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

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!






Check out the complete Transcript from this week’s podcast below:

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


Jeff Malec  00:07

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 seventh seventh July 7 177 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 rank managers here on the pod. So stay tuned for that. Under 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’s it grown? Has it hedged? We’re walking in some high cotton with Ron Lawson of logic advisors and RCM ag group to cover all this and more. Send it This episode is brought to you by the hedge edge podcast. I’ve been working with Jeff Eisenberg for over 20 years and he hosts the hedge edge by our RCM ag group where they cover all things ag growing hedging it marketing it with guests like Ron here on our pod today. Check it out by searching for the hedge 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 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 and you turn off all the lights.


Ron Lawson  01:59

We’ve got just for the back layer. we’ve knocked it down the yeah, we’re just north of San Francisco in the Sonoma wine country I when I was my younger years, I ran Merrill Lynch futures everything west of the Mississippi. And when we got when the Merrill might get out of the broker business and stick to derivatives. I moved up here to the wine country, if you’re gonna shoot me shoot me someplace nice. then sure enough, they got other business. I took it private. And so that’s my, you know, that’s that’s how we are in business today. was moved out of LA and moved up here and seems like we’re still on vacation.


Jeff Malec  02:39

I love it that that was a territory, everything west of the Mississippi to help. It’s a hell of a territory. Yeah,


Ron Lawson  02:45

yeah, there was, what 126 brokers in 25 different offices and we set up, we had set up different I ran the cotton desk for the firm that we had a cattle desk and we desk etc. So it was a good process. It made sense. But one of the things that as derivatives were coming along, Merrill realize that the brokers were were basically driving the boat. They didn’t like that as a as a management style. So they got out of the broker business stuck with the derivative side and the rest is history.


Jeff Malec  03:21

The end, what do you mean by the derivatives they’d rather do over the counter swap?


Ron Lawson  03:27

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.


Jeff Malec  03:49

Let’s dive into that. Interpol first first ever mentioned Interpol on the derivative podcast.


Ron Lawson  03:55

Yeah, it was it was interesting period of time where, you know, 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. Well, in the meantime, all of us have gotten all the brokers all the commodity guys have gotten away from Maryland futures and we all gone out on our own


Jeff Malec  04:22

and wasn’t at Merrill Lynch, Pierce, Fenner and Smith for a while was the actual FCM name I think on the on the floor. It


Ron Lawson  04:30

changed over time as different iterations had had come through. When I when I was hired, I was hired by Merrill Lynch and went through three or four different name iterations in Merrill Lynch, Pierce, Fenner Smith, and then Maryland futures. A curious about cotton and I you mentioned it in one of your questions here is that the firm Merrill Lynch started with money from a cotton merchant. so deeply ingrained within the firm was the whole cotton ethos of you make You know, taking delivery, you know, sample rooms and processing in Manhattan we were, 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 is being forced in the market.


Jeff Malec  05:18

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 earnings 10. Can Gin bar, green bar. All right, I want to call 10 can earn these 10 bar. Tell us a little bit about that. So the


Ron Lawson  05:37

family has one of the few alcohol licenses in the state of California where you can serve beer only. Just beer, it’s leftover from the prohibition days he inherited from his grandmother. They can’t serve wine or hard alcohol. But to the bonus idea of kids can be in there. It’s not a it’s not a 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 ship, see 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 gotta buy the house around there strict with that. So


Jeff Malec  06:36

I 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 Napa so


Ron Lawson  06:49

yeah, you know, takes a lot of cold beer to make good one.


Jeff Malec  07:01

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 really sell off over the last couple of weeks. Yeah, falling from a high of 154 ish and early May, once it the 158 down into the low 90s. So lost, you know, more than a third of its value.


Ron Lawson  07:21

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 did we use this as a as a mark PROMAR for Macy’s closed its doors COVID shut down boom. Less than 48 hours later, we had our cotton warehouse customers in Georgia received cancelation orders on shipping bales of raw cotton overseas to be spun and converted into goods. That’s how fast the pipeline impacted 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 that what they try and do is they try and want everything on a spreadsheet to put an algorithm. And you can do that on the supply side. Count bales count acres abandonment, weather yields, you know, we can figure out we can count supply side demand sides is is absolutely material, you’ve got all kinds of emotional efforts that push and pull at the retail level at the wholesale level at the at the people that die the cut that we’ve had 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, you know technicals we follow very closely that and there’s a pattern that I’ve noticed in the cotton market. I’m doing this for two years, and I’ve got a long term book going back to the 1930s on the charts. 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 100% over the last, you know, since 1941. We had a bottom Don’t be sure. And that was our that 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 have this nice run. Okay, things run and it’s going great goes to a buck 50 Ta, 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, you know, the have a contract, we want this much with an option for more all those options went away. Okay. And where they really started to get panicky he 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 need, because they weren’t sure who could get it to them from which country was it Brazil was a China, you know, India where you were we and all of a sudden, just as the apparel pushback came here shows all the time. So now they’re opening rooms are full, they’re 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 demand side, I’m sorry, on the production side on the supply because there’s drought in in in Texas, and that’s still an issue. I met with a group of Brazilian farmers represent 60% of their production on a on a trip from bare one Santo and they were telling us that their crop is three to 4 million bales less than the USDA flooding on half of the Australian crop. You know, they’re, they’re done. They’re hard trying to harvest and that’s the Mr. Flood. So everyone’s focusing on the supply side. But because the demand side 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 they were printing money because they didn’t have a supply chain problem. And all of a sudden, they they were getting pushed back. So we put all our clients on on notice, look, we know there’s a supply side problem. But now 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’m explaining 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 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 takes 1218 months, from the time you plant, you know, prep the soil for the seed. So you buy a pair of Levi’s at the store. And along that way you got to consider what’s the what’s the cost of land, the rent, what’s the fertilizer, pesticide, herbicide, you gotta buy water, labor, diesel for your tractor, go through the field three or four times grow the crop harvest the crop, now you gotta Genet 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 bales, 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 this is the proof of it. So


Jeff Malec  14:22

that was my that was gonna be my first question it was this a cotton specific thing or a macro thing? And we’re going into recession. This is the Feds going to, you know, kill the economy put us in recession sell your cotton, or you’re saying it was it was sort of both?




