The cotton ‘fabric of our lives’ rally

OIL-PROXY: Struggling commodities are finally seeing some relief. With firmer global growth, a stabilising US dollar, and supply-side weather disruptions. Cotton has been a leader in this catch up. This ‘fabric of our lives’ is crucial across clothing, fast fashion, and retail. And stands at the centre of the ESG debate. With its high water and labor intensity. But also biodegradability benefits vs the oil-based fibers that dominate clothing. Cotton prices are being driven by drought and fire in Texas, the largest producer in the largest exporter. And the tight correlation with rising oil that drives competing polyester (see chart). This makes cotton an interesting oil price proxy.

SUPPLY: India and China are the world’s dominant raw cotton producers, at 47% of total. But most is used locally. The US is the largest raw cotton exporter, at 29% of total, and drives the traded market. A quarter of this comes from Texas. The US is also the biggest importer of finished cotton goods. Brazil is the no.2 exporter, at 26%, where cotton is often grown as a rotation crop for soybeans. Raw cotton is then milled in countries like Bangladesh, Vietnam, and China. Global supply has grown c.2.5% per year. Led by new growing areas, in the Indian sub continent and China. And higher GMO seed-led yields. Despite rising water and labour issues.

DEMAND: Synthetic oil-based fibers, like polyester, dominate the global clothing market. Their 70% and rising share makes their relative price a key driver for cotton demand. With cotton having an average c0.50c/lb price premium. Cotton dominates the natural fibers market, with 80% being used for clothing, led by denim. The rest is mainly for household sheets and towels. Making consumer spending, and fast fashion in particular, the major demand drivers. With cotton prices, and sustainability issues, therefore big issues for retailers like Inditex (BME:ITX.MC), H&M (HM-B.ST), and pending IPO of Shein, to clothing stocks GAP (GPS), and Levi Strauss (NYSE:LEVI).