Cotton

Cotton is a natural fibre grown in tropical and subtropical regions. America, India and Africa are leading producers of the crop, and 2019 / 20 production grew 6 percent. Some wild varieties of the crop can be found in Australia, Africa and Mexico.  China is the largest consumer, producer and importer, but in 2018-2019, the failed trade negotiations between the US and China halted trade. Now, the prices are at one of the lowest since mid-2016 at 65 cents/pound. India had a low yield in 2018-2019, but the Brazilian output was 14-year high, that will create global oversupplies amidst a slowdown in global demand. Even the US stocks grew sharply due to the largest harvesting forecasts, and restrictions imposed by China on imports. It will make both, the US and Brazil, hold one of the largest exportable supplies.   

Vietnam and Bangladesh imports can grow due to their expansion in spinning demand, and India, which was one of the largest suppliers’, may have to double the imports, to fulfil the demand of local textile mills.  Cotton is a key raw material for such mills that produces yarn and thread.  In general, the demand is driven by growth in demand for cotton clothes and other materials used each day. It has a low correlation to stocks and bonds but can be used as a hedge against inflation.

There are 3 ways to invest - ETFs, Futures and Stocks. ETFs provide opportunities to gain exposure to the market price values. The US investors use pure play options and the European investors tend to have more ETF options. Its futures market is not as large as other commodities, although, it provides sufficient accessible liquidity to the investors. Cotton stocks can provide an opportunity to gain indirect exposure to the resource via an investment in companies, or investors can buy in cotton growing companies or companies like Origin Agritech (SEED) that sells hybrid crop seeds. Some such companies provide products and services to the farmers, and their profitability tends to show a correlation to agricultural spot prices like Potash (POT), Monsanto (MON) and The Mosaic Company (MOS).