The Derivative - Cotton the Canary, Why it’s a leading indicator, and how it’s traded with Ron Lawson

Episode Date: July 7, 2022

Are the Fed’s hikes starting to dampen inflation? Oil, grains, and metals have all fallen from their highs. But the rarely spoken of Cotton market was one of the first to crack…falling from 1.58/lb to 0.95/lb in just a few short days. We're digging into this sharp drop and just why and how Cotton is involved in seemingly everything with RCM's very own cotton king, LOGIC Advisors Ron Lawson. In this episode, Ron is giving us the low down on how and why he believes it’s not Dr. Copper which acts as the global economic barometer, but how Cotton is the real Canary and leading indicator on global demand. In between those talks, we’re covering all things Cotton including crop insurance, irrigated vs dry land, the scam that was Pima and Egyptian Cotton, the process of cotton – which countries have it, which want it, ginning it, spinning it, dyeing it, global commodity merchant co’s pushing it around, and even micro-plastics, climate change, and how Cotton always flows to the cheapest labor source. Finally,  we're walking in some high Cotton putting Ron in the hot seat. Will we ever get the growth back? Tune in to get these critical hot takes — SEND IT! Chapters: 00:00-02:00 = Intro 02:01-07:10 = Welcome to Ernie's Tin Bar 07:11-26:16 = Cotton market Selloff, the lack of demand, and Crop Insurance Payouts 26:17-42:20 = Who has the cotton? Where is it going? The Touch, the Feel, the Process of Cotton 42:21-55:34 = Merchants, Ginners, and Spinners: The players in the cotton game 55:35-01:11:45 = Pima & Egyptian Cotton, Technologies & Standards 01:11:46-01:16:38 = UC Davis - Is all Wine starting to taste the same? 01:16:39-01:24:32 = Hottest Take: We'll get the Growth Back Check out and sign up for LOGIC newsletters here and for more information visit their website at logicadvisors.com Don't forget to subscribe to The Derivative, and follow us on Twitter at @rcmAlts and our host Jeff at @AttainCap2, or LinkedIn , and Facebook, and sign-up for our blog digest. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Happy 7-7, July 7th, 177 days till the end of the year. I halfway want to go through all the famous sevens in sports, Mickey Mantle, Ronaldo, Elway, Bork, but we'll save that for another day. Speaking of halfway through the year, that means we'll be doing our annual managed futures ranking soon.

Be sure to find that under our white paper section on the website, and we'll follow that up with getting some of those top ranked managers here on the pod. So stay tuned for that. On to this episode, the inflation-fueled commodity rally has seemed to have lost some speed. One of the first markets we saw that in was cotton, which dropped more than 30% in a few short weeks. Move over Dr. Copper because canary cotton is signaling a recession. Why does cotton play a role in the global economy? Where has it grown? How is it hedged? We're walking in some high cotton with Ron Lawson of Logic Advisors and the RCM Ag Group to cover all this and more. Send it.

This episode is brought to you by the Hedged Edge podcast. I've been working with Jeff Eismer for over 20 years, and he hosts the Hedged Edge by our RCM Ag Group, where they cover all things ag, growing it, hedging it, marketing it with guests like Ron here on our pod today. Check it out by searching for the Hedged Edge on your favorite podcast platform. And now back to the show. All right. So we're here with Ron Lawson, going to talk some cotton. How are you, Ron?

Good, how are you doing? I'm great. And where are you? We talked a bit about where you are, but it looks like you're in some California rolling blackouts there. Did you turn off all the lights? No, we've got, just for the back glare, we've knocked it down. Yeah, we're just north of San Francisco in Sonoma, the wine country.

When I was in my younger years, I ran Merrill Lynch Futures, everything west of the Mississippi. And when we got wind that Merrill might get out of the brokered business and stick to derivatives, I moved up here to the wine country. I figured if you're going to shoot me, shoot me someplace nice. nice and sure enough they got out of the business i took it private and uh so that's my you know that's that's how we are in business today was uh you know moved out of hell a and moved up here and seems like we're still on vacation i love it that that was a territory everything west of the mississippi it's a. It's a hell of a territory.

Yeah, yeah. There was, what, 126 brokers in 25 different offices. And we had set up different, you know, I ran the cotton desk for the firm. Then we had a cattle desk, a wheat desk, et cetera. So it was a good process. It made sense. But one of the things that, as derivatives were coming along, Merrill realized that the brokers were basically driving the boat. They didn't like that as a management style. So they got out of the brokered business, stuck with the derivative side, and the rest is history.

And what do you mean by the derivatives? They'd rather do over-the-counter swaps? Yeah, there was a real strong sense on the capital market side driven by a certain individual at the firm who later was on Interpol's most wanted list for some big energy market problems involving offshore oil contracts and deals that are pretty nefarious.

Anyway, that's all behind us and it's gone. Let's dive into that. Interpol. First ever mention of Interpol on the Derivative podcast here. Yeah, it was an interesting period of time where Merrill Lynch, prior to the global financial crisis, we always thought would buy Bank of America to build up the banking side. And it turned around with the GFC.

Bank of America bought Merrill. So, well, in the meantime, all of us had gotten, all of the brokers, all the commodity guys had gotten away from Merrill Lynch Futures and we all gone out on our own. And wasn't it Merrill Lynch,

Pierce, Fenner and smith for a while was the actual fcm name i think on the on the floor it had changed over time as different iterations had had come through when i when i was hired i was hired by merrill lynch and i went through three or four different name iterations in merrill lynch pierce fenner smith and then merrill lynch futures and curious about cotton and i you mentioned it in in one of your questions here is that the firm mary lynch started with money from a cotton merchant so deeply ingrained within the firm was the the whole cotton ethos of you making and taking delivery your own sample rooms and processing in Manhattan. We were, you know, we handle about 30% of the volume of the futures trading and options

trading back in the day, given the propensity of Merrill Lynch's being a force in the market. I love it. And so we got to give a shout out. We just talked offline real quick. Close to your office there is a little great American dive bar called Ernie's Tin Can. Tin Bar. Tin Bar. All right. I want to call it Tin Can. Ernie's Tin Bar. Yeah.

Tell us a little bit about that. So the fellow has one of the few alcohol licenses in the state of California where you can serve beer only, just beer. It's left over from the Prohibition days. He inherited it from his grandmother. They can't serve wine or hard alcohol. But to the bonus side, kids can be in there. It's not like a hardcore dive bar somewhere in the bad part of town. It's right out in the countryside in between grapevines and sheep, you know, out in

the sheep fields. And Ernie has, I think it's on the order of 40 or 50 different beers on tap, all high-end, good stuff. And because of its proximity to the Sonoma Raceway, where they hold NASCAR, they get a lot of different traffic from a lot of different types of folks, locals, travelers, visitors. It's a it's a cool local place. And their big rule is if you use your cell phone, you got to buy the house around. They're strict with that. So I've got a picture here. I'll show those on YouTube can see the picture.

You're literally in the garage. Right. And you can pull up some stools under some tires there and have a beer. And it was great after the wines in Napa. Yeah. It takes a lot of cold beer to make good wine. So before we dive into just how all this cotton stuff works, let's talk about how cotton was one of the first commodity markets to really sell off over the last couple of weeks. Yeah. Falling from a high of 154-ish in early May.

158. 158 down into the low 90s. So it lost more than a third of its value. Yeah, we're at 89 and change right now. Just to show how we got to where we were back in 2020 when COVID shut down everything. Macy's, we use this as a mile marker. Macy's closed its doors, COVID shut down, boom. Less than 48 hours later, we had our cotton warehouse customers in Georgia receive cancellation orders on shipping bales of raw cotton overseas to be spun and converted into goods.

