Cotton farmers have 'buffet' of marketing options

Right along with that, significant changes were occurring in the way growers earn money from what they produce.

"The days of making three bales in California and getting 70 cents a pound are long gone," said Ernie Schroeder Jr., chief executive officer of Jess Smith and Sons Cotton (JSS), Bakersfield, Calif. "You market cotton that way today, and you are cooked financially." The yields may differ for the rest of the U.S. Cotton Belt, but Schroeder’s point is universal.

With ever increasing costs of production and world competition, there is what Schroeder calls a "buffet" of marketing options now open to producers to maximize income. His family-owned company offers all of them.

Where growers once had two basic cotton marketing options; sell to a merchant for a cash price or deposit bales in a cooperative seasonal pool, now there is a bushel basketful of innovative marketing tools available to producers to match ever changing market conditions.

"What works one year may not work the next. It is important to have as many options as possible to stay alive today. These tools are keeping a lot of growers around," he said.

Payment hedging

None are more radical that the idea of hedging government countercyclical payments (CCP) proposed a little more by Schroeder’s company. Another vocal proponent of this was Carl Anderson, Texas A&M University Extension economist for cotton marketing.

When the cotton market went into the dump in December 2002, JSS and Anderson suggested growers consider buying options to protect what was then government countercyclical payment of almost 14 cents per pound or roughly $70 per bale.

"The idea is simple," said Schroeder. "Go to the FSA office and get your program acreage and program yields. This will give you the total amount of pounds. You place your marketing strategy against the CCP on 85 percent of your total pounds."

It was not cheap, 3 cents per pound or $15 per bale to buy the option. "It was like buying insurance. If the countercyclical payment went away, you protected it with options. If it did not go away, you collected it from the farm program." Bottom line: $55 per bale was protected at a cost of $15 per bale. On a three-bale yield, that is $165 per acre.

Schroeder tossed out the idea at one of the JSS risk management seminars for growers. A few bought into the idea and added substantially to their bottom line.

Schroeder and Anderson both were disappointed that more producers did not hedge that payment, but if the opportunity every came up again, Schroeder said many more would climb aboard the bandwagon.

"That does not work every year, but enough people have bragged to their neighbors about how well they did that you can bet more will listen next time the opportunity is there," said Schroeder.

One-stop marketing

Risk management seminars and marketing newsletters are just two of the new services Jess Smith and Sons Cotton, the 7th largest private cotton marketing company in the U.S., began about five years ago when it transformed itself from a cash buyer to a merchandising firm offering one-stop, Wal-Mart style of cotton marketing options to producers.

In the past five years, the 60-year-old Bakersfield company has increased its cotton handle from 200,000 bales of primarily California cotton to 600,000 bales of cotton from throughout the U.S. as well as the world. JSS markets for about 600 growers beltwide.

"We started handling other growths because when a mill calls, it usually doesn’t need just SJV cotton. It needed growths from other areas as well. We missed sales in the past for our growers because we could not deliver everything a mill wanted," said the 32-year-Schroeder, who shares ownership of the company with his 62-year-old farther, Ernie Schroeder Sr., now board chairman. Ernie Sr. bought the company in 1983 from the founder’s son, Leo Smith.

Schroeder says Jess Smith and Sons offers more marketing programs that most.

However, Western Cotton Shippers Association members as well as the cooperatives make known to growers the wide array of wider of marketing opportunities available to maximize grower returns in an increasingly volatile marketplace. This volatility is evidenced by a 20-cent swing in the cotton market over a six-week period not long ago on news out of China.

"That is an unbelievable market swing, but I think we are likely to see more of those kinds of things in the future," said Schroeder. "From here on out this year I think the supply/demand numbers are very friendly — numbers we have not seen in a long time. China will be back in the market this month or next. The technical picture is improving. I feel we should be back to 80 cents futures and have a slight chance of challenging contract highs."

Schroeder says growers naturally want to catch the brass ring — the top dollar possible for their cotton. They want to ride it to the top and squeeze very penny possible from a market moving up. However, as market analysts often say, the top is discovered only when market heads the other way.

Quick fix temptation

After a few years of struggling, Schroeder says it is natural for producer to try to recoup losses with a quick one-year home run. However, that often leads to foul balls.

That is why Schroeder is seeing increasingly more producers looking for as many marketing options as possible to achieve high seasonal averages rather than home runs.

