An Examination of Utilization and Price Risk Management in Texas
Cottonseed is an important product of upland cotton production, where roughly 700 pounds of seed on average are produced from each 480 pound bale of cotton (Cotton Inc.) Whole cottonseed is a significant ingredient in livestock rations, putting it in competition with other feedstuffs, such as corn, soybeans and its crush components, and other oilseeds. Cotton Incorporated describes one fourth of U.S. whole cottonseed as being sold directly from gins as livestock feed, and another quarter is distributed as livestock feed products after being processed by an oil mill.
A majority of cottonseed marketing takes place from September to December after the typical harvest period in Texas, and the value of whole cottonseed is traditionally applied to offset ginning costs. Conventional risk management practices for similar commodities consist of longer term storage, forward contracting, and using futures markets as a means to combat unfavorable price movements. However, special considerations must be made for storing such products and no futures market currently exists for cottonseed, limiting users and growers in their marketing planning and price risk management strategies.
This study examines commodities with established futures markets to determine an appropriate cross hedging vehicle that is sufficiently associated with the West Texas whole cottonseed price, which can then be used to hedge against price movement in a negative direction depending on the users need to buy or sell physical cottonseed. These strategies will conceivably allow growers, gins, oil mills, and livestock feeders to reduce price risk and aid in financial decisions. Although this study is primarily focused on markets within the state of Texas, the same methods can be used nationwide with presumably similar results.