That's how fast the pipeline impacted. Wow. 48 hours. Okay. From there, the market bottomed 48 cents and change. We then noticed some dynamics within the global marketplace where the pipeline had drained so quickly that the mills were starting to concern themselves about, well, with supply chain problems, how do we get our cotton? So we started to see interest at the consumption level that is very difficult to quantify. When we talk to a lot of funds, what they try and do is they try and want everything on a spreadsheet to put in an algorithm. And you can do that on the supply side, count bales,

count acres, abandonment, what are yields? You know, we, we can figure out we can count supply side. Demand size is absolutely mercurial. You've got all kinds of emotional efforts that push and pull at the retail level, at the wholesale level, at the people that dye, that cut, that weave, that spin. There's so much of that unknown and it's not, they don't act in concert. They don't have their own individual drivers. So we started to see the demand side come and we got, and we looked at some technicals. We follow very closely that.

And there's a pattern that I've noticed in the cotton market. I'm doing this 40 years and I've got a long-term book going back to the 1930s on a chart. And I found, and I have found that every major bottom 100% of the time, every major bottom in the cotton market adheres to this certain pattern on the weekly continuation chart and we formed it and we called everybody and said look you know this is the technical thing it's there it's uh 100 over the last you know since 1941 we had a bottom don't be short and that was our was our play. Don't be short. Now, you know,

a lot of guys would rather not have a position and being flat is a position and that's okay, but we just, we got everybody out of the short side of the market. And then we had this nice run. Okay. Things running, it's going great. Goes to a buck 58. We started back in May of hearing the mills, the same mills that were panicking for supply starting, you know, these are our clients. We talked to them regularly and they were starting to complain that the apparel companies they dealt with were feeling inventory buildup. And we're starting to ease back on their orders,

asking for delayed shipments, cutting back on the contract. We want this much with an option for more. All those options went away. Okay. And where they really started to get panicky was during the supply chain problems that had built up during COVID, they were ordering two and three, four times the amount of cotton they needed because they weren't sure who could get it to them from which country. Was it Brazil? Was it China? You know, India? And all of a sudden, just as the apparel pushback came, here shows all the cotton. So now their opening rooms are full. Their spinning schedules are down. They're running at 65, 70% of capacity. They're laying off people. And so we start hearing this panic in their voice. And what we tried to get across to our clientele was, look, everyone's focusing on the production side, on the supply, because there's drought in Texas, and that's still an issue. I met with a group of Brazilian farmers that represent 60% of their production on a trip

from Baird, Wonsano, and they were telling us that their crop is three to four million bales less than the USDA, flooding on half of the Australian crop. You know, they're down there trying to harvest amidst the flood. So everyone's focusing on the supply side. But because the demand side is so mercurial, it's very hard to say, okay, you know, raise a flag, there's a problem. But we saw the problem. And we saw it not just in the spinning mills that were making great headway during COVID, those being the ones that didn't have to send product over water into Northern Europe. You know, they were printing money because they didn't have a supply chain problem. And all of a sudden, they were

getting pushed back. So we put all our clients on notice. Look, we know there's a supply side problem, but no, the demand side is really, really sick. And so we called in everyone and put out the word and, you know, very vocal in our writing. We write a letter every day, as I've explained it to you, you know, when you inhale and exhale cotton every day, you know, someone who checks in with you once a month and wants to know what it smells like, it's like, hey, come on, you know, read the letter. We put it out every night. And I believe, and this is one of our long held theories, that cotton is one of the longest leading economic indicators and best indicators that there is. And it's for the simple reason that from conception to consumption, it's the longest commodity. It takes more, it takes 12 to 18 months from the time you plant,

you know, prep the soil for the seed till you buy a pair of Levi's at the store. And along that way, you got to consider what's the cost of land, the rent, what's the fertilizer, pesticide, herbicide, you got to buy water, labor, diesel for your tractor, go through the field three or four times, grow the crop, harvest the crop. Now you got to gin it labor diesel for your tractor go through the field three or four times grow the crop harvest the crop now you got to gin it it's not like you harvest corn put it in a silo use it no they got to take it get the fiber off the off the seed take the bale store them cost of insurance cost to carry ship them from the raw cotton bales into thread, thread to be woven, thread to be put into fabric, be cut, to be sewn, to be dyed, wholesale to retail, retail shipped back to the US and put on the shelf. So over that period of time, you have exposure to pretty much every macroeconomic

factor that exists. And so as a barometer of what's happening in the global economic world, cotton is a hell of a good tool. And it tells us that this drop is probably portending some, you know, we are in recession. This is the proof of it. So that was going to be my first question. Was this a cotton specific thing or a macro thing? If we're going into recession, this is the Fed's going to kill the economy, put us in recession, sell your cotton. Or you're saying it was sort of both? I think cotton started to react to it innately prior to the Fed.

But once the Fed did raise rates, it kind of put a dagger in the heart to the market. And you saw cotton broke before the other markets did. And again- I wanted to have you on. Tell us why that is. It's simply because all of the people that have their fingers in the pie, whether they're cognizant of it or not, have an effect on the price of the market, right? I mean, at the end of the day, nobody knows anything more about the market than the market itself. What did it close at? What were people willing to buy or sell cotton on the markets close every day that that tells you what it's worth. And we started to see the demand side go away. It's one of the old lines in the

cotton market. I don't care how small the crop is. If there's nobody there to buy it, the prices are going down. That's what we're faced with here. So we had no buying from the consumer. The selling from the producer side, the normal hedge selling from the producer side wasn't there simply because they didn't know what their crop is going to be. In Texas, for instance, where you would expect to be 7 million acres, 6 to 7 million acres planted, it's only they had that planted. But this year, because of the drought, they're not going to harvest. They're going to have a 50% abandonment. Now, ironically, this is going to be one of the best years for cotton farmers in

Texas ever, of all time. And the reason is when they plant cotton, they buy insurance and they get 10 days for emergence. So you plant it on the 1st and if on the 11th, the seed hasn't come up, you get your insurance check for non-emergence. And there's different areas of the state where different times of planting come optimally. But generally, by the time you get to June 30th, all of the optimal planting dates have come and gone, plus 10 days. All the insurance has been paid for, and you start to get the guys just writing off the acres. So here's the dynamic. The insurance rates are based on the previous year's price, which this year equated to $1.03, which for cotton is a hell of a price. Yeah. I almost say take the insurance and don't put in the work, right?

Precisely. 70 cents cost of production. Then it's now over a dollar because of fuel costs and all, but fertilizer. So here are these guys went out and planted every field they could and bought insurance on it. And now they're going to get $1.03 per pound based on their average historical yield. Okay. No input cost, no cost of water, no fertilizer, no pesticide, no diesel. But they still have to plant it? Well, they use put the seed in the ground. Got it. But so what does that look like? I don't want to get anyone in trouble, but do they kind of mail it in?

Right. If you know you're going to do that, you just do your minimal effort to put the seed in the ground? Yes. Yeah. In fact, the cultural practices were, you know, I'm not pointing a finger at anybody. No, no. You've got insurance for 50 years as a farmer, and the one year you get to collect, okay. Yeah, true. Normally, you drill seed in with as minimal, the least amount of topsoil disturbance to trap moisture. Well, what they did this year is they opened up the bed, they dropped the seeds in, and then they dusted over. It's all the moisture escaped.

What little was there? So here, these guys are going to get $1.03 a pound based on historical yields. The seed also has a rebate value. So about 7 cents a pound for that. So they're about $1.10 is what it works out. And then all of our customers, we had purchased puts. Real quick on that, but they're not, they're buying this insurance or it's just government provided? No, they buy it from the government. It's the government.

Okay, but they have to actually purchase it. Right. I think that's a little unknown, right? When people see the billions of dollars that go in farm subsidies, so there are two things there. There's subsidies and there's government-sponsored insurance.

