Sterling Terrell

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 #1	Times at #2	Times at #3	Times at #4	Avg 20-yr Price
1/3 Marketing		2	8	9	1	74.28
Monthly Marketing		0	8	9	3	74.21
Sell At Harvest		10	2	0	8	73.66
Early Year Marketing		8	2	2	8	76.41

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.

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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.