Price and yield risk management in the marketing of cotton products using futures, options, and crop insurance

Over the years, agricultural policy in the United States has attempted to protect agricultural producers from the uncertainty of markets and growing conditions. Recently, the movement toward less government involvement in the pricing of agricultural commodities has increased awareness of the importance of price risk management tools, such as futures and options, that could be substituted for government price support programs.;Ten different marketing strategies were designed and analyzed in this study together with several crop insurance scenarios. Marketing strategies focus on managing price risk while insurance can be used to manage output risk.;The results indicate that the optimal marketing strategy or combination of marketing strategies depends primarily on the level of futures prices in the spring. Crop yield coverage can complement marketing tools in providing better protection for producers' revenues. The optimal insurance level depends on the level of risk aversion of the producer. A marketing strategy or a combination of marketing strategies substituted for government price-support programs could provide similar price stability in the market, but could not generate the same price level.;In addition to price and yield risk management, the possibility of predicting cash-futures basis for cotton was investigated. Three analyzed basis forecasting models were: a three year average model, a reduced form structural model, and a time series model. The time series model was found to be the best followed by the three year average model. The three year average model performed the best in forecasting cotton cash-futures basis for harvest period.;The final question of this research was to examine cross hedging possibilities for cotton seed meal. The investigation of cross-hedging cotton seed meal with soybean meal futures reveals that soybean meal futures can be used as a cross-hedging vehicle for cotton seed meal. The reduction in the variance of price resulting from exercising a cross-hedge strategy is, however, rather limited. Cross hedging is more effective for longer hedges than for short term hedges. The twelve week cross hedge was the most effective of the analyzed cross-hedging strategies.