When I was a graduate student in agricultural economics, a group of my professors frequently met for afternoon coffee in the office next door. The major topic of conversation was the stock market. Funny how that is.
The financial fallout from the coronavirus uncertainty has highlighted, among other things, the ways that the cotton market and the broader economy are connected.
For an ag commodity market, ICE cotton futures price patterns are probably more related to the general economy than grain or livestock markets. Cotton lint is an industrial input, and its retail product is a discretionary, semi-durable consumer good, e.g., apparel and home furnishings. That is why per capita cotton consumption rises and falls with economic growth (usually measured by gross domestic product, or GDP). In contrast, per capita grain consumption is historically more stable across varying economic growth patterns.
This association is also sometimes visible in the movements of cotton futures in relation to stock (or equity) markets for general retail companies. Consider, for example, the stocks of 500 large companies that are tracked by the Standard and Poors (S&P) 500 index. During the coronavirus scare in early 2020, the S&P 500 has had a dramatic correction, as have ICE cotton futures (Figure 1).
A financial explanation of the positive correlation between the two in response to global “black swan” events like unfolding coronavirus as a mutual flight to safety. That is, investors are probably pulling money out of riskier assets like commodities and stock markets in favor of fixed income investments and cash.
A more fundamental economic explanation of the mutual market corrections is that the coronavirus quarantines are disrupting consumption of cotton and oil, apparel and gasoline, and many other consumer goods and services.
Looking further back, we can see times when cotton fundamentals are more influential while the stock market moved differently. Looking at Figure 1 during mid-2019 shows a soaring stock market while ICE cotton futures declined. I attribute the latter to expectations of a large U.S. cotton crop, coupled with lingering uncertainty about the U.S.-China tariff dispute.
This just goes to show that markets can come under different influences, from local to global.
For additional thoughts on these and other cotton marketing topics, please visit my weekly on-line newsletter at http://agrilife.org/cottonmarketing/.
