China Demand Gives Cotton A Boost

Cotton has gotten plenty of attention from investors in the textile industry recently. Last year, the soft commodity suffered significant losses, surrendering just under 13% on the year. This year, however, rising demand from China has the bulls lining up to place bets on what they believe will be a great year for cotton [for more commodity news and analysis subscribe to our free newsletter].

Cotton Prices Are Rising

The recent rise in cotton prices is a case of simple supply and demand economics. China’s textile mills are importing more cotton than analysts expected, even though the country’s warehouses are brimming with stockpiles of cotton. Though investors logically thought these stockpiles would reduce the need for imported cotton, Chinese manufacturers are instead choosing to import higher quality U.S. cotton for approximately the same price.

Thus far in 2013, auctions of stockpiled cotton run by the China National Cotton CottonReserves Corp. Mills have seen lackluster demand as most of the cotton has been rated as below average quality [see A Deeper Look At China's Commodity Industry].

On the supply side, the United States has seen a dramatic decrease in cotton plants. The National Cotton Council forecasts that cotton planting will fall to the lowest level since 1983, shrinking 27% over the next year. This combined with China’s growing appetite for the commodity has pushed prices significantly higher; since August, cotton has jumped 17%.

In addition, U.S. exporters have taken some significant strides in ramping up international trade deals. Over the past three months, U.S. export deals have amounted to over 3.8 million bales, the majority of which will go to China. In 2012 alone, U.S. cotton exports to China climbed 60% from the previous year, and analysts aren’t expected this trend to slowdown anytime soon [see Think You Can't Afford Farmland? Think Again].

For those looking to place a bet on the soft commodity, the futures market is perhaps the best option. There are, however, two ETFs that offer exposure to cotton:

  • iPath Dow Jones-AIG Cotton Total Return Sub-Index ETN (BAL)
  • iPath Pure Beta Cotton (CTNN)

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Disclosure: No positions at time of writing.

About Daniela Pylypczak

Daniela Pylypczak-Wasylyszyn is a regular contributor to CommodityHQ.com, where she primarily focuses on commodity producers equities. She is also an analyst for ETFdb.com, where she contributes articles and analysis each week. Since joining the team in 2011, Daniela has quickly grown to be one of the most widely-followed authors in the industry. Her articles are syndicated in a number of online publications, including Financial Advisor Magazine, Fidelity.com, and Yahoo! Finance. Daniela is also a contributor for TraderHQ.com and Dividend.com. Daniela graduated from DePaul University with a bachelor’s degree in finance and economics.
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