Here’s to the Future

By Bill Spencer|March 13, 2009

Talk about a year of trials for cotton.

The explosion in futures market prices came into the cotton market at a time for concern about cotton acreage in 2009. It was thought that cotton prices would have to move higher to compete with oil seeds and grains, but prices skyrocketed so high that spot market activity was shut down. And the cotton trade proved to be too small for the amount of money coming into futures. Merchants had fixed price purchases on which they had short futures as a hedge, and these merchants faced terrific margin calls on their hedges. Thus, merchants were forced out of some contracts at great cost. Some were margined out.

“Merchants had to buy back those short contracts,” says Bill Griffin, Bill Griffin Cotton, Memphis, “and that added fuel to the fire. If I am short, and the market is up the limit, and I need to get covered, I’m going to do the options and people were constantly bidding those options up. When a lot of people do that, the call premiums go up.” The whole world was bullish on commodities at that time, and there were fundamental reasons for some of the commodities to show strength, but not cotton. Fundamentals for cotton were, and still are, fairly bearish. Cotton usage and acreage will be down, the carryover is up, prices are down.

Still, there’s reason for optimism. Cotton has been through these boom and bust cycles before and in the long run will recover as carryover stocks are worked down and the world economy again strengthens. Right now, the demand for food is stronger than the demand for fiber. Cotton’s large surplus compared to grains and oilseeds “has allowed the spread of grains and oilseeds vs. cotton to maintain itself and even widen as cotton prices have come down more drastically than those crops,” says O.A. Cleveland, Mississippi consultant. But could the speculator buying binge that brought about the March debacle happen again? No one knows for sure. More government regulations might help, but Griffin doesn’t expect any more than tweaking. The good news is that this scenario has never before happened to cotton in some 150 years. Speculators are needed to take the price risk. It may take another 150 years to duplicate what happened.

In the interim, a lot of people can make money in the cotton market, and we’ve brought together some of the world’s best cotton minds in this issue to explore how. The strongest business people know that one person’s challenge is another person’s opportunity. And there’s plenty of opportunity to go around as we head into 2009.