So you have to buy into the insurance. The subsidies are just extra if they pass a law. Yeah, those are based on when you go back to the CCC was developed in trying to ensure that we had proper amounts of commodities produced. And, you know, you can go get into that political, historical, agricultural division. This is just on insurance for your crop crop that you pay for so every year you buy it and this one year they get to use it so here they come along they've owned puts we got them all what we did is we would we have a program where we own puts for the growers and every time the value of their crop goes up two cents and in this case you know eight cents we would roll the put up

for 400 points, 400 strikes. They're getting two for one. Every time we roll, they may double their investment. Okay. And if you get a hundred percent return on your investment, that's a pretty good deal, right? So we got them up to a buck and a quarter, the market collapses. So now they're sitting on, you know, 25 to 30 cents worth of profit on a crop that does not exist. And there's no government regulation that you have to actually, right? That you can earn money from a hedge on a crop that didn't exist. They took the risk of the hedge. Their bankers financed them.

All these programs we set up. So in the end, the farmers are going to make $1.30, $1.40 on a historical yield with zero input cost. Now, what most of them are going to do now that the crop is... And what's in Texas, the average over the last 10 years is $0.50 or something? Like, what's the comparison? Yeah, normally your $0.65 to $0.70 is a good year for them. And, you know, they'll do normally two bales to the acre. You know, this is both dry land and irrigated combined. And even the irrigated crop didn't

come this year because the, it's normally a irrigated supplement. So you use the rain from the sky, obviously for irrigation, you supplement with irrigation. Well, they got no rain. So the seedlings never really came. They sent a taproot down, they found nothing but dust, and they died. Guys get a check. The number of acres, it could be two to three million acres written off, is so large that the insurance guys, what we call, they just tap the table. You show proof of planting, and we know that there's been no rain for 25 days. So here, here's your check. Right. So they're not putting in their own input costs we're not going to spend a whole bunch of money verifying this we know it's bad and so what

they'll do now is a lot of them you know farmers are farmers they don't like this they don't want to yeah go to the coffee shop and not work so a lot of them are coming back with a with they'll go in and dust in some some you know salower, something that's a very low minimal water requirement seed and just see what happens. It's basically just to keep the ground together. So let me add, it seems like a weird commodity, right? Because like you're saying that 12 to 18 months, it turns into a pair of jeans. Yeah. I don't have to buy a new pair of jeans every month.

Like I have to buy food, right? Or like I have to fill up my car. So it seems like in a demand destruction, it doesn't necessarily snap back. Right. So it seems like it's not always needing, needing to be replenished. So it's that kind of what drives the tie into macro of like, it's kind of a, it's not a perishable good, right? No, it's not. And there's, there's an interesting dynamic when you look at it. The utility of cotton, it depends on which end of the cycle you're talking about. You're talking about which is why you see blends coming in when it's very, when cotton gets too expensive, you tend to have 100% cotton

goes to 90% to 80% to 70% when they supplement with man-made fiber. The big pushback on that, though, is the microplastics problem in the oceans is becoming what I call it is the millennials DDT. If you remember back when Silent Spring came out and DDT and the weak eggshells and DDT has been banned around the world, I'm not going to get into an argument, but basically DDT was the biggest weapon that a lot of countries to Africa had against the TT flying to the

mosquitoes and banning it. No DDT. It's just off. That's the stuff that keeps the mosquitoes off. DDT actually kills and the cotton guys are to blame more than anybody else. So try and just kill the bull weevil. They use too much DDT and it wrecked the environment and so it's been banned so here we are now finding that some studies claim that in any given year you at this point each human

consumes microplastic over a period of year equivalent to eating a credit card and they found it in the bloodstream of yeah i've seen like the deepest deep ocean right and they pulled up had microplastics so what we're seeing is a pushback against uh man-made fiber people are preferring the natural fibers it's not just cotton it's you know it's hemp it's silk it's uh you know other man-made fire the biodegrade at a micro level where the plastics do not. So that's one of the big pushbacks that we're seeing. And the plastics require

fossil fuels, right? They require oil? Yeah, they come from that's one of the strains and that's why when you saw the oil prices go up, the price of polyester goes up. So it also retarded a bit of that consumption. So here we are.

It's almost like not quite a luxury good, but it's like a thing that if I have to choose, I'm going to go buy my family food versus a new clothes, right? Right. That might be some of the reason why it turns over first. Yes. And what we've tried to explain in our analysis is that we continue to get information. Oh, look at retail sales. They're doing great. But they're talking about dollar sales, not unit cost, right? So if the prices go up and the sales go up, but your unit costs are high, the consumption, the tonnage. One of the things, this is fascinating, that during COVID, when people went from wearing

dress shirts, silk ties, and, you know, suits, wool suits, they went to staying at home and wearing heavier hoodies and sweats. And the consumption of cotton went way up because the clothing that was required for a hoodie, the amount of cotton required for that is eight or nine times that of a dress shirt. And they want to be comfier, more cotton, the more comfortable it is. Right. So the fashion sense is that we look at the tonnage consumed, not the cost to it. So we had lower cost goods that had higher relative percentages of cotton within them and heavier growth, tonnage so we had a renaissance in consumption which is now gone now people can't afford food and energy they can't go to work they

can't buy gas they're not going to be buying clothing they've got all they need for now so that's another reason why we saw that apparel back up into the mill sector that sent the alarm up for us yeah and that and that was... Everyone kind of passed over that. Inventories are building up. That was everything, right? Toys and bikes. You couldn't get a bike. Now you can get a bike. Now there's too many. You couldn't get patio furniture. Now there's too much patio furniture.

So let's back up a little bit and talk more on the physical side kind of uh or the big overview of like who has the cotton like which countries where is it going which other countries um you kind of blew my mind in the beginning there you're saying we a lot of it's grown in america basically goes somewhere in asia i would assume to get turned into clothing and then ship back to america yeah i i always think back back when I first started in the industry, the US produced roughly, just to use the number, 20 million bales. We spun domestically 17, 16 million and shipped three or 4 million. Today, we only consume two and a half to 3 million domestically.

All of it else, all the rest of it's exported. So the three biggest players are India, China, the U.S. And each one has its own challenges. In the U.S., we produce cotton for the export market. Cotton is priced in dollars around the world. So we are a little sensitive to exchange rates here as far as customers go. China, biggest producer and consumer of cotton. They do have an issue that is existing right now. We've been talking about it for a number of years, and that's the human rights problems in the Xinyan province where they produce most of the cotton. The global apparel industry has turned its back on China for any products made from Zingyan fiber or made in Zingyan. So what they've had to do is any cotton there, unless they're made, 80% of their production is there. They've had to use that domestically only and then import bales to be converted and

re-exported. And they still have a very vibrant textile industry. And just last night, we are hearing from China that their strategic reserve, which they wore down, they're going to refill it, but not with as much with imported cotton, they're going to use Zingyan. So in the near term, that's a negative because they won't be buying as much imported cotton from the US and India and Brazil and Australia, they'll refill with their domestic, but that just means there's that much more demand down the road for imported cotton and the US is one of their favorite customers. And do you ever even believe in when they say that? Part of me thinks they say that, drive down the price and then buy, right? And stock the- They're really good at that, which is why we talk to our people in china who

are actually doing the buying yeah that when it's you know which lie is true basically so china china is you know a big a big drain on the world market now and they will remain that way we're a little concerned on the finance side in china 25 of the gdp is real estate which is getting beat up badly. You know, in the old line, China gets a cold, China sneezes, the world catches cold. Okay, we got to watch that. The next one's India. India is a big producer and consumer. They've just gone through a renaissance in their seed. Normally, when you buy cotton seed that's genetically modified to be resistant against pesticides and herbicides, they've just allowed that into genetically

