Higher and More Stable Returns from Whole Cottonseed: A Preliminary Study

The purpose of this study is to 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 cotton 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 was determined 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 that reasonably reduce 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. Though past performance is not an indicator of future outcomes, this suggests another possible marketing strategy for cotton gins to possibly improve their financial position and sustainability. The strategies analyzed could conceivably allow growers, gins, oil mills, and livestock feeders to reduce price risk and uncertainty and aid in financial decisions.