While many commodity investors and traders primarily focus their attention on larger natural resources like gold or oil, there are plenty of other opportunities in the space; one of them lies within the soft commodity of cotton [for more commodity news and analysis subscribe to our free newsletter].
The cotton plant is used in a host of textile applications, while its seeds can be refined into cottonseed oil and used for human consumption like any other vegetable oil. Given the planet’s growing population, demand for the soft commodity has exploded over the last few years. This rising demand has only been met with inefficient and volatile supplies, as some of the major growing regions–like India, Brazil and Pakistan–deal with adverse and unpredictable weather conditions. As such, cotton price volatility makes it a prime target for investors looking for a trading instrument.
So far, cotton hasn’t disappointed on the return front this year. Already, cotton futures have jumped to their highest point in 11 months, with ICE cotton futures for May delivery reaching $0.94. That’s the highest for a most-active contract since March 30, 2012.
Much of the price fervor is coming from rising demand in China. Beijing–through the China Cotton Association–has agreed to extend its stockpiling program of the commodity, and will renew cotton stockpiling from September 2013 to March 2014, with no upper limit on purchases. With China purchasing more and more cotton to add to its reserves, analysts estimate that at least half the global stocks of the fiber will be locked up in the Asian nation [see A Deeper Look At China's Commodity Industry].
At the same time, cotton plantings are expected to be 27% lower this year; this represents the lowest level of plantings since 1983, according to the National Cotton Council. Lower plantings, stockpiling from China and additional global demand–pegged at a 2.6% increase by the USDA–could send cotton prices higher throughout the year- especially in the crucial summer months. Cotton has historically seen some of its biggest price jumps during this time as volatile weather patterns in its key growing regions–including the United States–can shift the soft’s fortunes higher.
How to Invest in Cotton
Given cotton’s expected seasonal and demand-based boost, investors may want to get in on the soft commodity today.
iPath DJ-UBS Cotton ETN (BAL): Launched in June 2008, the iPath DJ-UBS Cotton ETN BAL) is the oldest and largest pure way to play rising cotton prices. The fund tracks the Dow Jones-UBS Cotton Sub-Index Total Return, which delivers returns through an unleveraged investment in the futures contracts on cotton.
So far, BAL hasn’t attracted much in the way of investor interest as the fund only has about $43 million in assets and features an average daily trading volume of only 41,000 shares. However, this ETN is the still the best way–aside from owning direct futures contracts–to bet on cotton. Expenses run 0.75%.
iPath Pure Beta Cotton ETN (CTNN): Also in Barclay’s popular iPath line of exchange traded notes is the iPath Pure Beta Cotton ETN (CTNN). This fund uses a propriety rolling strategy created by Barclays that may roll the futures into one of a number of futures contracts with varying expiration dates to limit the effects of contango and backwardation in the market. Despite its contango-fighting properties, investors are less pleased with CTNN, with AUM at only $2 million and trading volume at less than 1,000 shares a day. Again, expenses run 0.75%.
ELEMENTS Rogers International Commodity Agriculture ETN (RJA): While it isn’t a pure play on cotton prices, the ELEMENTS Rogers International Commodity Agriculture ETN (RJA) ranks its exposure to agriculture commodities based on their importance in the world; this puts cotton near the top behind corn and wheat. Currently, RJA has just over a 12% weighting to the natural resource.
Overall, the fund–along with the 21 different Ag commodities it tracks–can be used as great play on broad natural resource demand. Expenses run 0.75%, but AUM tops $360 million and trading volume is swift. While it’s not a pure-cotton play, it could actually be the best fund to gain some exposure over the long haul.
Disclosure: No positions at time of writing.