Ron Lawson  14:38

I think cotton started to react to it innately prior to the Fed. But once the Fed did raise rates and kind of put a dagger in the heart to the market, you saw cotton broke before the other markets did.


Jeff Malec  14:50

Yeah. And again, wanted to have you on tell us why that is? Yeah.


Ron Lawson  14:53

It’s simply because all of the people that have their fingers in the pie, whether they’re I’m cognizant of and not having an effect on the price of the market, right? I mean, the end of the day, and nobody knows anything more about the market than the market itself. What are the clothes that what were people willing to buy or sell cotton on the markets close every day that that tells you what it’s worth. And when 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. Yeah, that’s that’s what we’re faced with here. So we had no buying from the 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, six to 7 million acres planted, it’s only, you know, 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 planted on the first 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 30, 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 riding 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.


Jeff Malec  16:53

Almost say take the insurance and don’t put in the work right?


Ron Lawson  16:57

Precisely 70 cents cost of production, then it’s now over $1 Because of in fuel costs and all that fertilizer but So here these guys went up playing in every 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 guilt. Okay, no input cost, no cost of water, no fertilizer, no pesticides, no diesel,


Jeff Malec  17:25

but the plant it? Well, they


Ron Lawson  17:27

use put the seed in the ground.




Jeff Malec  17:28

Got it. But so what does that look like? I don’t want to get anyone in trouble. But did they kind of mail it in? Right? If you know you’re gonna do that? Do you just do your minimal effort to put the seed in?


Ron Lawson  17:39

Yes. Yeah. In fact, the the cultural practices were. I’m not pointing a finger at anybody. No, no yards for 50 years as a farmer in one year you get to collect or okay. Yeah, true. Well, normally, you drill seed in with his minimal, the least amount of topsoil disturbance to trap moisture. Well, but the issue is they opened up the bed, they dropped the seeds in and then they dusted over, it’s all the moisture escape, 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 seven 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


Jeff Malec  18:25

real quick on that but they’re not they’re buying this insurance or it’s just government provided.


Ron Lawson  18:30

Well they buy it from the government. It’s the government okay, but they have to actually purchase it. Right. I


Jeff Malec  18:34

think that’s a little unknown, right? When people see the billions of dollars that go in farm subsidies. Are there two things there there’s subsidies and there’s government sponsored insurance. So you have to buy into the insurance you got to succeed they’re just extra if they pass


Ron Lawson  18:50

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’ll we’ll get into that political historical agricultural division. This is just on insurance for your crop to 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 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. In this case, you know, eight cents we would roll the put up for 400 points for and our strikes, they’re getting two for one every time we rolled, they may double investment. Okay? And if you get 100% 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 that does not exist


Jeff Malec  19:47

and there’s no government regulation that you have to actually know right that you can earn money from a hedge on a crop that didn’t exist.




Ron Lawson  19:54

They took the risk of the hedge their bankers financed them. Yeah, results programs we set up So in the end, the farmers are gonna make a buck 30 Buck 40 on a historical yield with zero input cost. Now what most of them are to go and doing now that the


Jeff Malec  20:11

crop in Texas the average over the last 10 years 50 cents or something like what was the what’s the comparison?


Ron Lawson  20:18

Yeah, normally your 65 to 70 cents is a good year for them. And, you know, they’ll do normally two bales to the acre, you know, this is both dryland and irrigated combined. And even the irrigated crop didn’t come this year, because the is normally a irrigated supplement. So use the rain from the sky, obviously, for irrigation, he 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 that the number of acres that could be two to 3 million acres written off is so large, that the insurance guys are what we call, they just tap the table, you know, you show proof of planting. And we know that there’s been no rain for 25 days. So here, here’s your check,


Jeff Malec  21:03

right. So they’re not putting in their own input costs. We’re not gonna spend a bunch of money verifying this bad, what’s bad.


Ron Lawson  21:09

And so what they’ll do now is a lot of farmers are farmers, they don’t like this, they don’t want to go to the coffee shop and not work. So a lot of them are coming back with a with, they’ll go in and Dustin some some you know, safflower something that’s a very low minimal water requirements seed and just see what happens. It’s basically just to keep the ground together.


Jeff Malec  21:30

So let me add, it seems like a weird commodity, right? Because like you’re saying that 1218 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 a in a demand destruction. It doesn’t necessarily snapback 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? Like it’s kind of a it’s not a perishable good, right?


Ron Lawson  22:00

No, it’s not. And there’s there’s an interesting dynamic when you look at it, the utility of cotton of it depends on which end of the cycle you’re talking about talking about, you know, basic T shirts, socks, underwear, versus, you know, paying 80 $90 for a dress shirt. Okay, yeah, we find it fairly inelastic at the low end that people can continue to need to consume, 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% or 70%. When they supplement with with manmade fiber. The big pushback on that though, is the microplastics problem in the oceans is becoming the, 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, you know, I’m not gonna get into an argument. But basically, you know, DDT was the biggest weapon that a lot of countries Africa had against the tsetse flying to mosquitoes, if they any No, no DDT, God, it’s just the off, that’s the stuff that keeps the mosquitoes off. DDT actually kills. And the cotton guys are to blame on anybody else to try and just kill the boll 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 that equivalent to eating a credit card. And they found it in the bloodstream of


Jeff Malec  23:46

like the deepest, deep ocean, right, and they pulled up had microplastics. And


Ron Lawson  23:51

so what we’re seeing is a pushback against manmade fiber and people are preferring the natural fibers. It’s not just cotton, it’s you know, it’s hemp itself. It’s, you know, other men may find the biodegrade at a micro level where the plastics do not. So that’s one of the big push backs that we’re


Jeff Malec  24:08

seeing plastics require fossil fuels, right? They do oil.


