If a drop in cotton demand is coming, Wall Street doesn’t seem worried.
While cotton producers and physical traders worry that President Donald Trump’s protectionist policies will cut into demand for cotton from its foreign trade partners in China and Mexico, hedge funds and other money managers are betting on rising prices in the cotton market at record levels.
Those investors cite recently strong demand for U.S. cotton from China and a booming economy under President Trump they say will drive up demand for goods like cotton, spurring inflation.
“If the U.S. economy is stronger, that will increase demand for cotton and other commodities. And if that demand goes up strongly enough, it will offset any tariffs that take place on one or two nations,” said Adam Sarhan, chief executive of 50 Park Investments.
In the long sleepy cotton market, speculator bets that prices will rise soared to a record 101,163 bullish bets as of Tuesday, according to the U.S. Commodity Futures Trading Commission, waking up a market that roughly a year ago was solidly in control of the bears because of swelling stockpiles of the fiber in China.
The $9.7 billion cotton futures market has watched speculative interest in U.S. cotton futures climb to the highest level since March 2008 when open outcry trading ended.
Rogers Varner, president of Varner Brothers, a firm that places bets in the cotton market on behalf of hedge funds, see Trump’s recent moves as a negotiation tactic.
“I don’t think this ‘America First’ thing bubbles over into a bonafide trade war. It is for show-and-tell,” he said.
But market participants say those speculators are on the wrong side of that bet.
Jordan Lea, chairman of Eastern Trading Company, a cotton merchant based in Greenville, S.C., says with Trump making policy decisions on campaign promises, the cotton market should be pricing in a drop in demand from countries that could push back by going elsewhere for cotton.
Mexico and China together account for one quarter of U.S. cotton exports this year and Mr. Trump has taken aim at both nations in his efforts to reframe trade policy.
“The powerful people in the world, the big money, has not taken him literally. But that’s starting to change. We’re in uncharted territory,” said David Martin, managing member of commodity hedge fund Martin Fund Management.
Mr Martin said with half the world’s cotton held in China and the potential for a trade war with Mexico, he’s staying out of the cotton market.
“Tariffs could increase the price of cotton. Or the price could actually collapse. It’s a big chess board,” Mr. Martin said.