DO YOU HAVE TO PUT YOUR COTTON IN THE LOAN?

Did you hear the horror stories this past year about those who put their cotton in the loan hoping that equity values would increase only to see accumulating storage and interest charges erode their production's value? Or about those producers who sold on call expecting an increase in the market only to have the differences between months eat up their equity?

Let's look at what happened in several different scenarios last season on cotton sold around the end of November and finally cashed in the end of June.

Obviously, the best plan would have been to sell cotton outright at harvest and not put the cotton in the loan, not sell on call or sell at a fixed price and buy an "at the money" call option.

BUT WE DON'T KNOW WHAT THE MARKET WILL DO!!!

We do know that the solution of putting cotton in the loan or on call without downside protection can cost you a lot of money you do not need to risk.

If you sell your cotton outright, you have established both a floor and a ceiling for what you will receive.

If you sell your cotton at a fixed price and use some of the proceeds to buy a call option, then you have established your minimum return and can benefit from a rise in the market. Sure, it costs something but you can scale the cost with the risk. For example, look at some recent option prices:

• At the money

Let's say you want to sell your cotton at a fixed price and buy some July call options which will give you until the first of June to take advantage of any market rise. July closed in this example at 74.84, nearly 75.00. The cost of a July "at the money" call option, the N75, would have been 290 points and you would benefit from any rise over 75.00 on July. But if you felt the market could go much higher and you did not want to spend so much on the premium, you could spend ½ that amount on option premium and benefit from the rise above 78.00. Or you could buy the "at the money" call option on only ½ of your cotton. There are many possible strategies here.

The point is that you can stop carrying charges on your cotton, create a real floor of a return for your crop AND take advantage of market rises.

This is a complex issue for your marketing but one you need to be aware of.