Gold has definitely outshone several other commodities in the last many years. But for investors struggling to come out of the crisis in mid-2009, cotton was definitely a better investment option.
The price of cotton is currently hovering around its 15-year high in international markets - almost dwarfing the gains made in the yellow metal since July 2009.
A number of factors are currently driving the global cotton rally.
In a broader spectrum, farmers have moved away from cotton towards more profitable crops, whereas demand for cotton in China and India, the worlds largest consumers, has doubled in recent years.
As a consequence, cotton inventories are feared to fall to their lowest level in more than a decade. According to the US Department of Agriculture, global cotton inventories will decrease to 45.4 million bales in the year to July 31, the lowest level in 14 years.
The situation could worsen, if the rains have caused serious damage in Chinas cotton-growing regions. The exact extent of the damage isn known yet, but given Chinas already voracious demand, the global markets have become jittery. Bear in mind that cotton imports by the Asian dragon doubled year-on-year in the first eight months of 2010.
Then, of course, there is the Pakistan flood factor. The damage to cotton crop caused by the floods hasn been estimated precisely as yet, but Chairman, Karachi Cotton Brokers Association, Naseem Usman, expects some 3 million bales of cotton imports this year.
This may cost about $1.25 billion based on the current international prices. But if prices rise further to about $1.23 dollars a pound, then Pakistans cotton import bill could potentially increase to $1.5 billion, according to Usman.
Thankfully, global prices seem to be reaching an immediate-term peak on hopes that India may ease limits on its cotton exports. But that is the only hope for now - and that too only for the immediate term, as commodity investors have now started eyeing the white gold.
According to a recent Financial Times report, hedge funds and money managers more-than-doubled their cotton futures and options bets on the New York market since early July. And it seems they will pour more money in the cotton trading market.
"We suggest an overweight to cotton in a commodity portfolio," analysts at Roubini Global Economics - a global economic advisory think tank- advised its readers last week. Usman, here at home, echoes RGEs view - citing that domestic cotton prices are likely to remain sticky around Rs7500plus mark.
A persistent rise in cotton prices also means additional inflationary pressure. Textile and apparel component has a small weight in the CPI basket (6.1%), but racing cotton prices can keep stoking core inflation little by little. Surely, this is not going to make matters any easy.
The bottomline for domestic textile players: booking cotton now may be the only available option.
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