Ultimate Guide To Cotton Investing

Cotton is a crop that has been around for centuries and has been important to numerous civilizations throughout history. The crop is most often spun and woven into yarn or textiles to be worn as clothing. In fact, historical evidence suggests that cotton clothing has been around since prehistoric times, and it continues to be an important commodity today. Cotton is the main component of many of our shirts, towels, bed sheets, jeans, socks, underwear, etc. The fluffy commodity is also a popular investment for numerous traders. Cotton has the potential to serve as a useful hedge against inflation, and can also be used for profit during strong economic times, or during times of high demand for raw materials. There are a number of different options to invest in cotton, including futures contracts, stocks of companies engaged in cotton production or planting, and ETFs [see also The Guide To The Biggest Companies In Every Major Commodity Sector].

Physical Properties And Uses Of Cotton

Successful growth of this crop requires sunshine, moderate rainfall, and soils typically need to be very heavy. For the most part, these conditions can be found in the dry tropics and subtropics in the Northern and Southern hemispheres.

Aside from its well known use as a textile, cotton can produce cottonseed oil, which can be consumed as though it were any other vegetable oil.  In addition to textiles, cotton is used in fishnets, coffee filters, tents, and gunpowder [see also Invest Like Jim Rogers With These Three Agriculture Stocks].

Cotton Supply And Demand

As the world’s population continues to spike, the demand for cotton will inevitably do the same. More inhabitants of the earth will call for clothing, and other major uses of this crop to increase drastically. This is evidenced by the fact that emerging markets account for the highest cotton consumption in the world, with China, India, Pakistan, Turkey, and Brazil making up the top five consumers on a global scale. As a whole, this bloc of five countries accounts for over 75% of global consumption, proving that emerging markets dominate the cotton market.

World Cotton Consumption
(Millions of 480 lb. bales) 2006/07 2007/08 2008/09 2009/10 2010/11 January 2010/11 February
China 50 51 44 50 47 47
India 18.1 18.6 17.8 19.7 21.5 21.5
Pakistan 12 12 11.3 10.9 10.2 10.2
Turkey 7.3 6.2 5.1 5.8 5.9 5.9
Brazil 4.6 4.6 4.2 4.4 4.5 4.5
Bangladesh 3.2 3.5 3.8 3.8 4 3.9
United States 4.9 4.6 3.6 3.5 3.6 3.6
World Total 123.8 123.3 110.1 118.5 116.6 116.6
Source: USDA

On the production side of the market, emerging markets still have a firm grasp, with the top five producers being China, India, United States, Pakistan, and Brazil. Together, these five nations make up nearly 80% of global production, meaning that cotton prices have heavy ties to a select number of countries from around the world [see also Three Mining Companies With Robust Yields].

World Cotton Production
(Millions of 480 lb. bales) 2006/07 2007/08 2008/09 2009/10 2010/11 January 2010/11 February
China 35.5 37 36.7 32 30 30
India 21.8 24 22.6 23.2 26 26
United States 21.6 19.2 12.8 12.2 18.3 18.3
Pakistan 9.6 8.6 8.7 9.6 8.8 8.8
Brazil 7 7.4 5.5 5.5 8.2 8.2
Greece 1.4 1.6 1.2 0.9 0.9 0.9
Syria 1 1.1 1.1 1 0.8 0.8
Rest of World 7.7 7.3 6.3 5.3 6.1 6.9
World Total 121.8 119.7 107.1 101.5 115.5 115.3
Source: USDA

Cotton Price Drivers

As a global commodity, the price of cotton is impacted by a number of factors, and is often subject to significant price swings in a relatively short period of time. The major price drivers of cotton include:

  • Subsidies: In the United States, cotton is one of the most subsidized crops, as the government offers subsidies that total more than five times those available for grain producers. A change in government spending or subsidies within domestic borders could lead to major price swings
  • Weather: Like numerous other commodities, cotton prices have heavy ties to weather patterns in production regions. Heavy rains or droughts can delay harvests or lead to lower than anticipated results. Because weather patterns, especially extreme ones, are difficult to predict, cotton prices can often surge on news of a potential disruption.
  • Synthetic Fibers: Numerous researchers and companies have worked to develop synthetic fabrics to compete with cotton and the issues this crop faces. Such products include Nylon, Acetate, and Rayon. Any big break or bust in the synthetic fibers field could lead to hefty cotton price swings.
  • Emerging Markets: As noted earlier, emerging markets account for the majority of global production and consumption of cotton. Any trends or major changes in these steadily growing economies could send cotton prices into a frenzy.

