[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.

Wouldn’t it be great if you could predict the price of cotton?

[This is part of the series: 5 Ways To Market Your Cotton]

As a cotton grower, the third way in which you can market your cotton is with options.

Options are most often used in real estate where you can often buy an option on a commercial space.

The option gives you the right, but not the obligation, to buy the commercial property, at a set price, anytime between now and a specified date in the future.

This works the same way for marketing cotton.

Say it is June, and the December futures price of cotton is 80 cents / lb.

Buying a “put option” on a December cotton contract gives you the right to sell cotton at 80 cents / lb. anytime between now and the time the option expires. The option costs, say for example, 3 cents / lb.

December gets here, and the December futures contract is trading at 70 cents / lb.

So, now the December cotton option you bought is worth 10 cents / lb (80-70).

You sell your option and profit 7 cents / lb. (10 cent option value – 3 cent cost).

Then you sell your physical cotton for the current cash price of 70 cents /lb.

Cash price + Option profit = 77 cents /lb.