modified seed in India. What they were doing before was what they call brown bag. I harvest my crop, I take the fiber, the lint I sell, and I hold that seed and I replant that next year. But over generations, you get a degradation of both yield and quality. So now they're bringing in the good seed and they're starting to come back and really improve. So that India's got a bright future, provided that the monsoon shows up and it's all a rain grown crop over there. It's rain grown. It's handpicked. It's a huge difference in the cotton world between irrigated and dry land growing, non-irrigated, machine picked and dozen years, for some reason in their model, continues to claim India has inventories of anywhere from 8 to 12 million bales of carryout at the end of the year. Our guys in India who are supposedly owning these bales, they don't exist. So it's a widely known situation within the cotton industry that the USDA's numbers continue to reflect excess supply in India that really isn't there. Well, the cash

market reflects what's really there. So whether you're statistically on board or not, it doesn't matter. That's the thing. So that's India's deep deal. The up and comer now is Brazil, where they can, I was, like I said, I met with the 30 farmers that Bayer Monsanto had brought in, in San Francisco here last month. And these guys are, this is 60% of the entire production of cotton in Brazil. And they are hell bent on doubling their production over the coming years. So they're the ones that are big up and comers. And it's because they can offset with soybeans, right? They can plant one and plant the the other get a double crop in there their problem is logistics they you know they don't have uh the rail capacity the port capacity the trucking capacity but they're working

on that and as an industry aside this this happened this was a decade ago china and their silken road venture had approached brazil and said at China's expense, using China's laborers, they would completely revamp the ports, Brazil backed away, and to their credit, and if you think about it from a global perspective, the last time one country, one sovereign nation, decided to help another sovereign nation along those ways was the Panama Canal. When did some country offer to come in and, oh, we'll take care of you, don't worry,

so long as we get ours out. So it was a big deal brazil backed away they've made a lot of strides and i think they're going to be they're going to be the up-and-comer uh you know in the future so that's is that tied to deforestation down there are they planting it in where they're clearing out rainforest right but it's most of it's coming on ground that's already been cleared for soybeans because that's been the big driver we we follow soybeans and cotton and just you know again we inhale exhale every day the cost of production the ratio between soybeans and cotton when you distill it to the just to the final end it used to be a 12 to 1 ratio where a break even was soybean prices 12 times cotton prices.

And then when it gets out of whack, you know that it's more profitable to plant one in those areas where you have a choice or the other if it gets out of whack. So what we saw here with the soybean market driving prices up over the last year and a half, two years, we were at not 12 to 1, but 14 to 1, 15 to 1. In fact, got to 17 to 1 at one point where it was way more profitable to plant soybeans. And so we saw cotton kind of fall back from its production side. Now with the yields and the way things have come, the prices come down, we're closer to that traditional 14 to 1 ratio. So we follow that very closely to give us an idea of what's going to go on the ground. Now, once it's planted, the ratio doesn't matter, but we follow that pretty closely.

And so you ask, what are all those countries in billions of dollars, what does that equal in terms of the raw crop being sold? So let's just say that over the next 12 months, there's about $55 billion with 90 cents a pound and 121 million bales. That's the production for the season. The next season, which is July till the end of June is about 55 billion. And so you can logically extrapolate, well, we probably got $55 billion from the current crop, right? So all told, $100 billion, maybe padded up $120, $130 billion of total raw cotton inventory over a 12-month period. What's in the ground, what's in the bale, what's in the warehouse and opening rooms.

And how much of America's gets shipped over to Asia to get turned into clothes and shipped back? We are 25% of the world's global consumption at the end user level. We're not that in. So if we're going to produce, you know, I'm looking at the WASDE numbers here and there, I've got them here in front of me and they were going to get a next set here coming up, but the U S produce, you know, looking at the WASDE numbers here, and I've got them here in front of me, and we're going to get a next set here coming up. But the U.S. produces, you know, the numbers for the coming year are 16.5 million bales versus 121 of the world, okay? And our domestic use is only 2.5.

So we only spend 2.5 million bales of 16 and a half produced but of all the goods produced in the world the end user consumption of apparel in the united states is 25 percent wow that's even greater than their energy right that's unbelievable yeah because we're less than 10 percent of the population right yeah we're close um those horses here yeah whoa um that's hard to believe i was just thinking of we're talking about this well one it i've never thought of it like this the cotton the fluffy that's the flowering part of the seed i guess like how does it naturally reproduce that will eventually fall off and get blown around in the wind and from within the flower very very much like you'll see a rose develop that hard bud. So you get that bud of the bowl.

And it's a green pod about the size of a walnut. And then it grows. And cotton is actually a perennial plant. If you plant it, it will go dormant in the winter and come back. But we grow it and use it culturally as an annual. So as it goes in, as we come into the fall, if we get a frost optimal, if not, you use a defoliant to shock the plant to drop all its leaves. And then what happens is the plant dries and that green bowl turns Brown and then cracks. And out of that will come the lint with the seeds attached.

And the harvesting machines come through and what used to be done by hand, picking the bowls, and it's still done in some countries, the machines pick the bowls off and they get put into what are now great big round bales, similar to, do you see big hay bales with the plastic? They take those. My kids call those marshmallow fields right driving past wisconsin and you see all those white big rolls they look like huge marshmallows they do and they used to do it cotton was put modules which looks like huge loaves of bread but that required and that was forever until you know actually the aussies were the ones that drove this trend till about 15 years ago.

And it required these big trucks to come in and pick up the modules at home. Now they have these bales and they stick a fork in it, put them on the trucks and it's a lot easier to move them. They remain in plastic on the gin yard. And then they cut the plastic off so the rain doesn't hurt it. It goes through the gin, you know, cut the plastic off so the rain doesn't hurt it it goes through the gin you know eli whitney cotton gin right yeah everyone why was that such a thing in in grade school right everyone knew about eli whitney and it was it's it's amazing if you if you go back if you're an agricultural historian you realize that the production of cotton historically ends up in the country that has the cheapest source of labor whether that be human labor or if you go through time if you were along a river and had a water wheel you could

drive it to steam all right and then then you have electricity and And you just, over time, you look at the Industrial Revolution, where most of the cotton was grown, processed, and harvested. And it all comes back to where's the cheapest labor. Wow. And so that was the U.S. colonies for the longest time. Yeah. Right. I mean, you can make a very strong case that our forefathers sitting around a bar in Boston said,

hey, let's start a country. Well, we can pay for it with this cotton because England needs it. They want it. We got it. And that was one of the finances, that and tobacco, the financing of the War of Independence. And a big component in the Civil War, because the cotton was produced in the southern states, but all the banking and financing was done in the Yankee northern states. And that was the ultimate. We've touched on a lot of issues here, but they had free labor and slavery. So that was a little tainted. And were there derivatives markets back then?

Were there futures markets? Or just where was the cotton trading hub? Was it always Memphis? It started in New Orleans for the cash market. New Orleans used to be, if you go back and look at your history, new Orleans was the financial hub of the United States because of the Mississippi river and everything could go to the world. When the banking came through and ended up in New York city,

then all of the financing came from the New York banking for the Southern farmers. And so whatever they, literally the cotton would have to be harvested, shipped to New York, where it was paid for, and then sent over to gin was invented and then brought back here. And then the spinning mills, the technology was stolen and brought back to the U.S. And we put it along our waterways and were able to then spin the cotton into fabric. So that was a big rubbing point with the South in that, look, we're the ones making all the money. You guys are making money on us. Why should we send it directly? a big rubbing point with the South in that, look, we're the ones making all the money and you guys are making money on us. Why should we send it directly? Why don't we just send it directly to

Europe? And so that must be why the New York Board of Trade, right? The Cotton and Cocoa Exchange was out of New York, which always didn't make quite much sense to me. They had a New Orleans Cotton Exchange forever that was there. Then the New York, then you had the cotton exchange, the coffee, cocoa, cotton, orange juice to start out. And then the New York Board of Trade. And then you had, you know, came along ice in their continental exchange. And that's when everything really changed significantly because you went from a privately held consortium of owners of an exchange who stood for the veracity and the worth of all to a public company who's, you know, by law, they're obligated to make as much as they can. They're shareholders, right? Yeah, they're shareholders. So they,

in the industry, and it's a little cynical, I agree, but they say that the, you know, the Chicago markets are commodity markets that utilize technology to be efficient, whereas ICE is a technology company that bought some commodity markets. I love it. Right. And that's a whole nother discussion because the LME canceled all those trades in nickel because, hey, they might have had to lay out a lot of money in their for profit exchange. I mean, you've been doing this a while. I can remember back when the tin market blew up, when the silver market. Well, when I was, you know, when Merrill and the gold market, you know, in the silver market with the hunts and great stories about that. But it seems in the commodity markets markets because they're so leveraged by nature and because they're at the crux of everything i mean you know crude oils like you know the crux of energy uh food you know corn who are the big type of commercials who play in this game yeah it used to be abcd allenburg bungie cargill done of it now it's a little shifted

uh you got i was making a list here is who the the people that are are more involved now you get um you know cargill uh noble econ lewis dreyfus olam and then there's there's other small uh you know well-known historical companies jess smith and sons uh Plexus, Reinhart. Then you have the co-ops here in California. We have CalCot. You have Staple. Cotton is another big co-op. And the PCCA, which is in Texas.

