Commodity Trading Trends: Cotton Futures Rally In 2012

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].

India, the world’s second largest producer of this crop recently dropped its outlook for cotton supply as diseased crops wreaked havoc on local fields. “A smaller-than-expected crop may lower stockpiles in the country as exports increase and demand improves from domestic textile mills, boosting prices and raising costs for garment makers such as Arvind Ltd. (ARVND) and Gokaldas Exports Ltd. (GEXP) Cotton futures increased 8.2 percent in New York this year after plunging 37 percent in 2011, the most in seven years” writes Swansy Afonso. On top of lagging production, demand from China has yet to let up, creating something of a shortage as exports are struggling to keep up with global consumption. With these factors aligning, now may be the perfect time to make a play on cotton [see also Inside Cotton’s Epic Crash].

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 30,000 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 The Ten Commandments of Commodity Investing].

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Disclosure: No positions at time of writing.