While a number of precious metals and soft commodities have surged on the year, a few have still seen weakness so far in 2012. Among these weak performers was cotton, the staple product of the textile industry. Recent releases from industry participants suggested that prices of the crop were expected to fall by double digits this year, pushing benchmark contracts near yearly lows. Yet, while trends have not been good in the space—prices have fallen by about 25% in the past twelve months—a new move by India could shake up the market and drive prices in this key crop sharply higher (also read Three Commodity ETFs That Have Not Surged).
On Monday, India announced that the country was immediately banning all cotton exports in order to protect domestic supplies. The country did not specify when they would lift the ban, sending prices sharply higher on the session as end users scrambled to secure new sources of cotton. “The entire cotton industry was apparently caught off guard by the export embargo of cotton out of India,” said Mike Stevens, a Louisiana-based cotton analyst.
In fact, some estimates suggest that between 1.5 and 3 million bales will have to be replaced, or roughly 17%-41% of India’s total cotton exports in a year. This is especially significant because India is currently the second biggest exporter of cotton in the world, significantly trailing the U.S. but also well ahead of third place Australia, with projections coming in at about 34.5 million bales of production for the year.
As a result, cotton prices rose by their limit in Monday trading in the U.S., adding four cents a pound—roughly 4.5%-- to finish the day at 92.23 cents a pound. The move looks to push more users into American supplies of the fiber, helping to push up prices in the country so long as the India export ban persists. This could be especially true of China’s purchases as some report that the Middle Kingdom accounts for roughly 80% of India’s cotton exports forcing the major consumer to look elsewhere for the crop (see Is USCI The Best Commodity ETF?).
For those who are looking to play this possible reversal in cotton, futures contracts on the commodity could be an interesting choice. Beyond that, a few picks in the Exchange-Traded Product world could also be ideal, especially for those who do not want to open a futures account and deal with the issues that come along with this strategy. Additionally, cotton ETNs do not face the same restrictions, either in terms of trading time or price stops, so they can arguably act as better price discovery mechanisms for investors. Currently, there are two ways to target exposure to the cotton market in ETN form, both of which we have highlighted below:
iPath Dow Jones-UBS Cotton Total Return ETN (BAL)
This ETN tracks an unleveraged investment in futures contracts on cotton while also including the rate of interest that could be earned on cash collateral invested on T-Bills. The product charges investors 75 basis points a year in fees and it has amassed AUM of about $41 million. This produces a note that has volume of about 83,000 shares a day giving it relatively tight bid ask spreads. On the news of the report, BAL surged by about 6.8% in the session, although the product was down about 5.3% over the past three month period (read Cocoa ETFs Surge On Supply Worries).
iPath Pure Beta Cotton ETN (CTNN)
For investors looking to dynamically allocate to cotton, CTNN could be a better pick. The note can roll into any number of futures contracts, as selected using the BarCap Pure Beta Series 2 Methodology. This technique looks to pick the futures contracts that are most representative of the front year average price, a strategy that looks to cut down on contango issues. Additionally, it should be noted that the product also includes the rate of interest available from a cash collateral investment in Treasury bonds, just like BAL (read Is HAP The Best Commodity Producer ETF?).
However, despite this intriguing methodology, there are some downsides to the product. While it does cost the same in expenses as its cousin, the volume is pretty weak, coming in at just 2,700 shares a day. Furthermore, the total AUM is below $2 million suggesting it has thus far failed to capture investor interest. In terms of performance, CTNN gained 4.5% on the day—less than BAL due to the different contract structure—although the note is up 2.9% over the past three months, beating out its counterpart in the time period.
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