So those big co-ops do, it's absolutely the same as it is in a grain market where they let the farmers produce and worry about that. And then the co-op takes care of the marketing. So they're the big players as far on the supply side. The merchants then are the ones that get it from the growers to the mills. And they're the ones that are the – I always said if uh the merchants are the smartest guys in the pipelines you know if you give them any rules they'll figure out how to beat you regardless exactly and that's like bungie and those kind of guys yeah the big lewis dreyfus is that is the big now big one now olam is huge and noble those those are the big

international guys and we'll throw out that i never knew until 10 years ago that julie julia louis dreyfus right from seinfeld that's her family right that's her grandfather whatever louis dreyfus who's yeah i don't know if they're billionaires but a lot of money right yeah and there's there's a lot of you know intricacies involved as there is in any market with uh different issues on different divisions of the company and the personalities involved. And the cotton is such a, I look back when I was at Merrill and I was running all the different desks, I'd have to go to the cattleman's association or the scrap dealers association and be a spokesman, everything. And the one thing I noticed about the cotton market very specifically was

these guys would trade the snot out of each other all day long i mean in the market back and forth and up and down the bell rings how they go get a beer yeah it was heavy heavy competition but at the end they were all in it together which which is, you know, they have the American Cotton Shippers Association, AXA. And I was just at the meeting up in Lake Tahoe last week, the annual meeting, and we had the new CFTC chairman came and spoke to us. And it's a group that is in place for the betterment of the industry, not for any one company, but for the betterment of the industry. And they will actually make decisions individually that hurt their own firm for the betterment of the industry. And it's very unique amongst all the commodity groups. And that's the cotton guys are that old school. Like you said, historically, they've been around a long time. You have old family traditions,

old lines that nobody steps across. And that's one of the attractive things about cotton. And so the merchants get it to the mills, and then the mills are facing off with Levi's or whomever? Yes. It's a misunderstanding a lot of the times. It's very much like in the meat packers industry. These guys work on margins, right? So if I'm making a 2% margin on an 80 cent product, and the market goes to a dollar, I'm making 2% on a dollar margins, right? So if I'm making a 2% margin on an 80 cent product and the market goes to a dollar, I'm making 2% on a dollar product, right?

They're margin oriented. So very risk averse. They, they, they hedge. So that, you know, the mills we're talking about, right. The mills, they had for the most part, they, there's a, there's a symbiotic relationship between the merchants and the mills where the mills and the merchants buy and call. On call is the term. And it's common in other industries as well. It's a common place where I'm the mill, you're the merchant.

I agree to buy a certain amount of cotton from you at a known difference, a basis over or under the futures market. And then when I need it, I call and say, okay, fix it at this price. Okay. So that relationship is ongoing and where you see it being stressed as we're going to see here is if guys bought cotton on call and fixed it at $1.30 and now we're sitting here at 89 cents, they're going to say, you know, I don't want that. Yeah, no thanks. So what we anticipate, and I'm not in any way saying this disparagingly,

it's just, it's a fact that there's, we've seen this movie before. After 40 years, I've seen this in other markets and I've absolutely felt it and been involved with it in cotton where we're going to get arbitrations. There's going to be significant numbers of arbitrations because mills just don't have the money. I can't pay you that because I can't pay you that. It's not that I'd like to, but I can't. Right. Going back to your numbers,

60 rounded up, 60 billion is now, the total crop is now only worth 40 billion. Yeah. Right. If they have to pay out the $60, they're like, I can't get it. Precisely. So there's going to be some disruption coming. That to me, and this gets, again, a little more esoteric on the concept, that's adding to the angst. You know, oh, my God, how bad is this going to get? How badly will that reflect upon the financial situation? People going bankrupt

never hurts an economy. It never helps an economy. So we see that as a real issue. It's like the unintended consequences of all these rate raises and we're slowing the economy down. We're going to put some people out of business. Right. And so that's one of the issues of all that commercial side. What are some of the other issues and how do they think about hedging those? So what a lot of the, you know, it depends on the sophistication. And I'll tell you the, again, in the industry, there's a, they put on an event every other year. It's called the USA sour Summit, where buyers of cotton, people that buy U.S. cotton to be imported overseas

or exported from here overseas, they come and they get invited and they get to meet all of the suppliers that the U.S. has, so all the buyers come together from all over the world. And it's been going on for a number of years. I'm on the Bull and Bear panel been going on for a number of years i've you know i'm in the on the bull and bear panel i helped organize several things and one of the things we saw was the bangladesh spinning entity show up here 12 years ago and the spinning is making the clothes actually yeah they were buying cotton and they were really the bangladeshi government was trying to really

get that industry buildings that hired a lot of people. You can, you know, cheap labor, import the stuff easily, and then export it to, you know, to Europe. So they came and they learned how to buy on call. Okay. Worked great. Things were super. We had the market go in 2011 up to $2.27 and then come back down and they all imploded. So here we are again at a

similar situation. I say, we've seen this movie before, we know how it ends. So we're expecting to see a number of problems come along. That's why we've redoubled our effort to explain to guys how to use options as opposed to futures or buying fixed price or going on call simply to give you the protection, like the high sleepability factor, but not be obligated to be locked into something. And it's really, it's, I can, the effort must be working because the volatility values have gone up that where, you know, the buying,

people are more eager to buy than I was willing to sell. And at the same time, we've seen the over-the-counter, the OTC derivatives come in significantly in the cotton. And the way we see that, they're selling premium. They sell option premium on both sides of the market. And if they do a collar and nothing happens, they keep all the money. Now, who's doing that?

Mostly the commodity banks. Our clientele are not just the producers and the spinners and the merchants, but the commodity banks, hedge funds, money managers, large speculators. We get our fingers on a number of different pulses to get a feel for it. banks are very eager to be premium sellers because they can take all of their uh structured positions buying and selling different insurance levels knock-in knockouts you know swap all these different things they can put them into a computer program and we and this is a daily occurrence every session going in the last half hour their computer model will spit out what their net equivalent futures position is. Yeah. Their Delta black and Scholes model. And then they can take an offset futures position at the end of the day. So they have a, a next to zero risk overnight,

and then they can move in and move out as they go. And so during all this time, they're collecting all the premium. And statistically, 85% of all the options that ever trade expire worthless. So if I take you to Vegas and tell you to bet red, 85% of the time you're going to win. Yeah. Well, the downside of that is the 15% of time you lose, you'll lose it all, if not more. But that's interesting because we talk on this podcast a lot with volatility traders and hedge funds that are always talking about the market makers and the equity index options who are essentially doing the same thing.

They're selling all this product. All of a sudden, they have a delta. They have a gamma. They want to flatten those all out and just earn the spread on what they buy and sell as a market maker. So they have to move massively in and out of the market in order to keep their flat deltas. They just collect the delta. They collect the time value. And what you see every day as we watch again, you see the volume.

