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Cotton Marketing Strategy #2: Forward Contracting | SterlingTerrell.net

Cotton Marketing Strategy #2: Forward Contracting


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

By: Sterling Terrell

As a cotton grower, the second way in which you can market your cotton is with the forward contract.

Unlike the cash sale that is done at the very end of the cotton marketing process, forward contracting is typically done at the beginning.

Often, cotton gets forward contracted before it is even planted.

For example, say prices are up and you want to lock in the good price by selling your crop - however, your crop is not ready for a cash sale.

In this case, you can go to a cotton buyer and forward contract your crop with one of two types of contracts.

1. An Acre Contract - obligates you to produce and deliver all of the ginned cotton produced on a given number of acres.

2. A Bale Contract - obligates you to produce and deliver a fixed number of ginned cotton bales.

Obviously, both acre and bale contracts are made with pre-set discounts for quality.

The risk of a forward acre contract is that you might not hedge all your acres, prices can also change after the hedge, and there is the possibility of buyer default.

The risk of a forward bale contract is that you might not produce enough bales to deliver on your contract. You can also produce too many bales and then the over-production is not hedged. Prices can change after the hedge, and there is also the possibility of buyer default.