If asked which commodity is up the most this year, the average person would probably answer gold, since it is in the news so much. But the real money in the Chicago commodity trading pits has been made in the opposite of hard assets — little white fluff balls.
Cotton, by the way, is up so much I expect the department stores to start putting dress shirts under lock and key. We might start hearing stories like the ones about copper a year ago, when crooks were stealing plumbing fixtures and selling them for scrap.�
�
Cotton prices are tracked by the exchange treaded note iPath�Cotton�(NYSE: BAL), shown above contrasted with the S&P 500 and gold this year. It’s ironic for me because last year at this time I was deep into finishing my annotated edition of “Reminiscences of a Stock Operator,” in which cotton tarred as the first commodity that made the fortune of the main character.�
Little known fact: The disgraced brokerage Lehman Bros. �got its start as a cotton broker in Alabama in the 1850s. Bavarian emigres Henry, Emmanuel and Mayer later moved to New York but secretly backed the Confederates during the Civil War. Then they launched their municipal bond business by selling credit for their native state during Reconstruction. Yes, �I have a million of these that didn’t make it into the book. Here’s one more: The notorious financier “Diamond” Jim Fisk got his start smuggling cotton to the North from the South during the Civil War, arbitraging the difference between the 12 cents/pound cost in the South and the $2/pound cost in the North.
Cotton hit a new high of 130.5 cents per pound on Tuesday, up from 62.63 cents a year ago. That’s the highest level since the U.S. Department of Agriculture started recording prices in 1912. I’m not sure why this is a surprise to anyone, since every other commodity has risen a lot more than that in the past 100 years.
�
Above you can see that the price of cotton was range-bound at 30 cents to 90 cents for the 25 years prior to 2010, when it broke out due to a variety of crop failures and demand increases. Veteran cotton analyst Mike Stevens at DTN Progressive Farmer told clients that prices recently have been driven by China’s “insatiable appetite.” He also said prices had recently been sparked by weather-related losses throughout the cotton belt of Texas.�
I spoke on Tuesday afternoon with Stevens of Louisiana. He said, “This is such uncharted territory. You’d have to be 140 years old to say you have seen something like this!”
Here’s the rest of his comments:
“What’s interesting is that this enormous bull run has lasted only 90 days. When it started, all the speculators were short. Then a perfect storm struck. A drought hit Russia, where there is a lot of world production, then floods hit Pakistan, which took out several million bales of cotton production, then rains hit India, which is a large producer. And then just a couple of weeks ago, a freak hail storm hit West Texas, which is the largest contiguous cotton-growing region in the United States, and wiped out the crop. Every day there’s been another bullish story.
“So in the process we’ve gone from 70 cents a pound to $1.30. This has never happened in cotton. There has been panic buying from mills around the world to keep their doors open.��And producers are not making money off this because they sold almost all their product over the summer��at 75 cents to 85 cents, which they thought was great at the time. Meanwhile, all the merchants like Cargill who bought at those levels turned around and shorted cotton to hedge it, so they have been sending millions of dollars to New York in margin calls. It’s been a disaster!
“Where the real pain is in letters of credit that can’t get opened. If a merchant bought cotton, hedged the price, and then the market moves up and the mill can’t pay for it because no one ever thought of extending margin lines out to $1.30/pound, it creates a myriad of problems. There is risk of default form producers who sold at 70 cents but need to deliver at $1.30.
”Whether it’s the producer, the co-op, the merchant or the mill, this move has been incredibly disruptive and painful and very few people have been able to capture profits except for long-only speculators in Chicago and New York. I’m not pointing a finger, because no one cornered this market to drive the prices up — it’s been supported by fundamentals all the way. I’m just saying there are very few winners outside pure speculators.
“The one place you probably will not notice it though is at the retail level. A very small part of apparel is the cost of cotton. There is only a half of a pound of cotton in a shirt, and two pounds in a pair of jeans. So if the cost of the cotton in a $50 shirt goes from 35 cents to 70 cents, I don’t think the manufacturers or retailers are going to be able to pass that increase along, they’ll just have to suck it up. So maybe you will see worse earnings results from apparel makers.
“Also there will be a lot of demand destruction at this level as cotton always competes with other fibers. Polyester in China has run up to 90 cents a pound now, from 60 cents two months ago. But that’s less than the rise in cotton, so they’ll just increase the poly blend in shirts.
“They don’t ring a bell at the top, but with demand destruction and the sheer panic buying we’ve seen lately, the $1.30 level cannot be sustained — it has got to be close to a peak now, where speculators are happy to cash in their chips and take profits.”
For more insights like this, please check out Jon’s daily Trader’s Advantage or Strategic Advantage newsletters.
No comments:
Post a Comment