It's always at the same point, same 20 minutes before the close, the volume it's always at the same point same 20 minutes before the close the volume peaks with these guys coming in and taking the offset every single session that happens i think a lot of that is totally algorithmic without question yeah question that's it's the same thing when we have a crop report all these computerized trades are they in if this, then that, if this, then that, based on usually on supply side or carry out numbers. And we see it as soon as the flash out from the USDA, the computers and boom, bang, they trade. And so often in cotton, because cotton is a screwy commodity, you'll get things that they go back and redo that there's no way to program the what-ifs, the multiple what-ifs.

If we readjust production over the last 10 years in Pakistan, all these different numbers. So every time we get a WASDE report, we see the blush reaction to the numbers that computers generate. And then it's like humans go, well, yeah, but what about that? And the market goes right back to where it's supposed to. Wait, you're saying the USDA report isn't entirely accurate every time? It's not. It's not even close. That was my attempt at sarcasm because it's terrible. I can't even believe it's like still a thing. It's so wrong.

What I try to say to my guys, guys is, look, by its very nature, it's a look-back model. It's never looking forward. It's only a look-back model. Is it a survey? Yes and no. In fact, we had one of our clients I can't mention names, got a call from the USDA because he put out his own estimation

of the Texas crop, which was a complete absolute opposite of what the USDA had. And they called him and said, where did he come up with these numbers? And he confided in me that he had his own guys out surveying. But when he told the USDA, he goes, ah, I know some guys inside your organization. I'm getting the leak. And they just went nuts.

They just went crazy. He was pulling it away. But anyway, they're look-back numbers. And what we have to get over is, even though they're look-back numbers, they're the only numbers we have for the next 30 days until we get the next report. And in the past, and it's still for the bigger companies, they still have their own guy. I mean, Louis-Dreyfus has their own guy that goes out looks at everything

does all that stuff and that does the analysis and they're way ahead they're days months ahead of the usda so so if you're trading off that as a retail trader like buyer beware right like it's going to be wrong there's guys who have known the number a more accurate number weeks ahead of you right one of the things i always tell them is look the only thing that travels faster than light is money so when you see things happen the market's already it already knows it so that's that's one of our our you know rules around here you've been mentioned we've been talking all this stuff cents per pound so right we're at 90 what are we at 89 cents per pound yeah 80 right now the december 89 20 per pound and and each each

bale of cotton is uh statistically 480 pounds but we running bales 500 pounds for 50,000 pounds in a contract. So, you know, 100 bales. And it changed in cents per pound. And you said before it's two bales per acre? Okay. So, for instance, it depends on what kind of cotton you're growing, where you're growing, and how you're growing. So, here in the United States, in the Delta how you're going so uh here in the in the united states in the delta you know i'm growing cotton the way my granddaddy did don't tell me

any different they're gonna make you know two and three quarters to three and a quarter bales per acre out here in california where we used to grow a lot more cotton but water can make more growing nuts now we were four four, four and a half bales. Okay. In Australia, where they've only been growing cotton intensely since the 1960s, they're at six, seven bales to the acre. Wow. And it has more water, more rain? No, no. It's as simple as they don't have to unlearn any bad habits i'll give you one example soil compaction is always a big problem in farming right because once you compact the soil the roots have a hard time finding water nutrients okay in australia when they break new ground

using gps they only ever send the wheels across that ground in the same rows ever. So really compact these rows. Don't touch these other rows. Right. And so what they end up with is tremendous root systems that can go down, find nutrients, find water. They're very cognizant and open to innovation. Like I said, they're the ones that went from modules to round bales first. They really embrace that. And the reason is, I said, they're the ones that went from modules to round bales first. They really embrace that. And the reason is, I mean, they're 100% export, not 100%, 99.5% export. I mean, they don't need to spend much cotton.

There's more people in L.A. than in all of Australia. Yeah, exactly. So they're an export. Their goal every year is 5 million baleses and their goal is to make 500 Aussie dollars a bale. Well, this year, it looks like even with the flooding they had after half the crop was picked, they're going to, they're going to do five and a half million and they're making six,

$700 a bale. They're, they're doing fine. So I'd love that. The technology piece is that built in, is that like a John Deere product, right? Does the tractor know to do that and the GPS is inside the tractor? Right. It's not quite autonomous, but these guys know where to line up and stay on that. And that's for all their crops. I mean, that's just the way that's one of the things. So they have a higher yield in countries where they're growing. There's other cottons and people this is the

funny part most folks are more informed or well aware of very specialty crop cotton like organic okay oh i organic cotton that's such a small it's it's a rounding error in the global production right yeah pima cotton is grown in the u.S. exclusively, and it's one of the ELS, extra long staple fibers that's grown. Egyptian is the other one. Oh, Egyptian cotton. Yeah, that was on my list to ask. Yeah. So same thing? Yeah. So again- That's a marketing ploy, it seems like you're saying? Yes. In fact, there was a Pima farmer in California that was tired of the additional expense and the reduced yield of growing Pima when it was showing that Walmart, Kmart, everyone said, well, we got Pima sheets, Pima sheets.

And he started adding up. He went out and did this tremendous thing. And he found that there was 100 times the amount of Pima product being sold than there was Pima cotton being grown. And so he went to his merchant, I'm going to leave the name out of who it was, and they did a study and they found out that this was prevalent throughout the industry. And they went over to China and they found that the opening room had five or six bales of Pima and 200 bales of Indian cotton. And they were blending it, calling it all Pima. It's kind of like you can get a Wagyu steak burger at Burger King or whatever. Yeah. So what happened was then this became an issue and the United States has championed the cause

to test fiber at the DNA level to prove within a square meter of ground where it was grown. So they can go to the gap or, you know, H&M, they can go to a plate, they can get some of that fiber and at a DNA level, tell you where that fiber came from. Now here's the backlash. Wellspun, the big Indian, the biggest Indian spinning merchants, they got caught saying everything was pima and it wasn't and it was such a scandal all of the u.s merchant all the u.s apparel just turned their back on them and their stock dropped 40 percent overnight this is going back two three

years the same situation now exists with zing yan cotton. They can test to see if Chinese products contain Zingyan fiber, which the world has universally turned its back on. So is there a slave labor work in the fields or whatnot? Yeah. Terrible things that are claimed. I'm not going to get involved politically. I've never been there. I haven't seen what's going on. I just know if it's bad, it's bad and people don't want to do it. It's kind of, if you think about it, just philosophically, China's learning how to exist in a capitalistic world.

You know, if you're a centralized government, you don't care what other people say. Well, now in capitalism, yeah, people care. So now they're having to learn how to deal with that. So that whole thing on the Pima cotton spurred this whole dna study and the reason pima cotton we'll go back to extra long staple is a premium when you make a thread okay the longer the fiber the fewer threads you need to be to be woven to make that same length okay so the lighter the fabric is so when we think about cotton there's five characteristics

length strength color micronaire which is how fluffy the thing is in contamination so those are the things that are variants that when you buy cotton so india does a very good job now they're getting with the program on quality australia has always been the the bellwether really high end u.s cotton machine picked you know grown when you irrigate cotton it grows at a constant constant rate when you have rain grown cotton it grows fast and then slows and grows fast and then slows so that fiber has different strength points along its length so in these high speed mills and high speed spinner and to try and spin these things it breaks and it causes neps which you see on a sweater sometimes you know yeah these are all things i love it yeah going into all the uh you know this is going off into the alfalfa of the cotton world so so don't overpay for egyptian cut but you're saying it is as good

it's just been over marketed and you can't really be sure it's pure egyptian cut but you're saying it is as good it's just been over marketed and you can't really be sure it's pure egyptian cut yeah if you're really getting it you know if you they could put a little bit in it but it won't be 100 and and it all boils down to what are you comfortable paying for a shirt i know that the pima su pima is the organization here in the united states that represents all the pima and they're with you know brooks brothers and the high end they do assure that this is all really on the on the up and up and they go to great lengths to prove that and it's a great product there's no question it's just the other guys that are trying to get the premium without really putting the real deal in there and what are your thoughts it seems to me like more and

more of my clothing right lulu lemon or like or like, I don't have a hundred percent cotton golf shirt anymore, right? It's all this performance type shirt that feels better to me. So is that going to eventually take over or we're always going to have cotton? We can't just make this stuff pure artificially. What's the end game? The awareness of the microfiber, the microfiber plastic, microplastic pieces is really going to push towards natural fiber. Now, again, that could be more hemp. That could be, you know, a greater reliance on bamboo. I've got a few bamboo shirts. I love them. Some bamboo underwear. It's comfy. Yeah. So there's going to be that. But along the way, cotton, because it is an efficient, people always, this is the big argument I always get with these knuckleheads in agriculture.

