HardAssetsInvestor

Written by Drew Voros  |

July 31, 2011

Neeper: Volatile Cotton Prices Settling Into Comfort Zone

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President of large cotton co-op says demand issues that fueled perfect storm for bull run in prices have faded.

The usual staid and stable cotton market found itself in the center of a volatile pricing storm in March, with prices reaching historic levels of more than $2 a pound before falling below $1 currently. Jarral Neeper is president of Bakersfield, Calif.-based Calcot, one of the largest cotton marketing cooperatives in the world, owned by cotton growers of California, Arizona, New Mexico and parts of Texas. He recently talked with Hard Assets Investor Managing Editor Drew Voros to discuss one of the most volatile years for cotton prices.

Hard Assets Investor: In March, we saw cotton prices at more than $2 a pound, their highest since the Civil War. Now we’re at $1 a pound. What caused this volatility?

Jarral Neeper: A year ago at this time, we were sitting at 78 cents a pound and not a whole lot was going on. Then the market fell down to 69 cents and went back up again. Growers who hadn’t sold the first time at 78 to 79 cents said, “I’m not going to miss this opportunity again,” because they hadn’t seen those kind of prices in five years. So growers sold early. About 80 percent of growers were done at 78 cents.

Then the market started rallying because of fundamentals. Harvests started getting smaller around the world and demand started picking up. Mills found themselves chasing this market higher and higher. They kept thinking the market was going to come back to them because for at least the last five years it came back to them.

HAI: What was different this year?

Neeper: I think mills failed to recognize that this year was different from the standpoint that there just were no extra supplies out there. You had really worn down cotton stocks around the world because of the financial debacle in 2008. The pipeline for textile and apparel goods had been running dry. Retailers were trying to rid their shelves of inventory.

The stage started getting set in late 2009 and 2010. We were just too silly, or too blind, to recognize it, because we’d lived under this cloud of just so much damn cotton. It was almost a stealth-bull market initially.

A telltale sign was that in the spring of 2010, the Chinese, in order to keep some prices down in the Chinese market, started releasing strategic reserves. But it wasn’t slowing prices down. Prices kept going up in China. The economic conditions were starting to get better and retailers started thinking, “Gee, I better put some product back on my shelves.” And so that pipeline had to start getting refilled. It was almost like you were not only consuming for what you needed now, but also what was needed to fill the pipeline back up.

This started gaining momentum. Then in the summertime, there was a snowstorm and a freeze in the big western province of Xinjiang in China in late May, early June. Then Pakistan was devastated by a 50-year flood. We didn’t make the crop that we thought we were going to make. So now all of a sudden you have a huge imbalance.

And then India also was as big a cause of the volatility. The Indian textile mills started screaming about rising cotton prices. “How are we going to produce yarn at a competitive price?” So the Indian government came out and said, “We’re just going to put a limit on exports out of India.” So where else do you get the cotton? The United States was the only place to get the cotton.