Hello friends.
The price of cotton has been shaved in half by 2 key factors:
1) Largest cotton consumer China closing down with the zero-covid policy
2) Expectations that a recession will reduce cotton demand
Looking at the current price, we think that it's very cheap and that a substantial move to the upside is on the cards. One thing I don't think the market is pricing in is the potential for China to reopen sooner than markets are anticipating. Obviously, this shutdown in China cannot be permanent and will end eventually. It's more a matter of when. And when it does, cotton should print a candle of +10% or even more in a single day.
The other thing that is being ignored by cotton speculators is the potential for producers to cycle through crops. Cotton producers do not have to exclusively be cotton producers -- in particular, they can and will replace their cotton crops with corn crops. This is because corn has only fallen a mere 17% while cotton is down 52%. If farming corn is more profitable, all rational cotton farmers who are able to make the switch will. When they do this, the supply of fresh cotton being created will be reduced.
Another factor impacting cotton is that it might not even be profitable to produce at this price -- the breakeven value is something like 70 cents on average based on what I'm seeing, but many producers are already drowning underwater. If it costs you $0.80 to make cotton, and cotton is trading at $0.75, you would save $0.05 by simply buying cotton rather than producing it -- so you will be forced to either pivot to the production of corn/other crops or to close down your farm for good. The lower the price goes, the more producers go underwater and are forced out of the business. Only the most efficient cotton producers who have the best land and technology will be able to keep going at these prices.
I also think that climate change will be a much longer-term driver of cotton prices in the coming years. A material example of this occurring is that cotton production in Brazil declined by 30 percent due to drought and heatwave. This lower yield and lower production puts a chokehold on supply and will only get worse as extreme weather and heat become increasingly more common and increasingly destructive to crops.
To be clear, we do think demand will decline somewhat due to a recession. People are going to be wasting less money on pointless consumption like clothes they don't need and will throw away, and will be more conscious of how they spend money. But the demand will still be there. The cotton must flow.
The price of cotton has been shaved in half by 2 key factors:
1) Largest cotton consumer China closing down with the zero-covid policy
2) Expectations that a recession will reduce cotton demand
Looking at the current price, we think that it's very cheap and that a substantial move to the upside is on the cards. One thing I don't think the market is pricing in is the potential for China to reopen sooner than markets are anticipating. Obviously, this shutdown in China cannot be permanent and will end eventually. It's more a matter of when. And when it does, cotton should print a candle of +10% or even more in a single day.
The other thing that is being ignored by cotton speculators is the potential for producers to cycle through crops. Cotton producers do not have to exclusively be cotton producers -- in particular, they can and will replace their cotton crops with corn crops. This is because corn has only fallen a mere 17% while cotton is down 52%. If farming corn is more profitable, all rational cotton farmers who are able to make the switch will. When they do this, the supply of fresh cotton being created will be reduced.
Another factor impacting cotton is that it might not even be profitable to produce at this price -- the breakeven value is something like 70 cents on average based on what I'm seeing, but many producers are already drowning underwater. If it costs you $0.80 to make cotton, and cotton is trading at $0.75, you would save $0.05 by simply buying cotton rather than producing it -- so you will be forced to either pivot to the production of corn/other crops or to close down your farm for good. The lower the price goes, the more producers go underwater and are forced out of the business. Only the most efficient cotton producers who have the best land and technology will be able to keep going at these prices.
I also think that climate change will be a much longer-term driver of cotton prices in the coming years. A material example of this occurring is that cotton production in Brazil declined by 30 percent due to drought and heatwave. This lower yield and lower production puts a chokehold on supply and will only get worse as extreme weather and heat become increasingly more common and increasingly destructive to crops.
To be clear, we do think demand will decline somewhat due to a recession. People are going to be wasting less money on pointless consumption like clothes they don't need and will throw away, and will be more conscious of how they spend money. But the demand will still be there. The cotton must flow.
Comment:
Another thing to note, the 2022 U.S. cotton crop is set to be the smallest in 7 years.
Trade closed: target reached
Comment:
What a rally!