[This is part of the series: 5 Ways To Market Your Cotton]
As a cotton grower, the fourth way in which you can market your cotton is with futures.
A physical cotton producer hedging with futures contracts is clean and straightforward.
Say it is June, and the December futures price of cotton is 80 cents / lb.
Selling one December futures cotton contract hedges 100 bales of cotton at 80 cents / lb.
December gets here, and the December futures contract is trading at 70 cents / lb.
Your profit is 10 cents / lb.
Then you sell your physical cotton for the current cash price of 70 cents /lb.
Cash price + Futures profit = 80 cents /lb.
For many, hedging with futures is scary because there is risk of the dreaded “Margin call.”
While this is rare, it does happen.
It should be noted though that futures hedging losses from an increase in price, are offset by physical crop gains from that same price increase.