Ron Lawson  24:12

Yeah, they come from from that that’s one of the strain 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, you know what I’m


Jeff Malec  24:25

getting. It’s almost like a not quite a luxury good, but it’s like a thing that if, if I have to choose, I’m gonna go by my family food versus a new new clothes, right. Right. Now that might be some of the reasons why it turns over first.


Ron Lawson  24:38

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 they’re looking at, 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 this is fascinating that during COVID When people went from wearing dress shirts, silk ties and, you know, suits, will suits they went to staying at home and wearing heavier hoodies and sweats and, 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,


Jeff Malec  25:24

and they want to be comfier, more cotton that come from more comfortable it is,




Ron Lawson  25:28

right? So we have we the fashion sense is that we look at the tonnage consumed, not the you know, not the cost to it. So we had lower cost goods that had higher relative percentages of cotton within them. And heavier growth, heavier tonnage. So we had a renaissance and consumption, which is now gone. Now, if 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 middle sector that set the alarm up for us.


Jeff Malec  26:02

Yeah, and that was everyone kind of passed over that of like, inventories are building up. It was kind of like this. That was everything right? Toys and bikes, you couldn’t get a bike. Now you can get a bike. Nowadays 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, or the big overview of like, who has the cotton? Like which countries? Where’s it going? Which other countries? 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 shipped back to America.


Ron Lawson  26:44

Yeah. I always think back when when I first started in the industry, you know, the US produced roughly disused number 20 million bales, we spun domestically 17 16 million and shipped three or 4 million. Today, we only consumed two and a half to 3 million domestically, all of it else’s, all the rest of its exported. So the three biggest players are India, China, the US. And each one has its own challenges in the US, we produce cotton for the export market. That 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. That’s the human rights problems in the xinyuan province where they produce most of the cotton, the global apparel industry has turned its back on China for any products made from xinyuan fiber or made in Xeon. So what they’ve had to do is any cotton there and thus are made 80% of their production is there, they’ve had to use that domestically only. And then import bales to be converted and re export it and they still have a very vibrant textile industry. And just last night, we’re hearing from China that they’re restricted their strategic reserve, which they they they wore down they’re gonna refill it, but not with as much with imported cotton, they’re gonna using Yuan. 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 China 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 there is one of their favorite customer customers.


Jeff Malec  28:35

And do you ever even believe them when they say that part of me thinks they say that drive down the price and then buy, right. And, and


Ron Lawson  28:42

they’re really good at that, which is why we talk to our people in China who are actually doing the time. Yeah. When it’s, you know, which lie is true, basically. So China, China is, you know, a big, big drain on the world market now and they will remain that way. We’re a little concerned on the finance side and China, even 25% of their GDP is real estate, which is getting beat up badly. Yeah. You know, in the old line, China gets a cold, you know, China sneezes, the world catches cold. Okay, we got to watch that. The next one is India, India’s big producer and consumer, they just gone through a renaissance in their seed. Normally when they used to 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 the Gambia. What they were doing before was what they called 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 futures prior to that the monsoon shows up and it’s all a rain grown crop of others. Rain grown, its hand picked. It’s a huge difference in the cotton world between irrigated and in dry land growing area of non irrigated, machine picked and hand picked huge differences in values and pricing and quality. So windy is a big, big, big deal. Something that everybody deals with. The one glitch there is that the USDA over the last dozen years, for some reason in their model continues to claim India has inventories of anywhere from eight to 12 million bales of carry at the end of the year. Our guys in India who are who are supposedly owning these bales, they don’t exist. So it’s a widely known situation within the cotton industry that the USDA numbers continue to reflect excess supply in India that really isn’t there. Well, the cash market reflects what’s really there. So whether if the US statistically on board or not, it doesn’t matter that that’s the thing. So that’s the India’s 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 year. So they’re the ones that are big up and comers, and it’s because they can offset with with soybeans, right, they can plant one and plant the other get a double crop and their their problem is logistics. They don’t have the rail capacity, the port capacity, the trucking capacity. But they’re working on that. And it has a history of side this this happened. This was a decade ago, China and their silk and road venture had approached Brazil, and said that at China’s expense using China’s laborers, they will completely revamp the ports the rails and roads have in Brazil, as long as China had first right of refusal on all ag products in the country. Okay, sounds like a great deal. Well, Brazil backed away, and, and to their credit. And if you think about it from a from a global perspective, the last time one country, one sovereign nation decided to help another sovereign nation along this ways, was the Panama Canal. When a country offered to come in, and oh, we’ll take care of you don’t worry, as long as we get ours. So it was a big deal Brazil back 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 you know, in the future. So that’s


Jeff Malec  32:33

it is that tied to deforestation down there, they planting it in where they’re clearing out rainforest,


Ron Lawson  32:38

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 breathe, 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 one ratio, where it breakeven 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 it will we saw, you know, here with the soybean market driving prices up over the last year and a half, two years, we were at it not 12 to one, but 14 to 115 to one fat got to 17 to one 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 price has come down, we’re closer to that traditional 14 to one ratio. So we follow that very closely, to give us an idea of what’s going to go in the ground. And once it’s planted, you know, the ratio doesn’t matter. But we follow that pretty closely.


Jeff Malec  33:55

And so us what what are all those countries and billions of dollars, right? Like what does that equal in terms of the crop being sold?


Ron Lawson  34:05

So let’s just say that, over the next 12 months, there’s about $55 billion dollars it with 90 and 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 from the current crop, right? Yeah. So all told 100 billion maybe, you know, patted up 120 100 $30 billion of total rock cotton inventory, over a 12 month period. You know, what’s in the ground, what’s in the veil, what’s in a warehouse and opening rooms,


Jeff Malec  34:46

and how much of America’s gets shipped over to Asia to get turned into clothes and shipped back.


