Cotton prices, COVID-19 and stock market closely related

Cotton prices, COVID-19 and stock market closely related

Probably the most effected of the agricultural commodities is cotton.

Even casual glances over the past few weeks show the shock of the COVID-19 pandemic dropped global cotton prices. And if you want the data to validate that observation, two agricultural economists looked deeper.

University of Tennessee agricultural economists Aaron Smith and Charles Martinez, as a sidestep to a larger project, took a recent look at how stock market fluctuations are correlated with cotton prices. On March 26, Smith and Farm Press discussed the duo's observations. Here's the conversation:


SEFP: Is the current COVID-19 pandemic and reaction to it directly affecting global cotton prices?

Smith: Yes. Since the first case of COVID-19 in the U.S. on January 21, December 2020 cotton futures have dropped 23%, from 70.9 to 54.61 cents per pound as of March 26. This was during a time period were limited changes to global supply projections were made. Markets can be disproportionately influenced by different factors at different times over the course of a year. Right now, the global economic turmoil of the COVID-19 pandemic, shown by the swings in the S&P 500 and other stock markets, for example, are influencing cotton prices more than when economic growth was more stable and more predictable. Since mid-February, cotton and stock markets have plummeted due to the spread of the COVID-19 virus. The COVID-19 pandemic has reverberated through all sectors of the U.S. and global economies. Probably the most effected of the agricultural commodities is cotton.

SEFP: Is there some data to back that up?


Smith: Yes, along with my colleague Charles Martinez, assistant professor of agricultural economics at UT, we found there is a close correlation between stock markets, such as the S&P 500, and cotton futures. Cotton is tied closely to global economic activity as, in general, clothing and other apparel purchases are not a necessity and can be delayed, unlike food. Specifically, we have found preliminary evidence that during times of dramatic declines in stock markets the positive correlation between stock markets and cotton futures actually strengthens. This means that the two are moving more closely together than typically.

SEFP: Can you talk a bit more about the correlation?

Smith: Let's remind people that correlation is basically a measure of the strength of the relationship between the relative movements of two variables. We use a value range of -1 to 1. So, what does that mean? -1.0 shows a perfect negative correlation, one variable increases the other decreases. 1.0 shows a perfect positive correlation, both variables increase. 0.0 shows no relationship between variables.

For example, the correlation between the June S&P 500 futures contract and the December ICE cotton contract from September 2019 to March 2020 was 0.915, a very strong positive correlation between S&P futures and cotton futures. We further examined the daily changes in both the S&P 500 and cotton futures and found that after the COVID-19 virus was dominating global stock market movements the two variables were moving more closely together than before the COVID-19 pandemic.

SEFP: So, COVID-19 epidemic is having a direct impact on cotton prices and this correlation proves it?

Smith: Yes, logistical disruptions due to the virus have limited movements of commodities and goods across the globe. Since cotton is an international commodity, logistical disruptions can restrict movement of finished goods and cotton. Also, with a tremendous amount of uncertainty regarding the long-term impact of COVID-19, the severity and duration remain uncertain, on U.S. and global economies consumer purchases of cotton-based goods will likely fall off. Intuitively, as incomes and economic prosperity decrease household purchases of non-essential items like cotton tend to decline. This contraction in consumer purchases provides a negative impact on cotton demand.


SEFP: Is there a light at the end of the tunnel for cotton prices? Too soon to say?

Smith: Long-term agricultural commodity prices, like cotton, will revert back to fundamental supply-and-demand driving price changes. However, in the short-term U.S. and global economic uncertainty will continue to influence agricultural markets, particularly cotton were expectations of reduced long-term demand are currently driving prices. A lot of the impact on cotton prices will be contingent on how quickly U.S. and global economies bounce back or establish a new normal. Prior to the COVID-19 pandemic, cotton prices were trading 60-72 cents (per pound). It may be a while before we understand the long-term implications of this pandemic and get back to those prices.


Source: farmprogress.com
You can read the full article here: https://thrakika.gr/en/post/cotton-prices-covid-19-and-stock-market-closely-related