Monday, December 20, 2010

"King Cotton booms in California. But what about the water issue?"

In last week's "Société Générale's Dylan Grice-"Commodities: ‘Their Expected Long-Run Real Return is 0%’"' I gave a drive-by disquisition on mean-reversion in 'softs':
Well duh.
Commodities are for tradin' not investin'....
...In the case of the grains the darn things are mean-reverting.
If wheat doubles in price, the acreage devoted to wheat goes up and prices come down. The substitution effects at the producer level are predictable if not timable:
better net profit for soybeans than corn? Beans it is boys!...
Here's a perfect example of the thinking, come hell or low water. From the Los Angeles Times' Money & Co. blog:
Rising commodity prices have kicked off a cotton boom in central California. And though California's current production numbers are a pittance compared with the 1990s, when more than 1 million acres of cotton flourished, farmers are ramping up -- particularly in the San Joaquin Valley, historically the heart of the state's cotton industry.

Growers were expected to plant a total of 309,000 acres of Pima and upland cotton this year, up from 201,000 last year, according to the U.S. Department of Agriculture's Economic Research Service.
A similar movement is happening in the South, Southwest and elsewhere in rural America. Nationwide, the total acreage of cotton planted grew nearly 21% this year, to 11.04 million acres. The amount of cotton harvested? It jumped 51%.

But whether this boom will bust depends on a number of factors.
There's the question of whether investors will continue to drive up cotton prices, as part of a broader push into the commodity markets as a hedge against inflation and the risk of further devaluation of the dollar and other paper currencies. There's the question of how much support -- and how many subsidies -- cotton will have in future federal farm bills.

And, of course, there's perhaps the biggest question of all: Will the water be available to grow cotton?...MORE