How to Invest in Cotton
Cotton is a part of everyday life for almost every population, as this commodity is used in a wide variety of textile products. Cotton is grown in a number of regions throughout the world, including the Americas, Africa, and India.
Cotton has historically exhibited a very low correlation to both stocks and bonds, making it a potentially appealing option for investors looking to smooth overall portfolio volatility. Since it is widely used in textiles, it also has the potential to hedge against inflationary pressures.
Though the physical properties of cotton make it possible to store for extended periods of time, gaining exposure through the physical commodity presents some logistical challenges. Better options include futures contracts, an exchange-traded note, and even stocks of companies engaged in cotton production.
Ways to Invest in Cotton
There are 3 ways to invest in Cotton: ETFs, Futures, and Stocks. Click on the tabs below to learn more about each alternative.
What are Cotton ETFs?
Exchange-traded products (a term that covers both ETFs and ETNs) are simple, low maintenance opportunities to gain exposure to cotton prices. Cotton is included in a number of broad-based commodity ETPs that offer exposure to baskets of natural resources, and U.S. investors also have a pure play option available. The iPath Dow Jones-UBS Cotton Total Return ETN (BAL) is linked to an index comprised of cotton futures contracts.
Investors should be aware that BAL is not designed to replicate spot cotton prices, but rather the performance of a futures-based strategy. That means that fund returns will be subject to the slope of the futures curve and prevailing interest rates. Also, it should be noted that BAL is an ETN, a debt instrument issued by a financial institution.
European investors have more options ETF available for cotton exposure, as ETF Securities offers short and leveraged cotton products as well.
What are Cotton Futures?
Though the market for cotton futures is not nearly as large as certain other commodities, there is sufficient liquidity available for investors with the sophistication and ability necessary to invest directly in futures contracts.
Cotton futures are traded on the ICE under the symbol CT, with each contract representing 50,000 pounds net weight of cotton that meets certain minimum standards of basis grade and staple length. Futures contracts are priced in cents and hundredths of a cent per pound, and contract months include March, May, July, October, and December.
Cotton futures are also traded on the New York Mercantile Exchange (NYMEX) under the symbol TT. These contracts are also for 50,000 pounds, and trading is conducted in the March, May, July, October, and December cycle for the next 24 months.
How to Buy Cotton Stocks
For some commodities, it is possible to gain indirect exposure to the resource through an investment in companies that are engaged in production. This is challenging in the case of cotton because many growers are small farms or private entities, and as such not open to direct investment.
There are, however, some options available. Origin Agritech (SEED), for example, sells hybrid crop seeds (including cotton seeds) in China. There are also many agribusiness firms that provide products and services to farmers, and the profitability of these companies often shows a correlation to agricultural spot prices. Some of the largest agribusiness firms include Potash (POT), Monsanto (MON), and The Mosaic Company (MOS). These certainly are not pure play on cotton, but present another option for investors looking to gain exposure.
Cotton in the News
Commodities in Focus Amid Russia Sanction Battle
March Backwardation Report: Energy Futures Downward Sloping
Ukraine Ignores Russian Threats Against New EU Trade Deal
3 Commodities Looking To Turn It Around in 2013
Monsanto Earnings Are In: Hits And Misses (MON)
Backwardation Report: Cotton, Crude and Gasoline Face Falling Prices
Beware: Cotton Heading For a Dip
Cotton Fares Well In 2013
China Demand Gives Cotton A Boost
The 5 Worst Commodities of 2012