Cotton: When White Gold Hit Civil War Prices

In March 2011, cotton hit $2.15 per pound. That was the highest price since cotton trading began on the New York Cotton Exchange in 1870. The last time cotton was anywhere near that expensive, the American Civil War was raging and the South’s plantations had stopped producing. It took 150 years for cotton to reach those levels again. Chapter 37 of Torsten Dennin’s “From Tulips to Bitcoins” explains how a combination of floods, export bans, hoarding, and panic buying made it happen.

White Gold

Cotton has been valuable for a very long time. In ancient Babylon, they called it “white gold.” For most of history, cotton was woven by hand. Then the 18th century brought spinning mills, the steam engine, the cotton gin, and mechanical looms. Cotton production went from a craft to an industry overnight.

The American South built its economy on cotton. And that economy ran on slavery. Before abolition in 1865, cotton production in the South grew from 10,000 bales to over 4 million. That is a staggering scale-up, and it was powered by forced labor.

During the Civil War, the supply of Southern cotton collapsed. Prices hit levels that traders in 2010 would have considered impossible. Then the war ended, production recovered, and cotton settled into a long, slow decline in real price terms. For the next century and a half, it never came close to those wartime highs.

A Quiet Market Goes Crazy

Since 1995, cotton had traded in a fairly boring range. Mostly between $0.40 and $0.80 per pound. Nothing exciting. The kind of commodity chart that puts you to sleep.

Then in September 2010, cotton broke through $1.00 per pound for the first time in 15 years. By November, it was up another 40%. There was a sharp correction, but by the end of December it had recovered to $1.40. And in March 2011, the price spiked to $2.15 per pound.

That is a 480% increase from the lows of November 2008. Four times the price level of early 2000. The most expensive cotton in 141 years of exchange trading.

What happened?

Everything Went Wrong at Once

Cotton is grown all over the world, but the market is concentrated. China, India, the United States, Pakistan, Brazil, and Uzbekistan together produce about 85% of global output. China and India alone account for more than half. When something goes wrong in these countries, there is not a lot of spare capacity elsewhere to pick up the slack.

In 2010 and 2011, something went wrong in almost all of them. At the same time.

Pakistan. The fourth-largest cotton producer in the world. In the summer of 2010, Pakistan experienced its strongest monsoon in over 80 years. The floods were catastrophic. More than 14 million people were affected. Over 280,000 hectares of cotton fields were destroyed. Two million bales of cotton were lost. Just gone.

India. The second-largest producer. India responded to tightening supply by doing what governments often do in these situations: they banned cotton exports. Indian cotton exports dropped from 1.5 million tons to 0.5 million tons. That is a million tons of cotton that the world market was expecting to receive and suddenly could not get.

China. The world’s largest producer and, at the same time, the world’s largest importer of cotton. China was dealing with shrinking harvests for the second year in a row. Low temperatures and excessive rain were hurting yields. Meanwhile, Chinese demand was growing. Monthly cotton imports were doubling compared to the year before.

Australia. The eighth-largest producer. Cyclone Yasi caused severe damage to cotton-growing regions. Australia’s cotton forecast was cut by more than 10%.

When the four countries that produce most of the world’s cotton all have production problems at the same time, you get a price spike that makes history.

Panic Buying and Hoarding

Supply problems alone did not explain the full price explosion. Human behavior made it worse.

Cotton processors started panic buying. When your factory needs cotton to keep running and you can see that supply is shrinking fast, you buy whatever is available at whatever price. You do not wait for a better deal. You cannot run a textile mill without cotton.

And on the other end, Chinese farmers started hoarding. According to Dennin, about 2 million tons of cotton never reached the market because farmers held it back. In the village of Huji in Shandong province, growers were holding back more than 50% of their harvest. Why sell today when the price might be even higher tomorrow?

So you had panic buying on the demand side and hoarding on the supply side. Both forces pushing in the same direction. Prices went vertical.

The Market Adjusts

Markets always adjust eventually. The question is how.

In the short term, textile processors did the obvious thing. They started mixing cheaper synthetic fibers with expensive cotton. If cotton costs four times what it used to, you use less of it and substitute where you can. Cotton makes up only about one-third of the world’s textile fibers. Synthetic fibers already dominate at around 60%. The price spike accelerated that shift.

In the longer term, farmers around the world responded to the price signal. Cotton acreage for the 2011-2012 growing season expanded to 36 million hectares. That was the most cotton planted in 17 years. When prices are high enough, farmers switch from other crops to cotton. Basic economics.

For anyone who wants to trade it: cotton futures trade under the symbol CT on US commodity exchanges. Each contract covers 50,000 pounds.

What Stays With Me

This chapter fits a pattern that runs through the entire book. A commodity sits in a boring price range for years. Then a weather event, or several weather events at once, disrupts production in countries that dominate the market. Supply drops, demand stays the same or grows, and prices explode.

We saw it with Australian wheat and El Nino in Chapter 27. We saw it with Indian sugar and the failed monsoon in Chapter 33. Now we see it with cotton and La Nina. Same story, different commodity, different weather pattern. The underlying problem is always the same: concentrated production plus extreme weather equals extreme prices.

The detail that sticks with me is the 150-year gap. The last time cotton was this expensive, it was because of the American Civil War. Enslaved people were being forced to pick cotton, the South was burning, and supply was cut off by a literal war. In 2011, it was La Nina, floods in Pakistan, an export ban in India, and Chinese farmers storing cotton in their houses. Completely different causes. Same result on the price chart.

And the hoarding detail is fascinating. Two million tons of cotton sitting in Chinese farmhouses instead of going to market. Farmers in Shandong province looking at rising prices and deciding that their cotton was worth more stored in a barn than sold to a trader. They were doing on a village level what speculators do on trading floors. Holding supply off the market because they expected higher prices. When everyone from Chinese farmers to New York futures traders is betting that prices will keep climbing, prices tend to keep climbing. Until they do not.

Cotton went from ancient Babylon’s “white gold” to the engine of American slavery to a sleepy commodity trading at 40 cents a pound. Then one bad weather season brought it back to Civil War prices. The market does not care about history. But sometimes history repeats anyway.

Based on Chapter 37 of “From Tulips to Bitcoins” by Torsten Dennin (ISBN: 978-1-63299-227-7, River Grove Books, 2019).

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