cotton – macro perspective 3rd November 2022

Is cotton market a great recession-predictor? Or it’s crisis-proof? Let’s check that in macro perspective for cotton market!

Current cotton prices

An image can tell more than a thousand words. So this is cotton futures on weekly (W1) interval:

Cotton futures (W1); source: Reuters Eikon

It’s easy to notice, that we are almost 50% from this year s highs. Yet, our pandemic lows (March 2020) are still much lower! What’s important to observe, that all crisis lows on cotton are higher than previous one! To be noted: U.S. dollar inflation between 2000 and 2020 is 50%!

Cotton in crisis

High inflation, recession or economic crisis have one thing in common: average consumers reduce their spending. For most people, those cuts are in basic necessities group. Of course, clothing is part of it, but definitely there is a space for savings: like wearing old jacket a bit longer or wash t-shirts few more times before throwing them away. Poorest people have to look for savings in all categories. Also, companies are looking for savings. One of the field of cutting budget is refurbishment. New painting or carpet can wait a year or to before it’s bought… So cotton is hit from both sides: consumers and companies.

Cotton, gold, crude oil Brent & wheat in crisis

Purely for wide knowledge I choose to compare four popular commodities during past three big crisis: dot-com bubble, Global Financial Crisis (GFC) and COVID-19 pandemic.

dot-com bubble

Below on chart there is cotton (green), gold (orange), crude oil Brent (blue) & wheat (violet). Daily (D1) interval, for three years (January 2000 – December 2002):

Cotton, crude oil Brent, wheat futures & gold spot (D1); source: Reuters Eikon

There is slightly correlation between some pairs from those four commodities, but looking closer there is not regular in this time period.

Global Financial Crisis (GFC)

Below on chart there is cotton (green), gold (orange), crude oil Brent (blue) & wheat (violet). Daily (D1) interval, for three years (September 2008 – August 2013):

Cotton, crude oil Brent, wheat futures & gold spot (D1); source: Reuters Eikon

Real-estate crisis in U.S. shows a huge dropdown on wheat and crude oil Brent. It needed a bit more than a quarter for crude oil Brent to start rising. Wheat have a huge ups & downs for over a year. Cotton was slowly rising with gold getting stable rising rally. Over three quarters all those commodities gets some correlation and rise together till Q3 2011 – when crude oil, wheat & cotton start consolidation and then correction.

COVID-19 pandemic

Below on chart there is cotton (green), gold (orange), crude oil Brent (blue) & wheat (violet). Daily (D1) interval, for three years(November 2019 – October 2022):

Cotton, crude oil Brent, wheat futures & gold spot (D1); source: Reuters Eikon

Most recent crisis, it’s the one still ongoing. China has “zero COVID” policy that is locking-up at least several million at once. Also, we don’t know what kind of policy against COVID-19, and its further mutations will be in European Union or USA. But those lines on chart above shows correlation between crude oil Brent, wheat & cotton. First solid dropdown then slowly recovery till Russians invasion on Ukraine in February 2022. Gold meanwhile mostly rise (with amazing drop based on liquidation needs) to set new all-time-high and consolidate widely till war in Ukraine.

Summary

We are on the doorstep to the fourth major crisis in XXI century. All three before are analyzed above. There is no clear way how cotton will react to this crisis.

But judging from daily (D1) interval from Q3 2019 till and of October 2022 we can see that there is a huge respect for Fibonacci levels on this market. It now bounces from 78.6%, but there is still some space to drop and still be above pandemic lows in March 2020. Somewhere between $c50/lbs and $c58/lbs.

Cotton futures (D1); source: Reuters Eikon