Ron Lawson  34:52

We are 25% of the world’s global consumption at the end user level, we’re not that in for itself. We’re going to produce, and I’m looking at the was the numbers here and there, got them here in front of me. And they were going to get an X set here coming up. But the US produces, you know, the numbers for the coming year is 16 and a half million bales versus 121 of the world. Okay. And our domestic use is only 2.5. So we only spend two and a half 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%.


Jeff Malec  35:31

Wow, that’s even greater than their energy. Right? That’s unbelievable. Yeah, because we’re less than 10% of the population. Right? We’re closed from all sources here. Whoa. 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 peat, that’s the flowering part of the seed, I guess. Yeah. How does it naturally reproduce that will eventually fall off and run around in the wind.


Ron Lawson  35:59

And from within the flower, very much like you know, you’ll see a rose develop that hard but still you get that letter the bowl, okay. 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 the 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 craps. 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 is still done in some countries. The machines pick the balls off and they get put into what are now great big round bales similar to you see big hay bales with a plastic. They take those


Jeff Malec  37:06

in my kids call those marshmallow fields, right driving past Wisconsin and you see all those white big rolls look like huge marshmallows.


Ron Lawson  37:14

They do and they used to do it and cotton was put to modules which looks like huge loaves of bread. But that required and that was forever until actually the Odysseys were the ones that drove the drove this this trend till about 15 years ago. And they required these big trucks to come in and pick up the modules and haul now they have these bales and they stick a fork and put them on the trucks and slide these and move them. They remain in plastic on the ginyard and then cut the plastic off so that the rain doesn’t hurt it. It goes through the gin, Eli Whitney cotton gin, right? Yeah,


Jeff Malec  37:48

everyone. Why was that such a thing in grade school? Right? Everyone knew about Eli Whitney.


Ron Lawson  37:53

And it was it’s amazing if you if you go back if you’re an agricultural story, and 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, drive it to steam. All right, and then then you have electricity. And you just just over time you look the industrial revolution where most of the cotton was, you know, grown, processed and harvested. And it all comes back to where’s the cheapest labor?


Jeff Malec  38:33

Right? So that was the US colonies for the longest time. Yeah.


Ron Lawson  38:38

Right. I mean, you can make a very strong case that our forefathers sitting around a bar and in Boston said, Hey, let’s start a country. Well, we can pay for it with this cotton, because they want it we got it. And that was one of the finances that and tobacco with the financing of of the War of Independence and a big component in the Civil War, because the cotton was produced in the in the southern states, but all the banking and financing was done in the Yankee northern states. Yeah.


Jeff Malec  39:09

And so that was the ultimate. We’ve touched on a lot of issues here but right they had free labor and slavery. So that was a little tainted, but and what were their derivatives markets back then were their futures markets or just where was the cotton trading hub was it was Memphis.




Ron Lawson  39:24

It was it started it was 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 sub of the United States because of the Mississippi River and everything could go to the world. Yeah. 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 the literally the cotton would have to be harvested, shipped to New York, where it was paid for and then sent over to Europe for to be used in Europe. And again, that was before the, you know, when the cotton gin was invented and then brought back here and then the spinning mills were, you know, the, the technology was stolen and brought back to the US and we put it along our waterways and we’re able to then spin the cotton into into fabric. So that was 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 to you? Why don’t we just send it directly to, you know, to Europe?


Jeff Malec  40:31

And so that must be why the New York Board of Trade, right, the cotton and cocoa exchange was out a New York, which I was didn’t make quite much.


Ron Lawson  40:40

They had a New Orleans Cotton Exchange forever, you know, there was there, then the New York any of the coffee, cotton exchange the coffee, cocoa, cotton, orange juice to start out and then and then the New York Board of Trade, and then you had you know, came along ice IntercontinentalExchange. 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, yeah, to a public company, who’s you know, by law, they’re, they’re obligated to make as much as they can. It’s not their shareholders. Yeah, the 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 busts and commodity markets.


Jeff Malec  41:38

Right, that’s a whole nother discussion, because the LME cancelled all those trades in nickel, because, hey, they might have had to lay out a lot of money in their for profit exchange.


Ron Lawson  41:49

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 in the in the gold market, you know, in the silver market with the hunts and yeah, great stories about that, but it seems in the commodity markets, because they’re so leveraged by nature. And because they’re at the crux of everything, I mean, you know, crude oil is the you know, the crux of energy, food, you know, corn soybeans, wheat the crux of food, you know, there’s it’s like a gate you know, where the where the hinge? Yeah, exactly. Make me go sweats like a long ways.


Jeff Malec  42:30

So, who are the big type of commercials who play in this game?


Ron Lawson  42:34

Yeah, it used to be ABCD. Hollenberg, Bungie Cargill, none of it now it’s a little shifted. You got I was making a list here is who the people that are more involved. Now you get, you know, Cargill, Nobel econ, Louis Dreyfus. Oh, long. And then there’s there’s other small you know, well known historical companies, just Smith and sons, Plexus Reinhardt. Then you have the co ops here and Kyle. Yeah, here in California, we have cow caught. You have staple? Cotton is another Big Co Op, and the PCCA which is in Texas. So those are those big co ops do is they’re absolutely the same as it is in a grain market where they let the farmers produce and worry about that. And then the coop takes care of the marketing. So they’re the big players as far on the supply side. Yeah. The merchants then are the ones that get it from the growers to the mills. Right. And they’re the ones that are the the I always said if the merchants have the smartest guys in the pipeline’s if you give him any rules, they’ll figure out how to beat you


Jeff Malec  43:50

regardless of drag. And that’s like Bungie and those kind of guys. Yeah, but


Ron Lawson  43:55

Louis Dreyfus is the is the big now. Big one now. Oh, LOM is huge and noble. Those, those are the big international guys.


Jeff Malec  44:02

And we’ll throw out that I never knew until 10 years ago that Julie, Julia Louis Dreyfus, right, from Seinfeld is that’s her family. Right? That’s her grandfather, whatever Louis Dreyfus was. Yeah. I don’t know if they’re billionaires, but a lot of money. Right.


