Feb. 22, 2006
Cotton (reminds me of Corn 18 years ago)
Maybe a useless reminiscence...but maybe not
In August,1987, at age 37, I left my Atlanta job as a futures broker at Merrill Lynch Commodities with the intention of spending a year traveling throughout South America. I departed with the idea I might write a book in some cheap bungalow on a Brazilian beach, maybe find a Brazilian wife, and maybe get rich by owning call options in the Corn market while I was gone. As it worked out, six weeks into the trip I met an incredible Chilean girl who I proposed to six days later and to whom I have now been married for 18 fantastic years. I ditched my backpack for a used VW van which we converted to a full blown camper and drove to the southernmost tip of South America (Tierra del Fuego), then up most of the eastern coast of the continent (Argentina, Uruguay, Paraguay, Brazil) to the mouth of the Amazon River. The camper was then loaded on the upper deck of a mammoth riverboat and we sailed up the BIG river for seven days to Manaus, Brazil, the economic heart of Amazona. As, at that rainy time of year, there were no passable roads in any direction out of Manaus, we then put the camper on the front "lip" of a barge and sailed south down the Madeira River for six days before disembarking in Porto Velho, Brazil (It's a big country). From there we drove all out for 15 days straight and arrived back in Dorka's home town of Puerto Montt, Chile (It's a big continent). After selling the camper (for 100% of what we'd spent on it after having driven for some 20,000 miles over a seven month period) we flew to the United States, and arrived at my parents' Florida home in August, 1988, about a year to the day after my having left Merrill Lynch....Thanks to the Corn market, we still were not broke (but not rich, which I'll get to) so we bought an old VW Westphalia camper which we drove to Alaska, back down to San Diego, then up to Salt Lake City for two weeks of skiing before arriving back in Tallahassee for our first Christmas in the United States....with $5000 left in the bank. In January, 1989, I sat down at my Merrill Lynch desk again and went back to work.
So, I wrote no book, I found no Brazilian wife, and....I didn't get rich in the corn market. I had had the right idea and I made some money but nothing approaching what might have been had I just done things a little differently...which is what this "newsletter" was supposed to be about before I got off on memory lane and our glorious one year honeymoon.
Going back to August, 1987....Spot Corn was trading around $1.50-$1.60 a bushel, which, at the time was a 15 year low and still remains the lowest price it has been for over 30 years. Very much like Cotton today, I had been a buyer for the previous six months (some of you old guys may remember it) and had watched it make a few upside attempts but then go nowhere. As I prepared to leave for South America, I viewed Corn as the biggest "lay-up" I'd seen since entering the commodity business seven years earlier and was certain there had to be at least a $1.00 move during the year that would follow. I therefore took about $30,000 (roughly half of my net worth at the time) and bought all the December, 1987 and March, 1988 slightly out-of-the-money call options I could get. I was set up such that if Corn did make that $1.00 move during the next 6 months, my $30,000 would turn into about $500,000. My plan (which I followed) was to hit the road, forget about the trade and check in once a month. I left my broker instructions to liquidate specific positions if the market really got going and certain price levels were hit.
And off I went...Corn did start up from there (charts below) but on the December expiration was still only about 10 cents above where I'd bought it in August. All of my December calls expired worthless. By the expiration of the March contract, corn had gone still higher but was still only about 20 cents above where I'd bought it in August, the result being my $30,000 had become $3,400...and I was out of the market. I then had charts FedEx'd to me of all the markets and from those charts made the decision to by one Soybean contract with a $500 stop...and continued traveling...A major part of this story was that about a month later, on a backwoods road in Northern Brazil, we slammed into a cow at 60 mph (blinded by an oncoming truck's headlights on a two lane blacktop) which I never even saw...just suddenly experienced what was like crashing into an invisible granite wall, no brakes, NO idea what had happened and then rolling in the pitch black darkness off the ten foot roadside embankment. We were very lucky, just some cuts and cracked ribs between us, but the accident laid us up for a month while we recovered and had the van put back together. A few days afterward, I called Atlanta to have money wired and charts sent again....and discovered Beans had moved up some, as had corn (which I didn't own). I bought some corn futures to go with the soybean contract....I'll skip ahead and just say that in June when we got off the boat at Manaus, I checked in to find corn at $3.40-$3.50 ($2.00 above the previous year's low) and the account at $44,000, which was not a fortune by any means, but did put me a little ahead of the game from the previous August when I'd begun. I sold everything. The story goes on from there but that is where I'll end it in this newsletter, just show you the charts that accompany the story....and then relate this all to today's Cotton market...and also thank you for permitting me to indulge myself by telling my tale
This is where I began....Buying December 1987 and March 1988 calls...Spending $30,000.
It had formed a big, slightly ascending base during all those months I owned calls...and then bad weather hit the market...
So how does this have anything to do with the current Cotton market?
It does not mean I will be right but I see the Cotton market today just as I did Corn back in August, 1987....I think it has no where to go but up, a minimum of 25 to 30 cents within the next 12 months, and if I were in a position to do so, I would absolutely buy Cotton calls and hit the road again....The big difference here, however, is that I think those six months where corn was crawling higher as my options were becoming worthless has already happened in the Cotton market....that the last six months (or more) have been the final steps toward building a massive base from which cotton is going to erupt any day now....
Led by China, world demand for cotton is enormous and I see NO REASON to expect this to change, especially with the price of this basic raw material still sitting at the low end of where it has traded for the past 30 years. Low raw material prices generally mean better profit margins and do stimulate more fabricator demand. Much is being written about what the growing developing middle class in China (and India) can mean as regards rapidly increasing demand for electronics, automobiles, etc?...Well, I haven't seen it really mentioned anywhere but I believe the same can be said for textile goods consumption in those countries as well....At any rate, it seems that every time an official estimate of world demand comes out they keep ratcheting the numbers higher.
Meanwhile, the weather in West Texas (probably the single most important cotton producing area in the US) has not changed. The drought there is now 3 1/2 months old and according to one contact around Lubbock, when it starts out like this, it usually doesn't get better. Weather and market action can be curious. Bad weather can be taking place, and you wonder why nothing big is happening, then suddenly, for some unknown reason, the weather factor does kick in and the market starts running. What I mean is, I don't know when the Southwest's drought will become a market influence, but I do know if the drought continues, at some point Cotton will just gap up one morning and start flying.
I am still buying July and December Cotton....In spite of the wear and tear from months of waiting, I am more bullish today than I have ever been. I don't just throw this stuff about "explosions" out there for effect. ....What I have easily seen happen many times is there is no convenient news to explain it, but after laying around comatose forever, a market just starts moving in chunks...As nobody knows "why" most people just end up "watching it" while it runs away.....Which is precisely what I think is coming in Cotton.
Is this just about where the 1988 Corn market was when it finally got it going?
When it comes to speculation, nobody ever knows if they are just throwing money away or really do have a shot at making a real "hit"....But if you ever are inclined to speculate on a commodities market, I really don't think it gets much better than this...
GIVE ME A CALL....?!!....And thanks if you actually read all this.