Global Weather Problems For Cotton Production Continue

First, it was the lingering effects of La Nina and drought on the Texas and Louisiana crops this summer. Next, record heat and earlier planting woes from flooding to key China cotton growing areas. Now, following what was supposed to be a bumper Indian cotton crop, areas of drought and now flooding and a pink bollworm outbreak, could lower India’s cotton production.

With crude oil (USO) in an uptrend and global weather woes, cotton prices could rally back to $1.20 or higher by sometime in early 2024

I have been bullish on cotton since June and the 80-cent level in December futures. The big questions in the next few months will not only be, “How bad is China’s economy, and will global demand for their textile industry be more adversely affected?” This is why my Spider has been lowered from bullish (+6) in June and July to more neutral to unsure (+2), in the short term.

Seasonal bearish factors the stronger dollar and poor global demand could offset the bullish global weather for now.

How higher crude oil prices affect cotton

There are a few key ways that higher crude oil prices can impact cotton prices:

• Increased production costs – Cotton farming and harvesting rely heavily on energy inputs like fuel, electricity, and natural gas. As these energy costs rise with higher crude oil prices, the cost of cotton production also increases. This can push cotton prices up.
• More expensive transportation – With fuels like gasoline and diesel being derived from crude oil, transportation costs for moving raw cotton and finished textile goods also rise as oil prices increase. This adds to overall supply chain expenses that often get passed on in the form of higher cotton prices.
• Shift to synthetics – As cotton prices rise due to higher oil-related costs, it can motivate some apparel and textile manufacturers to shift toward using cheaper synthetic fibers like polyester instead of cotton. This substitution effect reduces cotton demand and can dampen the upside in cotton prices.
• Strengthening dollar – Higher oil prices driven by global supply concerns often correlate with a strengthening US dollar. A stronger dollar makes cotton more expensive for foreign buyers, reducing exports and weighing on cotton prices.
• Macroeconomic impact – Rapid rises in crude oil prices that impact global growth and consumer spending can trickle down to lower demand for cotton apparel and goods. This macroeconomic dynamic may counteract the cost-push effect on cotton prices.

The overall impact depends on the scale of oil-driven cost increases versus any demand reductions stemming from substitution or economic impacts. But largely, higher crude oil prices tend to be inflationary for cotton production costs and prices.

Which equities could benefit from higher cotton prices?

So how about equities? If I am correct and cotton eventually goes to over $1.20 next year, some firms can be affected. Here is a list of some equities, which are historically helped or hurt by higher Cotton Prices:

• Cotton producers:
• Louis Dreyfus Company (private)
• Olam International (OLAM.SI)
• Cargill (private)
• Textile manufacturers:
• Hanesbrands (HBI)
• Ralph Lauren (RL)
• PVH Corp. (PVH)

Potentially Hurt by Higher Cotton Prices:

• Apparel retailers:
• Inditex/Zara (ITX.MC)
• H&M (OTCPK:HNNMY)
• Gap (GPS)
• Synthetic fiber producers:
• DuPont (DD)
• Lycra Co. (private)

If adverse weather continues in India, China, and the US, then higher cotton prices tend to benefit cotton producers and textile manufacturers if they can pass on the increased costs, while apparel retailers and synthetic fiber producers see lower margins or shifting demand. The overall impact will depend on various companies’ level of vertical integration, price controls, consumer demand elasticity, and other factors.

Conclusion:

The cotton ETF (BAL) was retired back in June. Hence, one should be looking to use any modest sell-off in prices on seasonal bearish factors and worries over China’s demand to enter a longer-term call option spread in March 2024 cotton.

More weather problems globally: this time in India could be a market factor later this year or in 2024. However, most of the stocks I mentioned above, probably will not be greatly influenced by terrible global weather and higher cotton prices, unless prices rally another 30% from there.