times during the year.
Specifically:

  • 1 April
  • 1 August
  • 15 December

#2. – Monthly Cotton Marketing

A portion of the crop is fixed each month of the year.
Specifically:

  • 1 January
  • 1 February
  • 1 March
  • 1 April
  • 1 May
  • 1 June
  • 1 July
  • 1 August
  • 1 September
  • 1 October
  • 1 November
  • 15 December

#3. – Sell At Harvest Cotton Marketing

The entire crop is fixed in December, near harvest.
Specifically:

  • 15 December

#4. – Early Year Cotton Marketing

The entire crop is fixed in the first three months of the year.
Specifically:

  • 1 January
  • 1 February
  • 1 March

In doing this, I used the daily nearby prices from the last 20 years (2022 – 2003).

If futures were not trading on these specific days, the price of the next business day was used.

The results?

Times at #1Times at #2Times at #3Times at #4Avg 20-yr Price
1/3 Marketing289174.28
Monthly Marketing089374.21
Sell At Harvest1020873.66
Early Year Marketing822876.41

Does this even help us?

Let’s look at it.

  • The 1/3 Marketing option was not the best option many times, but it was not the worst marketing choice too often either. I find it a very middle-of-the-road approach that is looking to shoot for par on a given year. Great overall option.
  • We could say the same about the Monthly Marketing option that looks to me a lot like a typical seasonal pool. It was not the best, but it was only the worst marketing option in three out of the last 20 years. A full 85 percent of the time it was either the second or third best option. As you would expect, the averages mitigate the highs and lows of the market.
  • The Sell at Harvest option is an interesting one. More than any other choice, and 50% of the time, it was the best thing you could have done. However, 40% of the time, it was the worst marketing option examined. This too makes intuitive sense because of the nature of often trending markets. When prices are moving lower – you will sometimes pick the high. When prices are moving higher – you will sometimes pick the low. And vice-versa.
  • Finally, Early Year Marketing stands out. While its ranking profile is not remarkably different from the Sell At Harvest option, it has a higher average price. Over a 20-year period, this is likely not by chance (see here). But what good is a higher average price if you face financial ruin by picking the worst option a few years in a row?

Of course, we would like to not bother with any of this, right?

Just give me the highest price of the year! 🤣

But that’s hardly a systematic and repeatable approach, is it?

In the end, I can only give you my best answer: What would I do if it were me?

How do we combine all these methods together in a coherent way?

First, understand that there is no magic bullet.

But here’s what I would do.

My Cotton Marketing Strategy

  1. On December 15 look at the price for NEXT year’s crop.
    If you think you can make money at that level, fix your entire crop on the 15th of December.
    Or, fix at least 1/3 of it.
    December is nearing the Early Year Option that often has the highest prices of the season.
  2. Do the same mental exercise in Jan/Feb/March as planting season nears.
    Can I make money here?
    If the answer is yes – fix your entire crop.
    If the answer is no – fix some anyway.
    Like we said: This is often the highest prices will be all season.
    At least 1/3 of your crop is hedged by March 1 (preferably 1/2).
  3. After that, I am doing Monthly Marketing.
    My goal is not to hit homeruns, my goal is to build equity in my land and business to farm another day.
  4. Diversify your income.

You have questions? 😳

Let me explain #4.

I truly believe that one of the best things you can do in marketing your cotton is to make cotton a smaller portion of your total revenue.

Talk all you want about market timing, in the end, the optimal cotton marketing program is about lowering a grower’s risk.

Right? Right.

It’s about risk.

And the fundamental axiom of lowering risk is diversification.

I wrote more about the need for revenue diversification in business here.

Possible Options?

  • Plant other crops if possible.
  • Buy a few rental properties.
  • Buy some mineral rights.
  • Build up positions in a handful of high-dividend stocks.
  • Buy another small business.
  • Start a small venture capital firm.
  • Become an L.P. in another business.

I mean, what is the problem and goal we are after? What is it really?

The answer is in turning the question around.

It’s not: When can I sell my cotton for the highest price?

Ask instead: How do I make myself insensitive to low cotton prices?

The former is impossible to do consistently – but the latter is straightforward to work towards.

Do you see it?

Not the advice you thought you were going to get here, is it?

It’s not what I originally began writing either…

But I think this is what so many cotton growers need – it’s what we all need – actually.

Less Cotton Price Risk = More Diversification

You got this.

=================================

While none of these programs specifically address options, it may be worth your time to read this post: Option Hedging: The Virtue Of Second Best

The idea of the Early Year Cotton Marketing option comes from the study I pointed to here.

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Filed Under: PotpourriTagged With: #Cotton, #CottonMarketing

Cotton Prices: How to Predict Them

Cotton Prices: How to Predict Them

Heart attacks are hard to diagnose.  Or, at least that is what I have been told.

Conventional wisdom would say that when trying to predict a heart attack, like most things, the more information the better.

What is the patient’s age, weight, height, race, medical history, current medications, test results, etc?

Sometimes, however, the more information we have, the more we get distracted – and we end up making poorer decisions.

Statistician, Nate Silver calls this overload of information, the “noise.”  He makes the point that in today’s world of big data, the difficult task is to separate out the “signal” from the “noise.”  Basically:  What information matters?  And what information doesn’t?

Silver’s latest book is aptly titled:  The Signal and The Noise:  Why So Many Predictions Fail – but Some Don’t.

This overload of information is also the case with predicting heart attacks.  Writer Malcolm Gladwell tells the story of Cook County Hospital in his bestselling book:  Blink: The Power of Thinking Without Thinking.

