During my last update on cotton I commented on how the outlook for 2015 looked very boring but I believed that the bottom was in. So far that proved to be true, until a couple weeks ago. This article will focus on the current outlook and conditions for the next three months. Here is the link to the original article.
Let's jump right in to what has been causing the increased cotton prices the past few weeks.
The map below shows the average annual Texas rainfall:
Here is the May precipitation map:
Here are the last 180 days and how it differentiates from the average rainfall:
Why is rain in Texas affecting the price of cotton? The state of Texas is the largest producer for cotton in the U.S. See below:
Going back to the last NOAA map, the worst flooding is located in East and Southeastern portions of Texas. The bulk of Texan cotton production comes from the West and Northwest regions of Texas. See below:
Current reports out of Texas state that the crop is two weeks behind. As long as the rainfall normalizes and the heat continues, the previous months' rainfall totals shouldn't put too big of a bump in cotton prices.
Texas represents a relatively small portion of the global cotton industry. China continues to enact and support subsidies for home grown cotton. India remains the top producer with production expected to decline for the second straight year. Globally cotton production continues to decline.
Chart from Cotton Inc. June newsletter.
I would expect these trends to support the price of cotton. I do not see anything close to the dramatic increases as we saw in 2010-2011 when China was buying every fiber it could find. However, price support is important.
iPath Dow Jones-UBS Cotton Total Return Sub-Index ETN (BAL)
BAL is your best bet for investing in cotton; this is an excellent ETN which properly tracks its index and does not suffer from contango. Below is the year to date performance of BAL:
BAL correlates, as expected, to the spot price of cotton:
I maintain my hold rating on U.S. cotton and believe the current market conditions will provide price support in the near term. In the long term, given improvements in the global economy, I believe we will begin to see more action on the demand side which will support further gains from these levels.
For more in-depth analysis of the production and market conditions of cotton I recommend reviewing the four previously written articles I have posted under BAL. In the coming months I will prepare a very detailed year-end review and 2016 outlook for cotton.
Thank you very much for reading and I hope you have a great week!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.