Oh, cotton is a thirsty crop. It uses too much water. Yeah, but most of it comes from the sky. You know, so cotton will always be grown because it can be irrigated for free. So the cost of production is more determined on a rain grown crop by diesel fertilizer, and then pesticide herbicides, you go through all the list, but that's why now, you know, normally in the Delta Delta States, you know, their cost of production is figured at 70 to 75 cents a pound. But today for next year's crop, we were talking with some Delta

farmers last week, it's a dollar seven. And that's the fertilizer, which we have supply chain issues, Russian issues and diesel. Right. So, you know, that the question then begs to be answered, well, the dollar seven, and I'm looking at next year's the red deck, the question then begs to be answered, well, the $1.07, and I'm looking at next year's red deck, the December 23 crop, right now is priced at $0.75. How much cotton are you going to plant if it costs $1.07 to grow and you only get $0.75? So low prices will cure low prices as assuredly as high prices cure high prices. Yeah. So what do they do

instead they'll plant soybeans or something right now yeah the ratio when i look at the ratio of the new crop soybeans new crop cotton is now at 16.4 as opposed to the like this november and this December, the ratio is 14.8. We're at 16.5, which heavily favors producing soybeans that don't require, you know, they're a legume. They fix nitrogen in the soil. You don't have to put nitrogen fertilizer in. So that's what behooves the soybean production, you know, for the new crop we'll we'll, we'll plant, you know, in the fall. What, what happens going a little off topic here, what happens when diesel's so expensive that like basically it makes all costs of production and if it, right, if there's no elasticity between crops, because whether I plant soybeans or whatever, right, I, my input costs are way too

much to make any money. So I just don't want to plan anything. That's at the crux of what a lot of these futurist and macro thought leaders are considering is that human nature, well, it's not just economics. If I'm a corn producer, a wheat grower, a soybean grower, and I can't afford the inputs, I just won't input them. So you're going to see global yields decline, right? You don't get the optimal return out of the soil and and what you are seeing and i and we're seeing it here maybe it's just because california we're fruits and nuts but one of the strengths what we're seeing here to this day as we speak and a guy in here yesterday they they have a biological product that when you and it comes from worm castings and when you take this fluid in a drip system it releases the stored mineral capacity in the soil so you don't have to not only do you not have to apply fertilizer you're liberating it from the

soil where over the years you know guys fertilize fertilize fertilize fertilize well what they found is you can you can cut your fertilizer cost in half and put this this uh extramint from the worm casting it's made a t not only do you replicate you get more out of the soil but your yields go up and what worm casting we're talking worm shit yeah exactly it's a permaculture they rebranded it to worm casting so what they do is they take these these long um you know vats if you will of uh organic cow manure from the organic dairies here and then the top foot and a half are all the worms. And they pile the stuff on. And what comes down out of the bottom, they eventually cut off. They take this mulch and they steep a tea, water through it.

And then all those nutrients, you know, you're a kid. They always say worms are good for the soil. Yeah. Well, what they're good for the soil is now in this liquid form. And when that goes into the soil, there'll be two or three hundred different antibiotic breakdowns that go into the soil and release and make the nutrients available to the roots of plants. And the soil that already is there without any additives, it's also, it's a drought, they're better in the drought. There's all kinds of sea yields, they get a longer shelf

life, more flavor to the fruits. And where they initially started was in the drought. There's all kinds of yields. They get a longer shelf life, more flavor to the fruits. And where they initially started was in the cannabis industry, because they found that with a 50 cents worth of this product onto the cannabis crop, they made 64 more dollars in yield. So 50 cents in, 64 dollars out, that's a pretty good ratio. And then it grew into the strawberries, where it's a very high dollar hand-picked crop. So the same type of results. So now all of a sudden the grape guys, right, the wine guys have big margins. They're realizing that when they plant grapes, it's normally a five-year wait for a crop to pick. It's down to three.

That's how fast the root systems expand with these products. So we're getting innovation along those lines yeah and then to me you're always like like you said satellites eventually will have electric tractors and whatnot right well there's actually out here for spraying uh almond trees which is a big industry out here now it's autonomous these machines come out of the barn they spray what they're supposed to autonomously, no human involved. And they come back and park themselves in a barn. Yeah.

Almonds. I knew a guy once had run some hedge funds, made a bunch of money, and then he bought almond farms. He's like, I make 10 times what I made in the hedge fund world on these almond farms. Right.

It all comes down out here to what can you convert a drop of water into? It's the greatest percentage return with the exception of if you go to a permanent, if you will, they call them permanent improvements, trees. An almond tree has about a 20-year span before the production level breaks down, they have to replace. What happens if you go ahead and you're five years, six years into it, and then you get your water cut off? Well, so then the idea is that, well, I'll have some of my crops impermanent, and then I'll be row crops, you know, tomatoes.

Out here is the big thing, you know, for that. Cotton's really suffered acreage-wise. i probably not too far of a stretch to see california be like no more almonds takes too much water it's bad for the bad for the earth yeah you know i can see that again a lot of the a lot of the rain yeah the almonds require this much water but a lot of it comes from rain okay so then what's your argument yeah i mean that gets glossed over when people like almonds use too much water right it takes such and such water to grow and all right and that's it comes out of the sky it's the same argument with with beef production oh it takes so much water well most of the time the cows are eating stuff that people can't eat anyway and off the acreage and nobody's going to

cultivate anyway so it's yes this is the caloric requirement. My degree is in livestock production management from UC Davis. And so I have an intimate understanding of the conversion process. And it's, if you're going to have a bunch of range land that's either going to catch on fire or be grazed down by cattle, where's the downside in grazing the cattle? Yeah. Which would you prefer? Speaking of UC Davis, when I was just there in your area and talking with a friend and he was kind of lamenting all the pros coming out of UC Davis that become the winemakers and all they're doing is like going down the same lane, all growing these big, calves right ripping out other vines to plant cab vines like

what's your any thoughts on that and he was kind of saying there's they become so good uc davis has taught them so well and all the tricks of the trade that it's like there's not much variation between years anymore and it's just becoming like one taste he was kind of like what's the fun in that but i don't what are your thoughts it's going to davis you know i played football baseball and rugby there and a bunch of my teammates were viticultures and get to know them and eventually i you know stay in touch with them they're all big wine guys now i mean the biggest and so you talk to these guys and vengi what was the one i said oh bungie i meanunchu? No, Kurt Vengi, I think his name is. Oh, Vengi?