Ron Lawson  44:17

Yeah. And there’s there’s a lot of, you know, intricacies involved ESeries in any market with different issues on different divisions of the company and the personalities involved. And cotton is such a I look back when I was in Maryland, I was running all the different desks I’d have to go to the cattlemen Association or the the scrap 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 in the market back and forth, and up and down on the bell rings. Had to go get a beer. Yeah. It was heavy, heavy competition. But at the end And they’re all in it together, 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 you we had the new CFTC Chairman came and spoke spoke to us and, 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, it’s very unique amongst all the commodity groups, and that’s the cotton guy to that old school. Like you said that historically, they’ve been around a long time, you know, you have old family traditions, old, old lines that are, you know, nobody steps across. And that’s, that’s one of the attractive things about cotton.



Jeff Malec  45:48

And so the merchants get it to the males, and then the males are facing off with Levi’s or whomever.


Ron Lawson  45:53

Yes, you’re It’s a misunderstanding, a lot of the times it’s very much like in the 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 $1, I’m making 2% on $1 product, right? Margin oriented, so very risk averse, they hedge so that, you know, the males we’re talking about, right? The males 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 buying call on call is is the term. And it’s common industry in other in other industries as well. It’s a common place where I’m, I’m familiar, 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 gonna 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 gonna say, you know, I don’t want that. So, what we anticipate, and I’m not, I’m not in any way saying this disparagingly, it’s just it’s a fact that there’s we, we’ve seen this movie before. After 40 years, I’ve seen this and other marks I’ve been I’ve asked absolutely felt it and been involved with in cotton, where we’re gonna get arbitrations, there’s gonna be significant numbers of arbitrations, because mill says they don’t have the money. I can’t I can’t pay you that because I can’t pay you that it’s not good. I don’t I’d like to, but I can’t.


Jeff Malec  47:37

Right, like going back to your numbers. 60 rounded up 60 billion is now the total crap is now only worth 40 billion. Yeah, right. If they have to pay up the 60. They’re like, I can’t I can’t get it.


Ron Lawson  47:48

Precisely. So there’s gonna be some disruption coming that to me. And this gets again, a little more esoteric on the content that’s adding to the angst. You know, oh, my God, how bad is this gonna get? How bad? How badly will that reflect upon the financial situation? You know, people going bankrupt never hurts an economy never helps an economy. Yeah. So we see that as a real issue.


Jeff Malec  48:14

It’s like the unintended unintended consequences of all these rate raises, and we’re slowing the economy down where you’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.


Ron Lawson  48:31

So what a lot of the 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 sourcing Summit, where buyers of cotton people to buy us 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 US has. So all the buyers come together from all over the world. And it’s been going on for a number of years. I 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


Jeff Malec  49:14

12 years ago, and it’s spinning is making the clothes actually


Ron Lawson  49:17

thicker. Yeah, they were buying cotton. And they were really the Bangladeshi Government was trying to really get that industry buildings and hired a lot of people you can, you know, cheap labor, import the stuff easily and aim exported to, you know, to them. So, they came in, they learned how to buy on call. Okay, we’re great things are super. We had the market in 2011, up to $2.27, and then come back down and yeah, they all imploded. So here we are, again, at a same similar situation. I’d 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 done redouble our efforts. To explain to guys how to use options, as opposed to futures are buying fixed price or going on call, simply to give you the protection, like the high sleep ability 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 there 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 there’s 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


Jeff Malec  50:39

the money. You know, so who’s doing that the mostly the commodity


Ron Lawson  50:42

banks we are the clientele are not just the producers in the spinners in 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. And the commodity banks are very eager to be premium sellers, because they can take all of their structured positions, buying and selling different insurance levels, knockin knockouts, swap all these different things, they can put them into a computer program. And we 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 next to zero, risk overnight. And then they can move in and move out as they go. And so then the during all this time, they’re collecting all the premium. And you know, statistically 85% Of all the options never trade expire worthless. So if I take you to Vegas, and tell you to bet red 85% of time, you’re gonna win.


Jeff Malec  51:58

Yeah, well, the downside of that is the one the 15% of time you lose, you’ll lose it all. But that’s interesting, because we talk on this podcast a lot with volatility traders and hedge funds, right, that are always talking about the market makers in the equity index options are essentially doing the same thing, right? They have, they’re selling all this product they have, all of a sudden, they have a delta, they have a gamma, they want to flatten those all out and just earn the right earn the spread on what they buy and sell, right, like market makers, so they have to move massively in and out of the market in order to keep their flight Delta’s.


Ron Lawson  52:34

They just collect the Delta, they collect the time value and what you see every day as we watch again, if you see the volume, it’s always at the same point, same 20 minutes before the close the volume peaks. Was these guys coming in and taking the offset? Every single session?


Jeff Malec  52:50

Yeah, I think a lot of that is totally algorithmic, without question,


Ron Lawson  52:55

Yeah, question. That’s, it’s the same thing when we have a crop report, all these computerized trades are there programmed 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 in boom, bang, they traded them. And what and so often in cotton, because it’s cotton, screwy commodity, you’ll get things that they go back and redo that there’s no way to program. The what is the multiple what is yeah, if we readjust production over the last 10 years in, you know, Pakistan, all these different numbers. So every time we get ahwazi 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 marshals right back to what we’re supposed to


Jeff Malec  53:49

wait, you’re saying the USDA report isn’t entirely accurate every time? It’s close, but it was that was my attempt at sarcasm because it’s terrible. I can’t even believe it’s like still a thing. It’s it’s so wrong.


