What a turnaround in fortunes! It seems only weeks ago that industry was talking up a crop number of 2.8 million bales and now it would seem that a 4 million bale crop in 2017 is possible.
The goal posts have clearly changed so it is appropriate the producers carefully consider acreage, yield, marketing commitments and marketing options.
Dragging out the Abacus and crunching numbers (and given that by the time this article goes to print much of the number-crunching will have been done) here’s a few tips when considering marketing opportunities for the 2017 crop year.
- During the last big jump in production after the drought, irrigated yields dropped by approximately 4 per cent between crop year 2009 and 2010. National dryland yields on the other hand increased a whopping 44pc! We also had a 93pc increase in production from a 33pc increase in acreage.
- In 2011 dryland yields dropped 14pc after an increase in acreage of 580pc which resulted in an increase in production year-on-year of 480pc.
Whilst we are not advocating you plug any of these numbers into your crop modeling budget, the key message is that wet years well and truly throw a spanner in the works in regards to yield so keep your estimates realistic, conservative and review regularly throughout the season.
So what do we take away from these numbers?
Wet years tend to see a drop in irrigated yields; so whilst it is ok to get a little more bullish on acreage, don’t extend that too much into the yield cell of your spreadsheet.
Let the acres do the work, not your yield estimates.
For rain grown production, we tend to see two scenarios hidden in the numbers.
Really wet year yields will be lower but higher than long terms averages.
In marginally wet years with good planting rain and then a “kind” December and January, we tend to see some really fabulous yield outcomes.
The message is the same - let your acres do the work.
Forward Contracting
Whilst cash prices continue to hover around the magic level of $500 per bale and we don’t want to get into the semantics of market forecasting; at face value prices are relatively good spread to other summer cropping alternatives and long term average AUD$ values for cotton.
So what needs to be considered?
For rain grown cotton, bear in mind that yield variability can be much greater than irrigated.
Fixed bale contracts need to be carefully considered and all marketing options explored.
Merchants very much want to buy your bales and there are marketing options where your yield risk can be reduced.
Building an option into your AUD$ fixed price for a forward contract is a tool that can offset this risk.
These products don’t come for free but they can be useful if you want to take advantage of prices but you are wary of over-committing your production.
What if you contract more than you produce?
Even the best managers of production risk and forward contracting sometimes get thrown situations impossible to foresee, so it is extremely important to understand your obligations.
Prior to entering into any forward contract, ask your merchant how they will deal with such a situation.
There are many scenarios but most common would be the requirement for you to buy bales (from another grower) to deliver against your contract; or a contract wash-out where you would be asked to pay the market difference between your contract and the current market pricing.
There are very clear and enforceable trading rules established by the International Cotton Association that deal with this and merchant contract terms and conditions will also clearly detail the ramifications of non-delivery against contract.
ACSA’s advice is to carefully consider your marketing options and be conservative on yields.
Far better to have cotton to sell when production is realised, than have to determine a way to trade out of an oversold position.
- The ACSA is an association of cotton merchants who are independent, commercial entities involved in the purchase of cotton from growers and the sale of cotton to spinning mills and the textile supply chain.