Okay, yeah, yeah. Some of these guys, you got to remember, if you go back, when we were at Davis, they were just coming to understand the science of the art. Prior to the 1970s, if you knew how to make wine, you were a real princely guy to make good wine, and a lot of it was not good wine. In fact, the Gunlock Bunchew Winery is the oldest winery here. They lost a million cases of wine in the San Francisco earthquake in 1906. So when you talk to the family, old Jimmy Bunchew, he says,

yeah, when Prohibition ended, I went to the family and said, we've got to go start growing grapes again and get out of those plums and pears and things that they've gone in. And these guys would meet every morning at this little coffee shop here in town, and they'd go, hey, which grapes are you going to grow? I'm going to try that Chardonnay. Oh, I'm going to go with that. I'm going to try that peanut. That peanut, you know know and that voyeur and all that they didn't know how to say the words they just knew that that there was some good returns in it so they started growing something that became very popular right yeah and they're

just farmers at the end of the day right that's exactly it that's exactly the to the to the very day and the and the bunches are classic know, we've got great stories about them. It's a great name, Bunchew. You unlike Bunchew, right. So Jimmy Bunchew, when Virgin Atlantic first flew into San Francisco, they had a big opening, a big fancy deal. And Bronson was going to come up and taste wine. He had a bus.

And it was his mom and all the celebrities, and they were supposed to go to Napa, where he had just gone. And he was following the bus in his helicopter. Well, Jim Bunchew goes down and gets a CHP uniform from a costume store, takes a motorcycle out, and makes the bus. He stops it and says, we're not going to subject you to drinking these terrible Napa wines. You're going to come drink Sonoma wines,

and has them redirected to his winery in Sonoma. So he's done other stunts like this, like he held up the wine train. Anyway, so what happens is here's the helicopter is flying. He's supposed to go this way, and all of a sudden there goes the bus with his mom in it. And Br's just panicked panicked anyway they find they land they find and by the time they get there everybody was having a great time drinking sonoma wines and and his mother was quoted in the bbc as saying these are the nicest people i've ever met in california so there's that that sonoma attitude of a bunch of old school guys that you know they're farmers

they just happen to farm something that became real popular they're always looking for a varietal i don't know if you how much you know about wine i'll bore you with a million stories but you know that movie sideways yeah okay well it turned everybody off from merlot which is old that's an old that's an old country wine mer Merlot is like the Bordeaux's, right? It's things that are very mild and constant, everyday drinking. And guys had to pull all their vines out because nobody would pay them for it. So you see that type of thing happening quite a bit. There is that common thought, you know,

the common thought of I learned how to make wine at Davis or Fresno State. That's the other big one. And this is how we're going to make wine at davis or or fresno state that's the other big one and this is how we're going to make it but what you see are guys are changing over in different boutique areas where they're going to more of the uh you know the old school european flavors you know the rhone varieties different things and you've seen a little experimentation but you know there's so much production people want the wine that you know, there's so much production. People want the wine that, you know, you produce what you make. Give them what they want.

Yeah. We'll wrap it up here. What are your, give me your hottest take on cotton or wine or whatever you got. I'll take it. No, I'll just, I'll stick with cotton. That's what we do best. Right now, we're in an environment where the bull market's not over forever. It's just over for now. And macro inflationary efforts, no one really wants to be short anything because you just don't know what inflation is going to do to it. So there's a reluctance to buy. And then in absence of buyers, the market can continue to go down.

And it's going to drop until one of two things happens. To me, it's a very simple discussion here. You're either going to reach an undervalued level where the conversion allows the trade to make a fundamental decision. OK, this is cheap enough that i can buy it convert it and make a profit okay then you'll see them come into the market or two you reach a technical level where the money manager speculators magically delicious decide this is where we want to own it okay and i don't know if you want to look at some type of moving average,

a Fibonacci number, something will happen that you'll get a buying force into the market. And in a lack of selling, it doesn't take a whole lot of buying to stabilize and then drive the market back up. So right now we're in a kind of not for now, but wait a minute type of environment. The market will calm. The volatility values, they're 44%. Normally we're 18 to 20. We're 44% fall. It'll calm down.

The cotton, the cotton vicks. You got a word for that? Cotton vicks is at 44. It's a mess. So we'll get the emotion out of the market. I still think there's probably a problem that we're not aware of in China economically that that's weighing on the market. I will tell you that the hedge funds that we dealt with over the last 18 months were gaming in the Russia-Ukraine deal and made tons of money on the market. And so there's always those guys,

like you said, the smartest guys out there, they're out there running with the money. So then that's what's going to drive it. So that's why I think- Yeah, the CTAs we track, right? The trend following guys actually now flat. They're not short yet. Some very short term guys might be short, but on the whole,

they're just flat right now. Yeah. The growers are not short because they don't know what their crop is. We had a Texas farmer, you know, this guy's got 5,000 acres. He thought he was 20% hedged, but because of the failure of the crop, he was 60% hedged. You know, I don't know. I mean, all of a sudden, not because he changed his position, it's just because of the failure of the crop he was 60 percent hedged you know i don't know i mean all of a sudden not because he changed his position it's just because he didn't have the crop right so there's just there's not a lot of appetite to go short anything from either a macro economic perspective or a micro production perspective so it's going to be you know go up slow come down fast shoots and ladders. We've already had a dead cat bounce. That was, it just happened. Now the market's coming back.

Last week. Yeah. Yeah. 80 cents. If you had to pick a number, put a gun to my head, be patient, wait for 80. There's, there's a chart gap too, that has to be filled, but yeah, 80 cents to me might, might be the extent of this thing. And at least it's a lower risk approach. What's your cotton informed view of we're going into recession, the Fed will keep hiking, stop hiking? I think we're in recession and all the numbers are looked back and we don't get them until a month later, a quarter later, et cetera. I don't think it's going to be long lived. One of the unintended consequences of lower interest rates with so much money around et cetera. I don't think it's going to be long lived. You know,

one of the unintended consequences of lower interest rates was so much money around and, you know, we all are appalled, appalled that you have to get a 4% home loan. Oh my God. Un-American. Yeah. The first lot, I remember the first house I bought, I was, I thought I was giggling. I made 11, I got 11%. That was great. So we'll get the growth back. We got to get over the shock. I think there's still health questions. Will China shut down?

Will the supply chain get unwound? We all have to deal with this. It's the noise that we live in now. So you just have to look past the screaming heads on TV and look at facts, looks at numbers. I always say that, you know, the only guy that really knows what cotton's worth is Charles Chart. The chart knows. Charlie knows. That's it.

That's it. So anyway, that's what I say. Awesome. Well, tell everyone where they can find you, where they can sign up for that newsletter, all that good stuff. Yeah, logicadvisors.com. It's Lawson O'Neill Global Institutional Commodity Advisors, but logicadvisors.com. We try to post some stuff now and again on LinkedIn to try and chum the waters, get people interested.

Our letter, the way we write the letter is we expect you to understand some of the stuff that's common knowledge. And so we write it from that perspective. And we realize that everyone that has any interest in this has got a ton of stuff to read every day. So we make it one page, one page. If I can't get one across, I'm trying to get every day. So we make it one page, one page. If I can't get one across, I'm trying to get one page. One of my clients says it's his perfect after lunch reading when he goes to the

men's room. One page, he gets it done. The trick is we write the letter and then I put a headline in that pertains to something within the letter. And the game is you have to figure out when it says, you know, three strikes, you're out. You got to figure out what I am talking about as you read the letter. It makes you, it forces you to get to the end. So that's the little hook. It's a, it's a trick I learned from a guy named Herb Cain that used to write here in the San Francisco Chronicle for, he was a legend for years.

So it's just something, you know, just a little game. If you can figure it out, that's good. There's a lot of bad puns and rock and roll lyrics so that you understand it. And that's the way to do it. Awesome, Ron. Well, it's been fun. Thanks so much for the download on all things cotton. I appreciate it.

All right. Sounds good. We will talk to you soon. And next time I'm out there, we're going to stop by. Hope you do. We'll meet for a beer at Ernie's. That sounds great. Have a good summer. You too. Thanks, Ron. All right. Bye-bye. You've been listening to The Derivative. Links from this episode will be in the episode description of this channel. Follow us on Twitter at RCM Alts and visit our website to read our blog or subscribe to our newsletter at rcmalts.com.

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