This graph shows daily settlement prices for Dec’04 futures from about fourteen months out through expiration. The blue and pink lines show the premium value associated with 63-cent put and call options, respectively. This was a year when there were split opinions on the outlook. Some (perhaps the more conservative analysts) thought stocks would build and prices would fall, while others thought strong Chinese demand would keep the late-2003 price rally going up to the 70s. As it turns out, the strong Chinese demand did not materialize, and prices followed the normal pattern for a year with substantially increasing carryover. This sort of event is somewhat predictable, although you can never be absolutely sure. You can only plan for this by purchasing inexpensive insurance against a major price decline. One very basic way to implement such an insurance policy would be to purchase put options in the early/mid spring when prices tend to be at their seasonal highest. Doing so in 2004 was a fairly inexpensive purchase (2-3 cents/lb) which allowed many growers to capture ten cents in put value (rising blue line) as Dec04 futures fell (red line). This ten cents was independent of any LDP gains.
Welcome to the educational website of Dr. John Robinson in the Department of Agricultural Economics at Texas A&M University.
The website focuses on farm-level implementation of strategies for Texas cotton growers to deal with yield and price risk. Contact me to receive a weekly e-mail notice of when the latest edition is posted on-line. In addition, we provide daily crop market news and commentary on Twitter (@aggie_prof) and also on the Master Marketer facebook page. We welcome your feedback and interaction in these social media.