Cotton Futures Trading Up 80%

| October 4, 2010 | 0 Comments

You’ve probably heard… commodities are on a tear.  No doubt you’ve seen what gold has done this year… up over 20%.  Or how about silver?  It’s up a whopping 43%.

You may have even heard about the run in agricultural commodities.  For example, corn is up over 40% this year.  Pretty impressive, right?

But none of those commodities come close to the biggest gainer this year.  Any guesses?

It may surprise you… the answer is cotton.

That’s right.  Cotton… the same stuff used to make your blue jeans.

Cotton futures are having an amazing and unprecedented year.  And they’re hitting historic highs.  Cotton prices are literally the highest they’ve been in history… which is pretty impressive considering cotton’s been cultivated for roughly 7000 years.

BAL is up an earth shattering 80%.  And a mind boggling 73% of this gain has been in the last three months.  Talk about a massive increase.

So what’s causing this meteoric rise in cotton?

Believe it or not, it’s mostly the fundamentals.

Normally when you see an explosion like we’ve seen in cotton recently, you start to hear the term “bubble” being liberally thrown around.  But in this case, the reasoning behind the buying frenzy is mostly justified.

There are several reasons behind cotton’s historic rally.  And for the most part, fundamentals are driving the increase.

First off, just like other agricultural products across the world, the cotton crop has been hit hard by weather issues.  The biggest problem was the massive flood in Pakistan.  It turned the country into a net importer of cotton.  Normally Pakistan is a sizeable exporter of the fiber.  That’s a big deal.

What’s more, unexpected cold weather in China and hailstorms in Texas are adding to cotton supply woes.

And that’s not all…

Cotton demand is also growing like crazy.  China’s economy is white hot.  More and more of the population is entering the middle class.  That means a growing number of people will have money to spend on goods like clothing.  And of course, more clothing means more cotton in demand.

Finally, the decline in the U.S Dollar is giving international buyers the ability to pay more for commodity products like cotton.

All in all, we’re seeing a perfect storm in the cotton market.  And it’s causing cotton futures to soar.

So what does the huge increase in cotton prices actually mean?

Basically, there are a couple major implications of the historically high cotton prices.

The immediate impact will be felt by textile companies.  They’ll have higher production costs.  And that means we’ll be seeing higher clothing prices at the mall very soon.

Don’t be shocked if companies like Polo Ralph Lauren (NYSE: RL) lower their earnings forecasts for upcoming quarters.  Higher raw material costs mean lower margins.

The other impact will be seen by farmers.  They’ll start to rethink the allocation of land for crops next season.  Skyrocketing prices in cotton may mean fewer acres for other crops, like soybeans or wheat.  It could drive other agricultural product prices higher.

Here’s the bottom line…

Don’t be surprised if it costs more to clothe your kids in the next year.  And remember, huge gains can come from anywhere… even something as commonplace as cotton.

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Category: Commodities

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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