Higher and More Stable Returns From Cottonseed

Wes Regmund, John Robinson and David Anderson

No 252813, 2017 Annual Meeting, February 4-7, 2017, Mobile, Alabama from Southern Agricultural Economics Association

Abstract: Price variability is a significant source of risk in the market for whole cottonseed. Conventional risk management practices for similar commodities consist of longer term storage, forward contracting, and hedging using futures markets as a means to combat unfavorable price movements. However, no futures market currently exists for cottonseed, limiting users and growers in their marketing planning and approaches for risk reduction. The purpose of this study is examine cottonseed supply and usage patterns within Texas and to analyze the feasibility of price risk management strategies by cross hedging cash cottonseed with soybean and soybean meal futures. Results from a survey disseminated to Texas gins gave credibility to the idea that finding an alternative method to managing price risk would be economically beneficial. The relationship between cash and futures prices are deemed to be significant enough to warrant further investigation and hedge ratios allowing for the proper risk coverage for a seller of seed are estimated. Additionally, a measurement of hedge effectiveness is considered and results in cross hedges using either soybean or soybean meal contracts reasonably reducing risk when compared to an unhedged position. Practical testing from a seller’s perspective using historical data produced outcomes that showed that net effective prices from cross hedging are typically higher than unhedged cash prices over the considered time period. This presents an additional potential outlet for cotton gins to market cottonseed aside from the traditional methods, and possibly improve their financial position and profitability. The strategies analyzed will conceivably allow growers, gins, oil mills, and livestock feeders to reduce price risk and uncertainty and aid in financial decisions.

Keywords: Crop Production/Industries; Marketing (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:saea17:252813

DOI: 10.22004/ag.econ.252813

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