During a Q&A on this issue, Gladwell had this to say:

One of the stories I tell in Blink is about the Emergency Room doctors at Cook County Hospital in Chicago. That’s the big public hospital in Chicago, and a few years ago they changed the way they diagnosed heart attacks. They instructed their doctors to gather less information on their patients: they encouraged them to zero in on just a few critical pieces of information about patients suffering from chest pain–like blood pressure and the ECG–while ignoring everything else, like the patient’s age and weight and medical history. And what happened? Cook County is now one of the best places in the United States at diagnosing chest pain.

So what do predicting cotton prices and predicting heart attacks have in common?

Exactly what I have already implied:  More information is not always better.

For example, what information should I be looking at and studying to predict, or explain, cotton prices?

  • Stock/Use ratios by country
  • Production by country
  • Consumption by country
  • Beginning stocks by country
  • Import/Export by country
  • Government interventions by country
  • Volume/open interest/cash sales
  • Weather
  • Alternative prices
  • Inflation
  • Land valuations
  • Exchange rates
  • Shipping rates
  • Energy costs
  • Etc.

That list looks like a good place to start.

At the same time, the list above also looks like an awful lot of information to get in front of in order to get an edge on the direction of prices.

If I was asked to build a model of cotton prices, I would no doubt use the data above, as well as anything else obvious that I found descriptive.

But is there a simpler way? A way that does not give most of us a headache?

Is there a variable that anyone can easily follow that would give us insight into all of the available information on cotton?  A variable that allows us to tune out the noise, and focus on what matters?

In fact, there is such a variable:  It’s the price!

Every variable listed above, current and expected, as well as other variables we have not even thought of are factors that are influencing and constantly setting the current, and futures, price of cotton.

By using the price of cotton to forecast the price of cotton – a simple prediction rule might be:

  • If cotton prices are moving higher – we predict higher prices.
  • If cotton prices are moving lower – we predict lower prices.

Traders call this prediction method: “Trend-following.” Trend-following trading, however, is not prediction at all though.

Like the name says:  It’s following.

In this method you are simply saying:  “I have no predictions or ideas or preconceptions about where the market is going.  But wherever it goes, I will follow it.”

Just to show the idea, let’s make a few imaginary predictions (post-hoc) using only the price of cotton as our indicator.

If the green line (the 15 day moving average of prices) is above the red line (the 30 day moving average of prices), we predict that prices will go higher.

If the green line is below the red line, we predict that prices will go lower.

Source: barchart.com

For a few more examples, what about corn, and wheat?

Source: barchart.com

Source: barchart.com

Over the last year, if you followed a trend-following rule, like the one above, you probably would not be wrong very often – and when you were wrong, you would not be wrong by much.

Trying to stay informed is great, but trend-following is immensely easier than stressing ourselves about the onslaught of information out there every day that so easily overwhelms us.

Good-grief, you would have begun predicting lower oil prices beginning in August of 2014 (below).

Source: barchart.com

Can trend-following actually work, you ask?

Trend-following trader, billionaire, and owner of the Boston Red Sox, John Henry had this to say:

I don’t believe that I am the only person who cannot predict future prices. No one consistently can predict anything, especially investors. Prices, not investors, predict the future. Despite this, investors hope or believe that they can predict the future, or someone else can. A lot of them look to you to predict what the next macroeconomic cycle will be. We rely on the fact that other investors are convinced that they can predict the future, and I believe that’s where our profits come from. I believe it’s that simple… when I was designing what turned out to be a trend following system…[that] approach–a mechanical and mathematical system–has not really changed at all. Yet the system continues to be successful today, even though there has been virtually no change to it over the last 18 years.

I’ll take his word for it.

And you should too.

[Note:  The connection between trend-following trading and the book “Blink,” by Malcolm Gladwell was first introduced to me by author Michael Covel in Episode 44 of his popular podcast, available on iTunes.]

More:

Cotton Growers, Stop Caring About The Market Fundamentals
5 Ways To Market Your Cotton
8 Ways Fundamentals Impact Cotton Prices, Quantified
10 Questions Answered By A Farmer
Cotton Commodity: 8 Ways To Get Better At Cotton Marketing
10 Reasons Why Cotton Producers Don’t Sell to Textile Mills

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Filed Under: PotpourriTagged With: #Cotton, #Trading

Tesla Model S

Tesla Model S

If I ever get a needless “fun car,” it’s gonna be a Corvette or a Tesla Model S.

I have wanted a Corvette since the eighth grade.

And a Model S…

I mean, 0-60 in less than 2 seconds? 😳

Woah.

At first the more traditional automakers viewed the Model S as a gimmick and its surging sales as part of a fad. These sentiments, however, soon gave way to something more akin to panic. In November 2012, just a few months after it started shipping, the Model S was named Motor Trend’s Car of the Year in the first unanimous vote that anyone at the magazine could remember. The Model S beat out eleven other vehicles from companies such as Porsche, BMW, Lexus, and Subaru and was heralded as “proof positive that America can still make great things.”

-Ashley Vance, Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future (Amazon)

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Filed Under: PotpourriTagged With: #Car, #Spending

Brandon Hays First Sermon @ The Church At Harpeth Heights

Brandon Hays First Sermon @ The Church At Harpeth Heights

No big deal here, just me, sitting in my car watching Brandon Hays’s First Sermon @ The Church At Harpeth Heights.

(First sermon as their senior pastor anyway, archive here.)

Watching – and wishing he was still preaching in Lubbock…

Ugh.

What a loss.

And I need more coffee.

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Filed Under: Not BooksTagged With: #Church, #Video

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