Ron Lawson  54:02

When I try to explain it to you guys. I said look it by its very nature, it’s a look back model, right? It’s never looking forward. It’s only a look back model based on a survey. Yes, and no, they do. In fact, we had one of our clients, I’m not, 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, like absolutely opposite of what the USDA had. And they call them said, Where do you come up with these numbers? And he could find it in me that he had his own guys out survey, when he told the USDA goes, Ah, I know some guys inside your organization and I get I’m getting the leak. And they just went nuts. They just went he was way. But anyways, it looked back numbers. And then what we have to get over is even though they’re lookback numbers, so the only numbers we have for the next 30 days, so we get the next report and in the past, and it’s still for the bigger companies. It’s they’ll have their own guy. I mean, Louis Dreyfus has their own guy that goes out, looks at everything does all that stuff and does the analysis. And they’re way ahead. They’re days, months ahead of the USDA. So,


Jeff Malec  55:13

so if you’re trading off that as a retail trader, like, buyer beware, right? Like, it’s gonna be wrong. There’s guys who have known the number more accurate number of weeks ahead of you.


Ron Lawson  55:24

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 markets already it already knows it. So that’s one of our you know, rules around here


Jeff Malec  55:44

you’ve been mentioned we’ve been talking all this stuff cents per pound. So right, we’re at 90, what are we at nine cents per pound?


Ron Lawson  55:52

Yeah, at right now to December at 920 per pound. And each each Bale of Cotton is 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


Jeff Malec  56:13

then you said before, two bales per acre.


Ron Lawson  56:16

Okay, so for instance in just depends on what kind of cotton you’re going, yeah. Where are you growing and how you’re going out? So here in the in the United States, in the Delta, I’m growing cotton the way my granddad he didn’t know tell me any different if they’re gonna make, you know, two or three quarters to three 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 for four and a half bales. Okay. In Australia, where they’ve only been growing cotton, intensively since the 1960s. There are six, seven bales to the acre. Wow.


Jeff Malec  56:58

And it has more water.


Ron Lawson  57:00

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.


Jeff Malec  57:25

So they’ll really come back, these rows don’t fit.


Ron Lawson  57:29

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 mean, there are 100% x y 100% 99.5% export. I mean, they don’t need to spend much cotton in is that that many? There’s more people in LA than in Australia. So yeah, exactly. You know, so they it’s they’re an export, you know, they’ll do their if their goal every year is 5 million bales. And their goal is to make 500 Ozzie dollars a bale? Well, this year, it looks like even with the flooding they had after half the crop was picked, they’re gonna they’re gonna do five and a half million and they’re making six $700 bail. They’re they’re doing fine.


Jeff Malec  58:18

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,


Ron Lawson  58:27

right? It’s not quite autonomous, but these guys know where to line up and, and stay on that. And that’s for all their crops. I mean, they’re just, that’s just the way that’s one of the things so they’re, they have a higher yield. In countries where they’re growing. There’s other cotton’s and people is the funny part. Most folks are more informed of well aware of very specialty crop cotton, like organic. Okay. Oh, I organic cotton. It’s such a small it’s, it’s it’s a rounding error in the global production. Right. Yeah. Pima cotton is grown in the US exclusively. And it’s one of the ELS extra long staple fibers that’s grown and Egyptian is the other Oh, Egyptian cotton. That


Jeff Malec  59:13

was Yeah, I was gonna that was on my list to ask. Yeah, so same thing. Yeah. So again, that’s a marketing ploy. It seems like yes, yes. In


Ron Lawson  59:21

fact, they’ve actually, there was a 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, you know, Walmart, Kmart, everyone’s holding up the machines, the machines, and he started adding up and he went out and did this tremendously. And he found that there was 100 times the amount of Pima product being sold and it was pima cotton being grown. And so he went to his to his merchant and leave the name out 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.


Jeff Malec  1:00:03

Like you can get a wagyu steak burger at Burger King or whatever. Yeah.


Ron Lawson  1:00:08

So what happened was then this became an issue. And they 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 play, they can get some of that fiber, and at a DNA level tell you where that fiber came from. Now, here’s the backlash Welspun Big Endian in the biggest Indian spinning versus they got caught saying everything was Pima, and it wasn’t. And it was such a scandal all of the US merch, all the US apparel just turned her back on him and their stock dropped 40% overnight, going back to three years, the same situation now exists with xinyuan cotton, they can test to see if Chinese products contain xinyuan fiber, which the world is universally turned his back


Jeff Malec  1:01:10

  1. So their slave labor work in the fields or when lights Yeah,


Ron Lawson  1:01:14

terrible things that you’re claimed I’m not going to get involved politically, I’ve never been there. I’m going on. I just know if, if it’s bad, it’s bad. And people don’t want to do 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 under capitalism, yeah, people care. So now they’re having to learn how to deal with that. So that that whole thing on the the Pima cotton spurred this whole DNA study. And the reason pima cotton will go back to extra long staple is that 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, micro Nair, which is how fluffy The thing is and contamination so those are the things that are very instant 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 it really high end, US cotton machine picked, which 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 when these high speed mills and the high speed spinner, try and spin these things, it breaks and it causes naps, which you see on a sweater sometimes. As the ball. Yeah, these are all things killed me naps. I love it. Yeah. Going into all the, you know, this is going off into the alfalfa, the cotton world. So


Jeff Malec  1:03:00

don’t overpay for Egyptian. But you’re saying it is as good. It’s just been over marketed and you can’t be sure it’s pure Egyptian cut.


Ron Lawson  1:03:09

Yeah, if you really get it, you know, it could put a little bit but it won’t be 100%. 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 in there with Brooks Brothers. And with 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.


Jeff Malec  1:03:41

And what are your thoughts? It seems to me like more and more of my clothing right Lululemon are like, I don’t have 100% Cotton golf shirt anymore, right? It’s all this performance, right 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,



Ron Lawson  1:04:00

I think the end game, the awareness of the microfiber of the microfiber plastic micro plastic pieces is really going to push towards natural fiber. Now, again, that could be more hemp. There could be you know, a greater reliance on bamboo.


Jeff Malec  1:04:19

Yeah, I’ve got a few bamboo shirts. I love some bamboo underwear. Company. Yeah.


