Having been in oversold territory for the better part of the summer and autumn cotton futures have risen to their highest level in 12 years and could have some way to go before the rally fully runs out of steam.
ICE Cotton No. 2 futures are trading just shy of 87.04 cents, but market watchers believe prices could comfortably rise above 1.05.
Fears over recession, particularly in the US and Europe, caused investors to oversell this agricultural commodity and prices dropped 25% in the second quarter of the year. But with supply and demand currently tipping in favour of demand, weather issues and fuel prices playing their part, there is likely to be more upside for cotton.
Slight tightness in supplies for current season
According to the International Cotton Advisory Committee the world is still using more cotton than it is making. In the 2021/2022 crop year producers made 25.91 million tonnes of the fibre while demand was slightly above that at 26.15m tonnes. The agency is due to report the final export/import numbers for the 2021/2022 season shortly, which will show if the global picture has been changed by a slight increase in Australian production earlier this year.
The war in Ukraine and the subsequent increase in fuel and energy cost is creating issues with access to fertilisers and adding to fertiliser costs which will eventually be passed on to cotton buyers.
Texas drought
China, India, and the US, the world’s three largest producers of cotton, all faced extremes of heat and drought this year which affected local agricultural production.Blistering heat and a heavy drought in Texas this summer caused some of the cotton to burn up in the fields and the state is expected to produce only half of its usual crop. In other regions too drought has prompted farmers to abandon virtually all non-irrigated cotton.
The situation in China is a bit more complicated in that the country’s zero-Covid strategy is affecting production but is possibly having a more negative impact on consumption than production. The extensive restrictions on movement are affecting shopping habits in larger cities as well as factory work. Recently there had been some speculation over China’s Politburo plans on gradually reducing some of the restrictions, and there are cities experimenting with slightly looser measures, but nothing has been confirmed so far and any changes may still be months away.
Listen: WisdomTree analyst Nitesh Shah on commodities and inflation
Listen wherever you get your podcasts: Spotify, Soundcloud, Amazon, Apple, YouTube and many other popular platforms
India plans to up production
The case for the bulls is likely to be in place for a limited period of time. India has already said that it plans to increase its planting of the fibre for the next crop season because of the recent increase in prices and it is possible that the country’s higher production will make up for the shortfall in output elsewhere.
The other dampener for cotton is the depth of the recession in the US and Europe. If the US economy starts re-emerging from the current slump at some point next year, domestic consumption will easily absorb higher production. But that is still a big if.
But before the next crop makes it into the world markets there is a case for higher prices.
Cotton ETFs from WisdomTree
| Product Name | ISIN | Exchange Ticker | Listing Currency |
| WisdomTree Cotton Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi |
GB00B15KXT11 | COTN | USD |
| WisdomTree Cotton – EUR Daily Hedged EQi |
JE00B70DCH80 | ECTN | EUR |
