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Home » News » Commodities » Cotton futures build momentum as hedge funds pile in and harvests drop

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

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The cotton sector is still in recovery mode, with insiders predicting a much better year as the market starts to recover. Supply chain and logistics issues could still contribute to a price squeeze, but then this is a familiar story. Cotton ending stocks and the stocks-to-use ratio for cotton are at their lowest levels for three years according to the USDA, and there is increasing pressure on mills, some of them understaffed. When a commodity sees these kinds of disruptions, then opportunity does tend to occur for investors.

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 NameISINExchange TickerListing Currency
WisdomTree Cotton
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | Charles Stanley Direct | EQi
GB00B15KXT11COTNUSD
WisdomTree Cotton – EUR Daily Hedged
EQi
JE00B70DCH80ECTNEUR

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This article is not investment advice. Investors should do their own research or consult a professional advisor.

Stuart Fieldhouse Editor

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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