Ron Lawson  1:04:24

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’s a thirsty crop. It uses too much water. Yeah, but most of it comes from the sky, you know? So we’ll 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 or besides you go through all the list, but that’s what I now 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 $1.07.


Jeff Malec  1:05:12

And that’s the fertilizer, which we have supply chain issues, Russian issues and diesel additives.


Ron Lawson  1:05:19

Right? So you know that the question then begs to be answered, well, the dollar seven and I’m looking at next year’s Red Deck, the December 23 crop, right now is priced at 75 cents, how much cotton you’re going to plant if it costs $1.07 to grow, and you’ll only get 75 cents. So low prices will cure low prices as assuredly as high prices cure high prices?


Jeff Malec  1:05:44

Yeah. What do they do instead? They’ll plant soybeans


Ron Lawson  1:05:48

right now. Yeah, the ratio when I look at the ratio of the new crop soybeans, the new crop cotton is now at 16.4. As opposed to the like, this November, and this December, the ratio is 14, eight, we’re at 16. For ages 16 Five, which heavily favors producing soybeans that don’t require you know, there are a night there lagoon they fix nitrogen in the soil. They don’t You don’t have to put nitrogen fertilizer in. So that’s what behooves the the soybean production, you know, for the new crop, what will will play it, you know, in the fall,


Jeff Malec  1:06:25

what what happens going a little off topic or what happens when diesel is so expensive that, like basically, it makes all cost 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 plant anything.



Ron Lawson  1:06:45

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 so easy. It’s economics. If I’m a corn producer, a wheat grower of soybean grower and I can’t afford the inputs, I just want to put them so you can see global yields decline, right, you don’t get the optimal return out of the soil. And in what you are seeing, and we’re seeing it here. Maybe it’s just because California where fruits and nuts but one of the strengths what we’re seeing here to this day, as we speak, that a guy in here yesterday, they they have a biological product, that when you 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’ll guys fertilize, fertilize, fertilize, fertilize, well, what they found is you can you can cut your fertilizer costs in half and put this this extra mint from the worm casting is made a tea. Not only do you replicate you get more out of the soil, but your yields go up.


Jeff Malec  1:08:03

And what worm casting we’re talking worm shit. Yeah, exactly. They’ve rebranded it to worm castings. So


Ron Lawson  1:08:10

what they do is they take these these long vats, if you will, of organic cow manure from an organic dairies here, and then the top foot and a half are all the worms and they pile the stuff on and that what comes down out of the bottom, they eventually cut off. They take this mulch, and they steep a tee water through it and then all those nutrients you know you’re a kid, they always say those 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 will be two or 300 different antibiotic breakdowns that go into the soil and release and make the nutrients available to the roots of plants in the soil that already is there without any additives. It’s also it’s a drought or the better in the drought. There’s all kinds of see yields to get a longer shelf life more flavor to the 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 on to the cannabis crop. They made 64 more dollars in yield. So 50 cents in $64 out that’s that’s a pretty good ratio. And then he grew into the strawberries, where it’s a very high dollar you can pick crops so the same type of results. So now all of a sudden the great guys right the wind guys have big margins. Yes. They’re realizing that when they plant grapes, it’s normally a five year wait for for a crop to pick, it’s down to three. That’s how fast the root systems expand with these products. So you’re getting innovation along those lines. Yeah.


Jeff Malec  1:09:47

And then to me where I was like, like you said, satellites, eventually will have electric tractors and whatnot.


Ron Lawson  1:09:53

Right? Well, there’s there’s actually out here for spraying almond trees, which is a big industry out here now It’s autonomous. Just machines come out of the barn. They spray with they’re supposed to autonomously, no human involved and they come back and park themselves in the barn.



Jeff Malec  1:10:09

Yeah. Oh, man, we I knew a guy once had run some hedge funds made a bunch of money and then he bought almond farms. It’s like I make 10 times when I made an edge fund world. Oh, almond farms,


Ron Lawson  1:10:20

right? Down out here to what can you convert a drop of water into this the greatest percentage return with the exception of if you go to a permanent if you will, they call them permanent improvements, trees. And almond tree has about a 2020 years span before the production level breaks down they have to replace. So 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 the idea is that well I’ll have some of my crops and permanent 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 with


Jeff Malec  1:11:02

an eye tag. Probably not too far of a stretch to see California be like no more almonds. takes too much water. It’s bad for the for the Earth.


Ron Lawson  1:11:11

Yeah, you know, I can see that. Again. A lot of the a lot of the rain. Yeah, they almost require this much water. A lot of it comes from rain.


Jeff Malec  1:11:18

Okay, so what’s your argument? Yeah, I mean, that gets glossed over when people like, oh, man, she’s too much water. Right? It takes such and such water to grow and


Ron Lawson  1:11:27

right. That’s 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 eat anyway and off acreage, and nobody’s going to cultivate anyway. So it’s yes, this is the route the caloric requirement, my degrees in livestock production management, from UC Davis. And so I have an intimate understanding of the conversion process. And if you’re going to have a bunch of range land that’s either going to catch on fire or be grazed by cattle. Where’s the downside and grazing the catalog?


Jeff Malec  1:12:00

Yeah. Which would you prefer? Speaking to 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, I become the winemakers and all they’re doing is like, going down the same lane. I’ll grow in these big bold cabs. Right rip ripping out other vines to plant cabins 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 yours anymore, and it’s just becoming like one taste. He’s kind of like, what’s the fun in that? But what are your thoughts?




