When the term “risk management” is defined by an international cotton marketing expert like Bruce Groefsema, you’ll likely get a glossary of the things such as options, futures, hedging and advance contracting under that umbrella.
After all Groefsema is a cotton man. His career spans more than 30 years working in organizations like Calcot where he was senior vice president, and Weil Brothers, both prominent cotton marketers. Groefsema is currently marketing and sales consultant for the San Joaquin Valley Quality Cotton Growers Association, an assembly of some of the valley’s most prominent cotton growers who produce mostly high quality Acala and Pima cottons.
Groefsema has also served in a variety of cotton industry leadership roles, including president and chairman of Cotton Council International (CCI).
He also wears another hat. He’s involved with the family’s San Joaquin Valley farming operations, though his brother Clay oversees the actual farming. Ironically, the Groefsemas don’t grow cotton. The ground they farm is better suited for permanent crops and other field crops.
“Risk management” in crops like alfalfa, almonds, pistachios and walnuts, all of which are part of the Groefsema family’s valley farming operation, is far different than cotton.
With as many as 400 different crops from which to choose, risk management in California starts with diversification, Groefsema says.
“First, in California you have to segment open ground from permanent crops in looking at risk management,” he said. With many options, the selection process must have balance because permanent crops are in the ground 20 years or longer.
Fortunately, the economics for the three major tree nut crops has been good, certainly over the past five years, he says. It’s hard to go wrong with any of the big three tree nut crops.
The row crop side has not been that rosy during the same period of time.
“What concerns me for the open ground is the struggling dairy industry,” he said.
“My family’s open ground is really not high-yielding cotton ground. It’s too sandy. However, it is good alfalfa ground in rotation with wheat,” he says. Corn silage is another crop tied closely to the dairy industry.
“It is one thing to get $200 per ton for hay, but if we lose the demand for hay because of problems in the dairy industry, where does that leave alfalfa?” he asks.
Alfalfa hay is a minimum of a three to four year commitment in the San Joaquin Valley, another factor to weigh in what to plant on open ground.
Although forward contracting for forage crops is a widely used form of risk management, growers often express concerns about the sanctity of those deals in the wake of the economic malaise of the dairies.
“The key to those deals is the faith and confidence you have as producer for the other side of the deal. It is a very real concern for us, and I am sure other growers as well,” Groefsema. “In my opinion, it is important not to be tempted by the best price of the day, but the quality of the customer. It is a total decision, not just a price decision. We sell hay to Harris Ranch because of the quality of the customer.”
Strong dairy influence on row crops
California’s dairy industry strongly influences row crop farming in California, he emphasized. “Unfortunately, there are those in the dairy industry who are notorious for promising and not being there for the delivery,” he added.
There are other row crop options for the Groefsema family as with other row crop farmers, like leasing ground for vegetable production, but the Groefsemas have not yet gone that direction.
For now, alfalfa remains a good open ground option for Groefsema. “If it were not there, we’d probably be planting more permanent crops. I am sure other growers would be pushed toward the same thing — if hay was no longer economically viable.”
Cotton is hanging in there, but California acreage is expected to take another sharp dip in 2013, due to lower prices than the past two seasons.
“It is still not as cheap as it was four or five years ago, but a huge world carryover is sending the signal that there is too much cotton for the marketplace,” he said.
California’s has a long history of producing the highest quality upland cotton in the U.S. The same history applies to Acala and now ELS Pima and that bodes well for the industry.
“Without the quality premiums we still get for our cotton, I think we would be out of the cotton business,” he said, adding that cotton also remains a good rotation crop in areas where inexpensive water is still available. High cottonseed prices over the past few years, coupled with higher yields due to crop rotations with crops like processing tomatoes, have kept cotton in the open ground mix.
Overall, Groefsema said California agriculture has had a good economic run, especially over the past five years.
“California agriculture is in pretty good shape financially, except for the dairy industry. It is a big bump in the road right now. However, we have all seen the industry struggle at times over the years, and it has always come back strong. I am not writing it off and am hopeful it will come back strong,” he concluded.