Cotton, the fluffy commodity, was one of the most talked about investments of 2010. With a number of factors combining, cotton prices spiked to historic highs last year and led to a number of investors jumping in on the trend, only to get burned when cotton tanked midway through 2011. Global consumption for this year 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, putting downward pressure on prices [see also Inside Cotton’s Epic Crash].
Last year saw the Dow Jones-UBS Cotton Total Return Sub-Index ETN (BAL) surge by 96%; this year that very same fund is down over 22%. Cotton prices continued their winning ways for the first few months of the year, climbing all the way to just above the 130 cents/pound level in early April. With prices now sitting at 87.42 cents/pound, cotton has been mauled by a decrease of nearly 35% from its mid-year highs. Not only that, but prices are now sitting at a 15-month low, as euro drama and shaky markets have combined with high stockpiles to bring this commodity back down to earth. With cotton sitting at an enticingly low level, there is a considerable opportunity in establishing a position in the battered commodity [see also Ultimate Guide To Cotton Investing].
How To Play
For investors who have a strong opinion on where cotton is headed or for traders looking to make a quick return, there are a wealth of options available. Perhaps the most direct method comes from the March TT Cotton futures contract offered on the NYMEX. The March contract is currently the most heavily-traded future and will offer the best liquidity. The previously mentioned BAL is another one of the most popular ways to make a play, with an average daily volume nearing 50,000 over the trailing three month period. Investors can also take a more indirect approach with stocks like Monsanto (MON) who’s profits do not depend solely on cotton, but certainly rely a great deal on this soft commodity [see also 12 High-Yielding Commodities For 2012].
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Disclosure: No positions at time of writing.