Ron Lawson  1:12:44

It’s usually I go into Davis, you know, I played football, baseball rugby there and a bunch of my teammates were viticulture student get to know Him. And eventually I you know, stay in touch with them. And they’re all big wine guys now, I mean, the biggest. And so he talked to these guys and


Jeff Malec  1:12:59

Venky what was the one I said? Well, Bungie, I mean, oh, God, like bunch, you know, Kurt Venky. I think his name is Bengi. Okay, yeah,


Ron Lawson  1:13:07

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 you were a real princely guy to make good wine. And a lot of it was not good wine. Yeah, in fact, one of the bunch shot gun like buncee winery is the oldest winery here and you know, they lost a million cases of wine and the San Francisco earthquake in 1906. Okay, so when you talk to the family Oh, Jimmy bunches? He says yeah, you know, when when prohibition ended, I went to the family say we got to go start growing grapes again and get out of this 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 go hey, yeah, which groups are you going to grow? I’m going to try that that chart chart on a oh, I’m going to do that. I’m going to try that P not P not you know and the volume or and all that then you 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


Jeff Malec  1:14:12

very popular right? Yeah. Well, they’re just farmers at the end of the day, right?


Ron Lawson  1:14:16

It’s That’s exactly it. That’s exactly the to the to the very day in the bunches are classic. You know, they got a great stories about them.


Jeff Malec  1:14:26

When the great name Bundschuh. You unlike buncee.


Ron Lawson  1:14:29

Right. So Jimmy bunchy 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 had a bus and it was his mom and all the celebrities and they were supposed to go to Napa where you just gone and he was following the bus in his helicopter. Well, Jim Bundschuh goes down and gets a CHP uniform from a costume takes a motorcycle out and makes the bus. He stops it and says you’re not, we’re not going to subject you to drinking these terrible Napa wines, you’re going to come to make 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 here’s the helicopters. Finally, he’s supposed to go this way. And all of a sudden, they’re cops the bus with his mom in it. And it’s just panic, panic anyway, they find they land they find it by the time they get there, everybody was having a great time drinking Sonoma wines and, and his mother was quoted at 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 varietals. I don’t know if you’re how much you know about wine. I’ve worked with a million stories, but you know, that movie Sideways? Yeah. Okay, well turn everybody off. Number low. Old, it’s an old, it’s an old country wine below is like, the Bordeaux is 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 him 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 it. But what you see are cheap guys are changing over in in different boutique areas where they’re going to more of the 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, you make


Jeff Malec  1:16:48

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.


Ron Lawson  1:17:03

No, I’ll just I’ll stick with cotton. That’s what we do best. The I think with the right now we’re in an environment and the bull market is not over forever. It’s just over for now. And, you know, inflationary, 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 an 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 it’s a very simple, simple discussion here. You’re either going to reach an undervalued level, where the conversion allows the trade to make a fundamental decision. Okay, 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 to your reach a technical level, where the money manager speculators magically delicious, decide, this is where we want to own it. Okay? Well, if you want to look at, you know, some type of moving average of Fibonacci numbers, 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 in a kind of, not for now, but wait a minute, type of environment, the market will come the volatility values there. 44% Normally we’re 18 to 24% Fall. It’ll come down


Jeff Malec  1:18:37

the cotton, the cotton VIX, yeah, yeah. Cotton VIX is at 44


Ron Lawson  1:18:42

It’s a mess. So we’ll get the emotion out of the market. I still think there’s probably a problem that we don’t 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, you know, Ukraine deal and made tons of money on the market. And so there’s always those guys if you said, you know, the smartest guys out there, they’re out there running with the money. So then that’s, that’s what’s going to drive it. So that’s what I think


Jeff Malec  1:19:16

the CTA is we track right but 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.


Ron Lawson  1:19:29

Yeah. The growers are not short, because they don’t know what their crop is. We had we have Texas farmer, you know, this guy’s got 5000 acres. He thought he was 20% hedged. But because of the failure of the crop, he was 60% hedge your I don’t know I mean, all of a sudden not because he 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 micro production. In perspective, so it’s going to be you know, go up slow come down fast Chutes and Ladders we’ve already had a dead cat bounce that was just happened now the markets coming back we 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 to that has to be filled with Yeah, 80 cents to me might might be the extent of this thing. And at least it’s a lower risk approach.


Jeff Malec  1:20:25

And what what’s your cotton informed view of we’re going into recession, the Fed will keep hiking,


Ron Lawson  1:20:33

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, etc. I don’t think it’s going to be long lived. You know, one of the unintended consequences of lower interest rates with so much money around and you know, we all are appalled. appalled that you have to get a 4% home loan.


Jeff Malec  1:20:55

Oh my god on American right. Yeah,


Ron Lawson  1:20:58

the first law I read the first house I bought I was I thought I was giggling I made 11% That was great. So we’ll get the growth back. We got to get over the shock. I think there’s there’s still health questions it will China shut down will the supply chain gets 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 the screaming heads on TV and look at facts. It looks at numbers. I always say that, you know, the only the only guy that really knows what cotton’s worth is Charles chart. The chart knows. Yeah, Charlie knows. That’s it. That’s it. So anyway.


Jeff Malec  1:21:41

Awesome. Well tell everyone where they can find you where they can sign up for that newsletter. All that good stuff.


Ron Lawson  1:21:48

Yeah, logic It’s Lawson O’Neill, global institutional commodity advisors. But logic, logic We try to post some stuff now and again on LinkedIn to try and you know, Chum the Waters if people are interested. Our letter, the way we write the letter is, we expect you to understand some of the stuff that it’s common knowledge. And so we write it from that perspective. And we realize that everyone that has any interest in this is got a ton of stuff to read every day. Yeah, so we make it one page. One page, if I can’t get what across what I’m trying to get one page if you know, one of my clients says it’s 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’m talking about as your letter makes you It forces you to get to the end. So that’s a little hook it’s a it’s a trick I learned from a guy named herb Kane that used to right here in the San Francisco Chronicle for he was a legend for years. So he just something you know, just a little game you figured out that’s good. There’s a lot of bad puns and in rock’n’roll lyrics, so that you understand it and


Jeff Malec  1:23:13

the way to do it. Awesome round with it’s been fun. Thanks so much for the download on all things cotton, I appreciate it. All right. We will talk to you soon and next time I’m out they’re gonna stop by. Hope you do. We’ll meet for a beer at earnings as fast. Have a good summer. You too. Thanks, Ron.

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