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Why is Cotton Not like A Boeing Aircraft?

12 April, 2024

Why is Cotton Not like A Boeing Aircraft?

This is the kind of catchy title cotton markets guru Ron Lawson uses in his daily market update. It’s just one of the “secret sauce” ingredients that sees Ron’s advice sought by cotton merchants and traders, spinners, apparel brands, banks and hedge funds all over the world.

Ron will be a keynote speaker at the Australian Cotton Conference in August, presenting on the topic “Looking at the World Through Cotton Goggles”, in other words what are the unlikely things to look for that could impact the business of farming and trading cotton.

Ron is most often asked “which way is the market going?” but he believes people should really be asking, “what’s going to hit me from behind that I didn’t expect?’ People look left and right crossing the street, but how often do they look up?

Ron’s cotton career spans over 40 years, starting on the family farm in California, moving on to run the Cotton Futures Desks at Merryl Lynch and Prudential and eventually establishing his own Trading Company- SFO Commodities, and consultancy firm LOGIC Advisors – to handle cotton futures and options, and provide market advice to clients.

No stranger to cotton or Australia, this year’s Cotton Conference will be his 15th visit. His first “Aussie” exposure was when he billeted five Sydney Uni rugby players while in College at U.C. Davis, including future Prime Minister Tony Abbott.

“That mob changed the way I looked at life, and I have remained close friends with them ever since.” Ron’s post-graduate Rugby career allowed him to represent his country overseas and included captaining the US under 22 side. His first rugby tour to Australia cemented the relationships first developed in College. “I now get to see those guys as often in the U.S. as I do Down Under.”

“When I first started doing business in Australia with companies like Twynam, Auscott, Q.C., Namoi, NAB, ANZ and Macquarie Bank, I could offer a winning combination – extensive cotton market experience, a farming background and the ability to speak rugby which was unusual for an American,” Ron quips.

“Since those early days I’ve developed many strong relationships with the Australian cotton industry and I believe Australia and Brazil are world leaders in cotton at the moment, with the U.S falling behind.

“Australian cotton farmers, more than any other in my experience, have the capacity and tenacity to be on the innovative edge. You rarely hear ‘that’s not the way my dad did it’ in Australia. They want to be ahead of the game and they recognise new ideas and applications quickly, which is why I believe Australian cotton farmers have the competitive advantage.

“Brazil’s leadership is on the selling side in the way its industry body ABRAPA has solved the traceability issue, allowing a bale to be tracked from farm to retail shelf which means companies can be assured of sustainability certifications and that they don’t have human rights issues in their supply chains. Brazil also has a more natural rainfall pattern that allows it to to grow more cotton than anywhere else in the world. This has seen them overtake the U.S as the largest cotton exporter last year,” Ron said.

Ron is a strong believer in “what hurts the most is what you don’t see coming” and his business is dedicated to seeing things the cotton trade is not generally looking for, drawing on years of experience to see repeat patterns and analysing everything with “cotton goggles”.

He looks for anomalies and correlations that those focused on growing a bale of cotton (farmers), or selling it into the market (merchants), or financing cotton (banks) simply don’t look for, and don’t often see.

“These are often the types of things that can hit you from behind, and that can be taken advantage of if you gain insight early enough. A good example was back in the Spring of 2022, I noticed the cardboard industry was becoming depressed, which directly related to a drop in demand for packaging materials which was an early indicator that consumer consumption of fashion was falling and this in turn saw a downturn in cotton consumption that we were able to predict and report early to clients,” Ron said.

“Another example is the upcoming election in the U.S. My job is not to predict the election outcome but to advise clients that if Trump wins, this is likely to happen to the cotton market, and if Biden wins, this will probably happen.

“Massive fast fashion brand Shein is currently exploiting a loophole in the U.S Uyghur Forced Labor Prevention Act by selling directly to individual customers – if this loophole is closed, and with food security a priority in China, will the Xinjiang region see a move away from cotton production, and what might they grow instead?

“These are all questions that could have an impact on the cotton market, and clients don’t pay me to tell them what to believe about issues like human rights or climate change, but how to deal with the market in relation to these issues,” he said.

Ron draws on institutional knowledge and networks and looks for seemingly unrelated details in the economic and political landscape, daily news, apparel and fashion trends, competing fibres, consumer sentiment and trends in credit card spending.

“It’s no good just to look at consumer sentiment because a consumer may want to buy the t-shirt, but they can’t afford to because their credit card is maxed out. We saw recently that a very large recycled fibre company collapsed which indicated that although brands want sustainable fibres, the business model isn’t working which therefore opens an opportunity for cotton.

Ron has trained himself to look at everything in terms of cotton, to always have his “cotton goggles” on and be asking ‘if this happens, then what will it mean for Cotton?’. He scans for intel that will help him join the dots between what’s going on in the world, and how that will affect the cotton market – but with the event of Artificial Intelligence (AI) he predicts this analysis will soon be done without the need for humans, and with ever increasing speed.

“The development of AI means analytical, hedging and trading roles like mine will likely be redundant, and then we’ll need to think differently. We saw a similar change on Wall St around 10 years ago when there was a shift away from hiring MBA’s, and towards employing mathematicians who could write code and algorithms to compare millions of data points so that trades could be made within nano-seconds,” Ron said.

“For example, hypothetically, these algorithms could analyse the number of social media clicks on the word ‘calorie’ and from that, predict that sugar prices would fall, and that Weight Watchers shares would go up.

“The competition became who could be the fastest to use the code to make the trades, until one clever Wall Street trader, flipped the script, went in and bought Weight Watchers shares, sold sugar short and THEN had a super computer input the word “calorie” into the social media world. Increasingly, we will have to look forward, not backwards, to anticipate what historical data imputes for forward facing price action.

“With AI, if everyone’s looking at the same information, we need to be thinking about the structure of cotton trading going forward and how we not just manage the risk, but take advantage of our knowledge of the playbook,” he said.

Ron’s Australian Cotton Conference presentation will focus on how to avoid being hit from behind by effectively using your cotton goggles – using real time, relevant examples from the world today.

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