This way you can evaluate the profit potential of a cotton crop before you are ready to merchandise and lock in an acceptable profit. The futures market also offers the cotton grower maximum market flexibility. Since you can offset your contract at any time, you don't have to deliver cotton as specified in the contract. You buy a futures contract on the day you sell cotton in the local market and apply the profit or loss received on the futures transaction to the price you receive locally. Most growers who hedge in the futures market do offset their contracts and actually sell their cotton on the spot market.
Futures trading has disadvantages, too.
You must know how the market operates. Futures trading requires you to guarantee your transaction with margin money. Cash contracting and hedging in the futures market offer cotton producers the advantages of being able to lock in a satisfactory profit for crops yet unplanted, still growing, or in storage. Both methods reduce marketing risk. Thus, lenders usually will advance credit more readily and in larger amounts against growing or stored crops hedged or cash contracted.