Schroeder saw a major switch in that direction in participation in the seasonal marketing plans his firm offers. Jess Smith and sons was one of the first private firms to offer cooperative-like seasonal marketing programs and have had a lot of takers, according to the younger Schroeder.

JSS started a seasonal marketing program for California growers and has since expanded to Texas and the Delta. These are regional plans with blocks of from 100,000 to 200,000 bales where growers turn over marketing decisions to the Schroeders and their staff. These are non-profit pools not unlike cooperatives operate. There is an advisory grower board of directors.

"Mills know we operate these seasonals and when they want a particular growth, they can hand select exactly what they need from the regions," said Schroeder. The regional pools are not mixed together. There are no retains.

"About five years ago, we went from a 50/50 percent of growers we work with using seasonals and individual marketing plans to about 75 percent of our growers in seasonals," said Schroeder. "When the market fell out of bed, a lot of people in the industry got hurt in the call and spot market. Seasonals did much better average-wise and that brought more of our growers into our pools."

The traditional cash markets are still there as well as what Schroeder calls minimum price and all-entitlement marketing options, which have become popular with producers.


Minimum price works well in a bullish market while all-entitlement is a program suited for years when a pop payment is in place, thus allowing the grower to lock in the futures, basis and pop at once as well as allowing the producer to shift the risk from himself to the buyer.

"Without financially successful cotton growers, there is no Jess Smith and Sons," said Schroeder. "That is why there are so many options available today to help growers optimize their chances of making money. It is not easy to make money in the cotton business as it once was."

Within the last year and a half JSS has branched into other commodities, hay primarily, to help producers maximize return on other crops. They hired L.V. Stockman, a veteran row crop marketer, and last year JSS brokered more than 100,000 tons of hay.

"It all goes back to the importance of working daily with markets to benefit growers," said Schroeder. "We take the risk of marketing hay just like we do with the cotton. It has worked out well for us and the grower." JSS will be setting up a bale press this year to expand its export hay marketing business.

Seek sales options

Schroeder said most California cotton producers are loyal to either a merchandising firm or a cooperative. "There will always be those producers who jump around each year. Everyone knows who they are. However, we will work with all producers, regardless. However, the one thing that always works best is a long-term relationship. Both sides will always get the most benefit out of this."

However, Schroeder said many of what could be called "loyalist growers" are browsing for more marketing options. "We have seen and heard from a much greater percentage of those that we thought were very solid with their marketers are now calling."

An example of this search for more marketing opportunities was the move by two of the biggest names in SJV cotton, Kings County’s Stone Land Co. and Kern County’s Starrh and Starrh Cotton Growers, leaving Calcot and serving as the foundation of the San Joaquin Valley Quality Cotton Association, which is carving a niche for itself in marketing guaranteed quality cottons.

"I think that was a sign of the volatile marketing times we now operate in," said Schroeder. "A lot of people took notice of that."

It has not been only growers leaving the cooperatives. Cooperatives say they are adding members and bales from the private side of the ledger. There definitely seems to be more growers looking for alternatives than ever before.

Cooperatives and private merchandising firms have long been in competition for growers’ cotton, but it has become more ferocious in recent years as grower profit margins shrink in low cotton prices and acreages drop.

The California industry has struggled in recent years and acreage dipped to levels of half what it once was. Schroeder and others grew concerned about what the future might hold if the trend continued. SJV acreage rebounds have been predicted for several seasons, but they have yet to materialize. It may happen in 2004.

Acreage plateau

"I think acreage has plateaued in the San Joaquin. All our growers say they are going in increase upland acreage this season," said Schroeder. "We will have a tough time reaching a million acres again — too many trees, lettuce, tomatoes and other crops cutting into cotton." However, Schroeder expects a gradual acreage increase.

Pima cotton acreage is expected to take a sharp jump in 2004.

"Cotton will not go away in California. We have the marketing tools to make is stay," he said. One of those, the federal farm program, may be a bit tenuous.

If the farm bill went away, cotton would survive in California. However, acreage would be sharply curtailed because the farm bill and the downside protection it affords would go away, said Schroeder.

The federal farm bill cost is a political hot potato. It has cooled off a bit this year with strong prices, and Schroeder hopes that will call off the dogs in Congress who would like nothing more than to kill federal farm support.

"I think we will see another good farm bill next time around," said Schroeder.

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