Cotton
When one thinks of the tremendous bull market we have witnessed over the past few years in the physical commodities sector. Cotton would be probably near the bottom of every traders list. The cotton market in 2007 was very well supplied with stocks totaling more than 50% of use. The last time that stocks totaled more than 40% of annual use cotton traded as low as $.30 a lb. Last year cotton traded as low as the high $.40 lb range, this year we have cotton prices rebounding. Cotton prices are now trading just over $.70 lb. There’s little question that record high grain prices will cut the acreage devoted to planting cotton, and of course that should be a good argument for the price of cotton to go higher. But let’s examine another market that in the last few months has gained substantially in a well supplied market.

Sugar has gained a whopping 40% in price in the past few months on what is a very bearish market with regard to supply historically. Why would sugar make such a substantial price jump then? Oil prices trading in a range of the mid $80 to more recently $100 a barrel should increase the demand for ethanol worldwide. Commodity indexes such as the CRB being at levels never seen before would probably put a limit on the downside levels of even bearish markets. Meaning sugar has traded as low as $.04 lb. in the past when the market was well supplied. Sometimes it is good to compare a market you may be looking at to various other markets and look for inter-market relationships and tendencies. Years ago I had noticed that as long as sugar supplies are not on the high side, sugar tends to trade very closely with gold and silver. The relationship between sugar and silver is so close at times that you could almost transpose the numbers. Meaning that silver at $17.00 oz. means that sugar could go to $.17 lb. if supplies of sugar are not on the high side. Point being that it’s good to look at the “whole” picture and that today’s trading environment is different than anything seen before, but comparing prices of markets that trade in a similar fashion could give clues to an astute trader.

Getting back to cotton when we examine today’s prices of physical commodities. One would come to the conclusion that nothing is “cheap” by historic standards. Grain prices are at all time highs, energy prices are well above all time highs. Metal prices, excluding silver are all at all time highs. As far as the exotic markets coffee is at an 11 year high. Cocoa prices just recently broke out to multi-year highs. Cotton is trading right around the middle range between it’s high and low. Like I said before cotton may not be grabbing all the headlines right now such as grains, metals and energies. What I do believe that cotton may provide a good opportunity to buy a physical commodity in the middle of it’s 20 year range in a time when commodity markets are shooting to levels that are just leaving traders jaws drop in disbelief.