Tuesday, May 17, 2011

Coins for Cotton

Once a month here at Greenhouse Fabrics we will look at things in the fabric, furniture, and textile industries and try to decide how much lighter (or heavier!) our wallets might be getting in the future. We might look at a recent event, or we might try and predict what is going to happen moving forward. The purpose of this exercise is not to make money or play the market. We merely want to have some fun and look at things from a perspective that we might normally overlook.

Looking at the graph on the right, the price of cotton has clearly been rising in recent months. Gasoline might be up nearly 100% but it started at $2.50, Cotton is up almost 100% per pound and it started at $126.60! Recently the price has started to back off, but it made us at Greenhouse ask the question, what was going on back in October and November 2010 to make the price increase like it has?

Basic theory says that the two places we should start looking are supply and demand. If we also consider the timeline and human behavior then we can assess if movements in the price come from real events (poor harvest from weather related issues) or behavioral issues (Chinese Government considers withdrawing corn subsidies, prompting speculators to wonder if farmers will choose to plant more cotton and less corn).

Cotton Plants
On Tuesday, November 9th the United States Department of Agriculture (USDA) projected lower global cotton production and consumption for 2010/2011. This may be in part due to corn ethanol subsidies which are expected to be renewed when they expire in December. These subsidies encouraged farmers in America to plant more corn through various tax breaks and price floors. Since land is a scarce resource, any increase of one good comes at a cost of another. In this case corn, quite literally, replaces cotton out in the fields.

The same week that the USDA issued their projection, the International Cotton Advisory Committee (ICAC) stated: “the steep rise and high volatility of cotton prices over the first three months of the current season reflect primarily a combination of low global cotton stocks and continued demand by spinning mills, but has also been affected by panic induced by fear of defaults on contracts.” Basically, the prediction about a decrease in supply was right, but mills were afraid that the demand would not slip as expected. This led them to purchase more future deliveries of cotton than they actually needed, pushing the price of cotton up.

Eli Whitney saddened that he cannot
afford cotton for his cotton gin
Fast forward to May 4th 2011, a bill introduced by a bipartisan panel of U.S. lawmakers aims to get rid of tax credits for companies blending ethanol into gasoline. U.S. Sens. Dianne Feinstein, D-Calif., and Tom Coburn, R-Okla., aim to eliminate the 45 cent per gallon tax credit for refiners to blend ethanol into gasoline. Was this factored into the April price decline?

Now we don’t mean to imply that the entirety of the price increase in cotton is related to this issue. In fact, we want to state explicitly, this is one factor among many. But remember, next time you buy a soda full of high fructose corn syrup, you may have to pay more for those window treatments.