Chapter 11
Success with cotton
I was unable to benefit from the bull market in silver in 2011, but I succeeded with another speculation, which corresponded better to my skeptical nature. Hence the following story.
A friend of mine, who lived in Berlin at that time, had a small textile company, with its production site in a small town in the federal state of Brandenburg, in the east of Germany. This fact alone amazed me, because, in 2010, there were not many textile companies that were able to produce in any of the former East German states, with their high unemployment figures. Rather, one would have expected the production sites to be in countries like Bangladesh. My friend’s company made industrial textiles, mostly workwear for hospitals. It was a niche in which she had managed to assert herself over the years, with the help of a loyal team. I really admired her for this achievement. Engaging people in that weak economic environment by making clothes. Hats off!
We met for a cup of coffee, and I remember that we also talked about her company from time to time. At the end of 2010, she called me, asking if I had time to talk. She knew that I was involved in the stock market. She sounded restless on the phone. When I met her a day later, she looked very worried. At first I thought that her company had run out of clients, and that she would have to dismiss employees. That had happened in the past. It turned out, however, that her concern was quite different. “I have several sales orders”, she said, “but I cannot deliver.” “Why?” I asked. “Normally, you always deliver punctually.” “Yes,” she said. “That’s not the problem. I cannot get any cotton. We’re desperately waiting for a delivery, but it’s just not coming, so we cannot produce.” “No cotton?” I said. “How can that be? Cotton is as plentiful as sand on the beach.”
I thought it was.
She put on her worried face again, and then she began to inform me about what was going on in the cotton market. Apparently, there was a big shortage of cotton. Apparently! When she started to explain the situation to me, I got a little lesson in the world of raw materials. All around the world, cotton is harvested during different seasons. Then it is processed and transported to the spinning mills. In that year there was a weak harvest in the important production country, Pakistan. Demand had grown steadily in the previous years. Especially China, with its hot economy, was hungry for all kind of commodities, including cotton. In addition, there were export restrictions, and as if that was not enough, producers in Pakistan and India began to hoard their supplies, due to steadily rising prices. “They simply are not handing over the cotton anymore,” my friend said in a desperate tone. “They would rather fill their warehouses, in the hope that prices will rise even further. The situation is desperate.”
In fact, the price of cotton on the Intercontinental Exchange in New York had risen by more than 160% in one year. At the time when my friend made me aware of the problem, the price of a pound of cotton stood at USD 1.68. When I looked at the chart at home, her problem became clear to me. In the preceding years, the price had fluctuated between USD 0.40 and USD 0.80 per pound. There was no problem getting cotton at that time. Actually, there was always enough cotton, but the exceptional demand from China and the weak harvest had fueled the price. It was an extraordinary situation. When the producers began to hoard, there seemed to be no cotton available. This was, of course, an artificially induced shortage, but it brought small textile companies, like that of my friend, to the brink of insolvency.
For a speculator, such information is worth its weight in gold. I could read the seriousness of the situation (and the utter exaggeration in the price) in my friend’s eyes. Her desperation actually told me everything. She had orders in her books. Heck, the customer was waiting for his workwear, but she could not produce, let alone deliver, because she could not get cotton anymore, although the warehouses of the producers in India and Pakistan were overfull. This information was served to me on a tray.
Image 12: Cotton, 2005 - 2019, Monthly chart