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Food Prices: Could Cotton Cause a Crisis?

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Cotton farmers chase high prices, but plowing under staple crops could spell big trouble for the poor.

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If the price of food skyrockets in the not-too-distant future, the blame will likely be laid squarely at cotton's proverbial feet.

Money manager Shawn Hackett, president and CEO of Hackett Financial Advisors, a Boynton Beach, Florida, firm with a specific focus on commodities, is quick to point out that cotton, which was recently selling for $0.35/lb, is now hovering close to $2/lb.

"When the markets crashed in 2008, the resulting move down in all commodities was especially hard on cotton," Hackett tells Minyanville. "Farmers didn't plant enough acreage in the US last year because prices were so low. That, combined with record low acreage in China, India, and Pakistan along with bad weather and increased demand, pushed prices way up. Because of this, we're planting record cotton crops in the US, as have China, India, and Pakistan. As long as we have normal weather, it looks like the next crop cycle will usher in a classic supply-demand reversal, which will drive prices right back down."

Research firm Cotlook Ltd. estimates global cotton output "will exceed demand by 1.1 million metric tons in the year that begins Aug. 1," and a Bloomberg News survey conducted last week has determined that domestic cotton farmers will be planting 20% more this year, to try and capture the highest prices possible.

"There's a lot more money to be made in cotton right now," Ramon Vela, a Texas farmer who plowed under his wheat fields to grow cotton, told the New York Times. According to the paper, Vela will plant 1,100 acres of cotton, compared with 210 acres last year.

With a cotton glut in the making and Hackett predicting a large drop-off in demand, those prices farmers are chasing will, obviously, begin to decline. While he can't say for sure exactly when it will occur, Hackett has his eye on an eventual "generational shorting opportunity" for commodity investors.

Hackett also sees upside potential in stocks like Hanesbrands Inc. (HBI) and Gildan Activewear (GIL) if cotton takes a dive, which will cause "their input costs for 2012 to drop substantially."

In the nearer-term, Morningstar believes ag stocks poised to benefit this year from the cotton-planting frenzy include fertilizer producers Potash (POT), Agrium (AGU), and Mosaic (MOS), as well as "makers of crop chemicals and genetically modified seeds -- including Monsanto (MON), DuPont (DD), and Syngenta (SYT)."

This abundance of cotton could also present a generational quandary for the hungry, as food is replaced by wearable fibers and cotton gins expand capacity in advance of the expected boom in supply.

"[F]rom a humanitarian perspective it's kind of scary," Webb Wallace, executive director of the Cotton and Grain Producers of the Lower Rio Grande Valley, told the Times. "Those people in poor countries that have a hard time affording food, they're going to be even less able to afford it now."

But farmers cannot resist the short-term lure of cotton, as agriculture's unpredictability requires getting in while the getting's good.

"It's going to be cotton stalks everywhere," says farmer Travis Patterson, who will plant 1,500 acres of cotton this year, compared with last year's 600. "The landscape's going to change."


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