An empirical simulation analysis on cotton marketing strategies in west Texas

The three marketing strategies, buying a put option, cash sale at harvest, and cash sale in June after December harvest, are simulated for six representative irrigated and dryland cotton farms in West Texas. Each marketing strategy is ranked using the net cash income probability distribution for the representative farms using stochastic efficiency with respect to a function (SERF). SERF rankings were consistent across dryland and irrigated farms. The buying of a put option was found to be the marketing strategy that produced the highest certainty equivalent (CE) for normal risk averse decision makers. Cash sale at harvest followed by cash sale in June marketing strategies were ranked second and third, respectively. A sensitivity analysis increased the national baseline price used in the model by 45 percent. Cash sale at harvest then consistently became the highest ranked marketing strategy followed by buying a put option and then cash sale in June. The research found that if a strike price and premium that covered the production costs of the representative farm was available during the pre-harvest period, the decision maker may have the ability to increase utility by hedging with the put option.