How The Trans-Pacific Partnership Will Change The Cotton Game

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In the world of investment, sexy commodities like gold and oil reap all the attention of the press, and for good reason: gold matches the fluctuations of the global economy, while oil consumption powers almost every industry in the business.  You'd be hard-pressed to find a less-discussed commodity than cotton due to a variety of factors.  First and foremost, cotton hasn't been a staple of the US economy since the Emancipation Proclamation.  Second, cotton has barely moved since 2012, rising and falling no further than twenty cents in either direction.  Third, far fewer Fortune 500 companies depend on cotton for their products than do other agricultural commodities like sugar or rubber.  Cotton has waited a long while for the spotlight, however, and with the likely passage of the Trans-Pacific Partnership Act, a cluster of factors will push the price of cotton firmly upwards.

All In The Details

Thirty pages of statistics, quotas, pacts, articles, and addendums make up the Trans-Pacific Partnership, a dull name for what will likely represent the most important free-trade act passed by Congress since NAFTA in the 1990s.  The TPP aims to provide the United States with a greater deal of economic clout in the developing economies of southeast Asia, where a variety of goods flow from nations like Malaysia and Singapore to the shores of the US.  Clothing represents one of the most important goods circulated between the US and east Asia; check the tags on your clothes and you'll see a variety of garments from shirts to scarves manufactured in TPP member-nations like Vietnam.  In addition to the crucial goal of promoting free trade, the US wants to counteract the economic clout of China in these regions, offering an inexpensive alternative for a customer base so that Americans get garments while the Chinese get no leverage over their neighbors.  It's not all just the US and developing economies, however: Canada, Australia, Japan, and Mexico have signed onto the pact in the hopes of developing trans-Pacific trade networks that allow for far greater exchanges of wealth.  As you can imagine, the passage of TPP in Congress has fallen across predictable party lines: Democrats believe the TPP will eliminate manufacturing jobs (by and large, it won't) while Republicans insist the deal's value will trickle down to enrich the working class (by and large, it won't).  With the Senate authorizing President Obama to pass the deal, however, it appears to be a done deal unless the Senate Democrats decide to die on this particular hill. 

Cotton Could Be King

While a variety of other commodities will likely get a boost from the TPP, including rice and soybeans, cotton stands poised to be the biggest winner on the day.  That's because the nations on the producing side of the TPP need to import a ton of raw cotton in order to provide new US markets with the necessary clothing.  Vietnam, for instance, ranks as the world's third-largest cotton importer, producing only one percent of cotton consumed in the nation domestically.  They then send the finished product back out, exporting more clothing than all but seven other nations (including, importantly, China).  The need for cotton coincides rather conveniently with an uptick in the price of the commodity itself, having gained five cents per pound, or about 7%, in the past six months.  That's not only good for those who hold cotton in their portfolio but for the United States writ large, as we no longer lap the world in cotton production but still export more than any other nation (India comes second with about half our total production).  As such the TPP represents a unique, and very profitable, circuit for cotton markets, as the United States sells the raw product to nations like Brunei or Singapore, then turns around to purchase clothing from their manufacturers. 

Trans-Pacific Challenges

A passage of the TPP doesn't mean a slam dunk win for cotton, however.  Some of the largest garment-producing nations in the world, most notably China but also Pakistan and Bangladesh, haven't and certainly won't sign onto the TPP even if it is extended to their negotiation tables.  While drier weather throughout parts of south Asia might have dried up the cotton market in turn and pushed prices higher, a new El Nino weather pattern has drenched the farmer's fields and threatens to produce a bumper crop that will push prices of cotton (as well as rice, sugar, oats, and soybeans) lower.  As always, political influence on agricultural commodities often takes second place to weather patterns that dictate the success or failure of a harvest.  Even so, the numbers suggest a big win: the TPP will increase the trade of agricultural products by about twelve billion dollars between member-nation states, nearly double-digit gains compared to the 2014 cycle.  The United States will haul in about a quarter of these gains as our farmers sell cotton abroad to eager markets. 

The Big Soft Picture

It's a good time to get in on cotton despite the fact that the commodity has risen steadily since hitting five-year lows in November.  The global demand for cotton will soar with the passage of the TPP not only due to the availability of free trade but because the opening of US markets comes at a time when Chinese cotton production will fall by about twenty percent, putting the nation in a distant third-place for global production and limiting the supply on the market.  Cotton likely won't rocket to the top like it did in the spring of 2011, when floods in Australia and frosts in China mitigated the world's supply, but there's no doubt that the TPP offers steady and long-term growth for the commodity by opening up new avenues of demand without actually increasing the global supply.

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