Art Samberg, of Pequot Capital fame, provided a compelling argument to go long cotton in this weekend's Barron's investor round table (subscription required).For you commodity traders out there, Samberg said go to long on the December '07 cotton contract. His reasoning is while cotton consumption in the U.S. has been in decline, China consumption, which has been growing nicely, is picking up more steam.
Cotton consumption in the U.S. has fallen from 12 million to 5 million bales a year due to the growth of polyester and other materials. Conversely, Textile spending is on a big upswing in China - up 27% in '06, after jumping 36% in '05. Chinese consumption which had been growing 4% to 6% per year is now growing 15% per year.
According to Samberg, China's cotton consumption has increased from 25% to 39%-40% of world cotton consumption.
Because of strong prices of corn and soybeans -- corn being used for ethanol production, US farmers are going to remove acreage from cotton to earn better profits in higher priced corn and soybeans. Supposedly, there have only been four times since 1913 when cotton was this cheap relative to grains such as corn and wheat. The last time was 1974. From 1974 to 1976, cotton tripled in price.
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