Remember that every large loss a Trader has, was at one point a small loss...

- Michael Levin

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May 22, 2007

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I know, I know… Cotton, “Big Deal” right? Think about it… We talk about global expansion and “developing countries” gaining ground from a newfound perspective of relative wealth… The average Chinese/Indian population coming into their own by actually having creature comforts of cell-phones, TV’s, Cars, Washing machines.. etc etc etc..

What about clothes & furnishings?

If we look at the big picture globally and break down growth in consumption of major commodities and then subtract out what everyone is already talking about (mass media wise) then one thing that hasn’t been said or written about lately is “Where are we going to get the materials to “dress” our world wide population? And of course, to those with home/fashion sense; “what about draperies, wall coverings and furniture?”

I could get into the man made fiber area and discuss break-throughs in polyesters and other materials, but for now I will concentrate on the bullish case for Cotton and the competition for the acreage to grow this crop vs. the current supply/demand worldwide and the potential for shortages as demand accelerates throughout the end of this decade alone.

Look, cotton has seen incredible advances in yields per hectare over the years, tripling actual yields in the past 20-30 years, but these advances seem to be leveling off just as real demand continues unabated and is actually accelerating worldwide. Also of consideration is the competition for acreage of any other edible/usable grown commodity…

China, The US, Pakistan and India account for almost 2/3 of the world’s production:

Top 10 in PRODUCTION
CHINA
USA
INDIA
PAKISTAN
COM. INDPT. STATES
BRAZIL
AFRICAN FR. ZONE
TURKEY
GREECE
AUSTRALIA

Not all of cotton is used for actual clothing needs, 60% of the cotton fiber is used for clothing, but the other 40% has industrial and medical uses as well as paper, yarns, sanitary products, automotive fillers and so much more. Like sheets, bedspreads, draperies, curtains…

It is also fascinating to see the byproducts that cotton is prevalent in and the growth in these areas isn’t so much staggering as it is hidden from obvious sight. Cottonseed oil for example, is the 5th most consumed vegetable oil in the world, with it being the #1 consumed fat in many 3rd world countries. It is used to feed livestock (the bran of the seed) I can’t even get into all of the other uses for cotton, so I am sticking to the main usages I pointed out earlier…

With everyone beautifying their homes here in the US visa-vis the Home Depot fix up my home rather than buy a new one, we can easily see how a few extra items locally in our homes translates into usage of this material… But what about the rest of the world?

Imagine the people in Asia and in India, as their incomes increase (from US outsourcing alone, lol) and they actually start buying an extra T-shirt and some sheets and maybe curtains for their homes… What about their wardrobes aside from a T-shirt?

There used to be an old adage or saying that “What if the Chinese decided to lengthen their shirts by 1” or more, what would that do to the consumption of cotton? I know that is a joke in one form, but what if the world itself and the population that CAN buy an extra shirt or 2 or a pair of denim jeans, started to do just that? Or home furnishings or medical supplies, etc?

What if these countries, with populations 4-5 times of those of us here in the US are already starting to do just that?

Look at these figures:

TOP 10 in CONSUMPTION
CHINA
INDIA
PAKISTAN
U.S.
TURKEY
BRAZIL
INDONESIA
MEXICO
THAILAND
COM. INDPT. STATES

The demand figures we have now may be totally obliterated as our population increases as does the price for competing fibers… My main point here is that the things that keep prices in check or in balance are the following:

Carryover supply, Current demand, Future demand, Current acreage/hectare-age, Weather and Technical patterns in the prices on the world’s exchanges…

In the longer term view here is what I see:

1. The world carryover has been down and seems to dwindle more and more.
2. Current demand is picking up at a larger pace then before and in my humble opinion will really pick up over the next few years as the average population that uses these products will be able to afford it more and buy more, even at only a fraction of their budget, still, adding a larger demand for the end products at the “visual” level as opposed to the underlying uses such as the automotive or medical or other markets that we can’t “see” as much.
3. That translates into a higher perceived future demand as that reality sets in that everyone really “wants” more of the product (to wear cotton is better than artificial fibers… a greener movement so to speak) With that higher actual demand and perceived demand, the price will go up as those who are willing to pay for it, will do so allowing more room in the chain for everyone to profit…
4. Countries that produce these fibers will start using more in their home markets, exporting less, leading to shortages.
5. Acreage that has been used for cotton growing still has to compete with other products worldwide and as corn, soybeans and other food related items also are growing in need/demand, the entire world wide vegetable/edible acreage will have massive competition for the $ per acre value and inventory turnover that is so important from a financial and socio-economic vein for the particular area in the world where these products are grown, and used.
6. What about the weather? As we know, the US has been experiencing a lot of violent weather patterns, particularly more noticeable in the middle of our country. We hear about different crops and their yields influenced by too much rain, not enough rain, floods, droughts, etc… This can only get worse in my view as the world sees much more variance to the weather patterns that affect specific crops in areas around the world… Less rain in major growing areas affects these crops as there is only 1 growing season per year, as does too much rain.
7. There isn’t adequate back up supplies to serve world markets if there is any major decline in production…

Just last week, China, as one of the largest growers of cotton, actually buying $400,000,000 of US West Texas cotton, signals that our quality is also in demand. It’s not just how much is needed, but also “how good”.

Look at this long-term chart for cotton and tell me that the recent congestion here in the 48 to 58 cent range isn’t due for a breakout? I wouldn’t be surprised to see a run past 58 cents and into the high 60’s like 67-68 cent area which would be the top of the trend line from the 111-112 area from the early 90’s to the 84-85 level of a few years ago…

Draw the line yourself, easy enough to do…

If you cannot view the long-term chart for cotton, go here.

So, now that I laid all this out for you, what should you do?

1. Decide if you agree with me and buy some long term positions in Cotton
2. If you are options savvy, then longer term options on Cotton are certainly another way to go
3. Once you’ve done that, go buy a nice Ralph Lauren Cotton shirt and feel good knowing you are contributing to the world wide demand for cotton… or
4. Take some cotton balls and stuff them in your ears so you don’t have to listen to me as I am wild for Cotton…

All the best in your trading…

Michael Levin is a Consultant to Platinum Trading Solutions. He has been in the Financial markets since 1981, having been a broker and trader on the PHLX Equity Options floor in the 1980's and ran trading firms in New York in the 1990's to 2002. Mike briefly set a record in the options trading division of the US trading Championships years ago.

Trade the Platinum Commodity Spread Program COMPLIMENTARY for 30 days.

This system works! Long only commodity funds that buy and hold huge quantities of futures contracts in many commodities have become a very powerful force in the market. These funds act in a very predictable way and the Platinum Commodity Spread Program has found an ingenious way to profit from the price movements of the spreads caused by these long-only funds. The Commodity Spread Program is now offered on a limited basis by Platinum Trading Solutions. Go here to find out more.