cotton 2012

Cotton

Cotton was one of the best-performing assets of 2010, with the cotton ETN, BAL, gaining over 95% on the year. After soaring to start the year, prices came crashing back to earth when a number of factors combined to create significant headwinds for the fluffy commodity. Global consumption for 2011 was expected to surge, but unfortunately, the expected 120 million tons of cotton use was revised down to 113 million after issues in China and Pakistan led to lower demand. As the need for cotton began to cool down, supplies ramped up all over the world, a deadly combination [see also Inside Cotton’s Epic Crash].

Cotton prices are currently sitting at their lowest levels in over a year, creating a juicy trading opportunity. While prices have certainly fallen from the mid-year highs, it is important to note that cotton was relatively range-bound between 70-80 cents/pound for the last few years. It could be that cotton is simply correcting itself to a sustainable level, but after watching prices hit $1.30/pound there is also a considerable upside potential for traders. No matter which way you think cotton will move, there are a number of ways to make bet on the commodity.
•TT Cotton: This NYMEX futures contract allows investors to make a play all the way out to the end of 2013. It should be noted that these are not optionable contracts and their trading volumes can be rather low simply because cotton is not as popular as something like crude oil.
•Dow Jones-UBS Cotton Total Return Sub-Index ETN (BAL): This ETN is one of the most popular ways for investors to make a play on the commodity as it tracks front-month cotton futures.
•Monsanto Co. (MON): This seed maker will present an indirect play on the commodity, but can still offer nice exposure to cotton.