Investing In Cotton

Cotton Futures

Cotton futures are traded on the Chicago Mercantile Exchange, with prices quoted in U.S. Dollars per pound. A single contract represents 50,000 pounds of cotton with a minimum fluctuation of $0.0001 per pound. Listed contracts conduct trading in the March, May, July, October, and December cycle for the next 24 months. All contracts are subject to the rules and regulations of NYMEX.

Trading terminates on the day immediately preceding the first notice day of the corresponding trading month of Cotton futures at ICE Futures US.

Cotton Equities

Investors can also gain exposure to the soft commodity via the stocks of companies that are involved in the planting and production of cotton as listed below.

  • Monsanto Company (NYSE: MON)

Cotton ETFs

There is one cotton specific ETN that invests in a single-commodity sub-index which consists of one futures contract on the commodity of cotton. The iPath Dow Jones-UBS Cotton Total Return Sub-IndexSM ETN (BAL) gives investors cotton exposure through an exchange-traded ticker, charging an expense ratio of 0.75%. There is also an ETF which invests in “soft commodities”, which offers 33% exposure to cotton.

  • iPath Dow Jones-UBS Cotton Total Return Sub-IndexSM ETN (BAL)
  • iPath Dow Jones-UBS Softs Total Return Sub-IndexSM ETN (JJS)

Resources On Copper Investing:

This entry was posted in Agriculture, Commodity ETFs, Commodity Futures, Cotton and tagged , , , . Bookmark the permalink.

Commodity HQ is not an investment advisor, and any content published by Commodity HQ does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities or investment assets. Read the full disclaimer here.

4 Responses to “Ultimate Guide To Cotton Investing”

  1. [...] On the other side of things, one of the worst performing commodities on the day was cotton. The fluffy commodity has long been known for its erratic price swings, but today’s poor performance came from a rare speech from Joe Nicosia, chief executive of the world’s largest cotton merchant, Allenberg Cotton. Nicosia warned that cotton prices are currently in free-fall, and while they are incredibly low for the moment, he expects the next year to be filled with volatility and major price swings. Another factor combining to hurt cotton prices came from India, one of the largest cotton producing countries in the world, whose cotton output is now expected to beat analyst predictions, putting downward pressure on futures. In total, cotton futures sank 1.9% on the day, finishing the session below the 96.5 mark [see also Ultimate Guide To Cotton Investing]. [...]

  2. [...] One of the biggest commodity winners on the day was cotton, which was featured just yesterday as one of the biggest losers. Though one of the world’s largest producers commented that cotton prices would be volatile in coming months, few could have predicted the fluffy commodity’s rapid turn around in Tuesday’s trading. Cotton prices rebounded from their 10-month low due to concern in unusually dry weather in the U.S., one of the world’s largest producers. “Just 29 percent of the cotton crop was in good or excellent condition on July 24, compared with 68 percent a year earlier” according to the U.S. Department of Agriculture. In total, cotton futures jumped 4.1% on the day to eclipse the 100 mark in near month contracts [see also Ultimate Guide To Cotton Investing]. [...]

  3. [...] 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]. [...]

  4. [...] After enduring a rough year, cotton may finally have its groove back. The commodity soared to historical highs in 2010 with prices breaking records on what seemed like a daily basis, but as 2011 rolled around, futures came crashing back to earth, effectively erasing most of the gains that had been amassed in the previous year. But now that 2012 is well underway, cotton may be poised for another big year, as its futures have been some of the best performing thus far. Though cotton is down over 7% in the trailing 12 month period, this year alone has seen prices jump by over 8.2%, putting the fluffy commodity back on top for the time being. Similar to 2010, there are a number of factors combining to push up cotton prices, all of which need to be considered prior to investment [see also Ultimate Guide To Cotton Investing]. [...]

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