The cotton futures market has been looking increasingly bullish since mid-September and the performance of the commodity is now attracting the attention of hedge funds. Spot cotton is up over 44% on a one year basis and we’ve also seen volumes ramping up considerably over the autumn months.
Cotton is now approaching a 10 year high and may be just part of a wider commodity boom story were are going to see in 2022. Hedge funds have been boosting the cotton futures market going into the end of last year. Near term contracts are now commanding a considerable premium over futures later this year.
Cotton price boom is a global story
This is not just a US story. The States are a big exporter to other parts of the world, but we are also seeing a squeeze in major markets like India, which in turn is having a knock on effect on international cotton prices. Asian demand is considered likely to play a very supporting role in cotton throughout Q1.
The US Department of Agriculture forecast world cotton production at 121.6m bales in 2021/22 (through to 1 August 2022). It is talking about the biggest harvest in four years, but many other cotton producers are forecasting lower harvests this year. China, Bangladesh and Turkey are also predicting lower production although some markets are still bullish – e.g. Vietnam.
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Indian cotton prices amongst most expensive
Interestingly, Indian cotton prices are now rated as among the most expensive in the world. The local garments industry is lobbying the government to try to get the trading of futures locally suspended. Approximately 40% of the last harvest has been delivered, but the Indian Cotton Federation reckons many farmers are sitting on their crops now to see if prices go any higher.
Market participants in India say they are seeing a lot of speculative activity in cotton going into 2022, including from multi-national companies trying to play the market to get the best price.
Post-Covid recovery still driving prices
Market analysts reckon that Asian and US demand will remain pretty strong over 1H 2022. With hedge funds now also contributing to the recent rally in prices, we can expect cotton to start testing new historical highs. Investors should also factor in the likely impact of inflation which is starting to make itself felt in the market.
Expect farmers to start planting more cotton in 2022 if prices remain this high.
Cotton ETFs from WisdomTree
|Product Name||ISIN||Exchange Ticker||Listing Currency|
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | Charles Stanley Direct | EQi
|WisdomTree Cotton – EUR Daily Hedged|