Forget Gold, Cotton's Up 60%
Justin Rohrlich October
28, 2010 8:30 AM|
price rise for the fibre could mean trouble for retailers
hard assets like gold and silver: the serious money
this year in the trading pits, say market pros, has
been made in soft white balls.
A lot of
investors, thinking about which commodity has enjoyed
the sharpest run to the upside this year, might guess
precious metals. In fact, it’s been cotton, which just
yesterday touched a new high.
retreated on Wednesday but, year-to-date, the price
is still up a whopping 62%. Gold is up 16%. The SPDR
S&P 500 ETF (SPY), which includes holdings
like Exxon Mobil (XOM), Apple
(AAPL), Microsoft (MSFT),
IBM (IBM), and Bank of America
(BAC), is up 5.5%.
Markman of Markman Capital Insight provides us with
the following nice visual, which shows the price of
that fluffy fiber as tracked by the exchange traded
note iPath Cotton (BAL), contrasted
with gold and the S&P 500 this year.
say cotton prices have moved dramatically higher due
to a series of headline-making storms around the world
which, coupled with still strong demand from China,
sparked worries about a shortfall. Aside from fundamental
factors, say traders, the surge has also been supported
by fund buying.
price of cotton is of course part of a more general
surge in commodities, due to global demand and a weaker
dollar. Hard assets like gold and silver have moved
sharply higher as have soft commodities like coffee
and orange juice. This in turn has renewed concerns
about what these rising prices will mean for an American
consumer, already suffering with a lousy labor market
and depressed housing market.
say analysts, there have been a series of weather-related
storms in big cotton producing regions: floods in Pakistan,
rains in China, dry weather in Russia and recent hail
storms in Texas. “There have been an unprecedented series
of weather-related events all coming together in one
crop cycle,” says Shawn Hackett of Hackett Financial
Advisors. “It set the market off.”
80 countries from around the globe produce cotton, the
United States, China, and India together provide two-thirds
of the world's cotton.
In the end,
the amount of cotton lost from these storms wasn’t actually
all that significant, but the problem was that there
were already such low stockpiles, says Judith Ganes-Chase
of J. Ganes Consulting, an independent commodities research
add it all up, it wasn’t as if there was some major
catastrophe,” says Ganes-Chase. “Significant sums of
cotton weren’t lost. But stocks were exceedingly low
to start with, and demand remained strong. So every
to the US Department of Agriculture, global production
by cotton farmers isn’t keeping up with demand, which
is grinding down inventories. World cotton consumption
in 2010-2011 is forecast at 120.8 million bales (a bale
equals 480 pounds), rebounding 2.6% from last year.
Global inventories are forecast at 44.7 million bales,
down 5% from a year ago and the fourth consecutive year
China remains particularly strong right now: so far
this season, a full 30% of the 11 million bales of cotton
sold by American farmers have gone just to China, says
As for investment
implications, the spike in cotton prices could also
spell tough news for clothing manufacturers and retailers,
says Hackett, as these companies suffer a mean choice
ahead: take the pain of higher cotton costs or try and
pass them along to shoppers. Looking ahead, he expects
some these companies to have their profits pinched.
raise clothing prices in a challenging economic environment
simply won’t work,” he says. “Buying clothes is elective.
I don’t have to buy a new outfit today. If you overprice
the clothes, nobody buys it.”