Two Cotton Investments Bound To Benefit from the Laws Of Supply and Demand
Source: ctei Date: 2010-01-05
Some of the best investment opportunities can happen simply by ignoring the Wall Street herd and venturing onto the road less traveled.
Take traditional "breakfast club" commodities like sugar, cocoa, coffee and orange juice; all of which enjoyed a great year, despite bearish forecasts of doom and gloom. Sugar and cocoa even traded at multi-decade highs.
Similarly, cotton got a bad rap going into 2009, though it finished on Friday with a tidy profit, rising on the standard laws of supply and demand.
That supply comes from subtropical regions around the world, with China ranking first in cotton production-though it also imports the most-followed by India and the United States.
Meanwhile, the U.S. exports the largest amount, followed by India and Brazil.
The soft commodity serves as a necessary ingredient in traditional wardrobe materials such as denim, corduroy and terrycloth, but also for coffee filters, tents, fishnets and gunpowder.
With that said, cotton prices still largely rely on clothing and textile production levels. So the recent uptick in global economic activity naturally sparked a cotton craze that should last at least this year, especially with the weaker U.S. dollar making it relatively cheaper.
But the most compelling reason for prices to rise in 2010 is supply, pure and simple��
A Supply-Side Story
The low price for cotton over the past several years has made it a very unprofitable crop for farmers everywhere, leading them to focus on other crops and only devoting small amounts of acreage to the fabric base.
That shows too, since global production levels haven't been this low since 1986. And in the U.S., it's even worse; American farmers haven't planted less since 1983.
In addition, rain played havoc with crops this year, affecting yields in the U.S., where shipments could decline as much as 21%. And China suffered as well.
Taking all that into consideration, the U.S. Department of Agriculture (USDA) projected that global production would fall 4% to 102.7 million bales in the 2009-2010 growing season.
Yet it also expects demand to rise 3% to 114.5 million bales on strong demand from China��
Simple arithmetic shows a significant imbalance between the two.
In fact, that 12 million-bale difference is the largest, annual global decline for cotton in seven years. And analysts expect the 2009 world cotton inventory-to-use ratio to fall below 50% for the first time in five years.
Moreover, a return of global growth and a rise in Chinese clothing exports will likely shrink inventories even further.
ETNs To Cash in on Cotton Trends
Traditional investors don't have to worry about trading futures in order to gain exposure to cotton...not with two exchange-traded notes (ETNs) on the market:
- iPath Dow Jones-UBS Cotton Subindex Total Return ETN (NYSE: BAL): Already up about 28% year-to-date, it links to an index that focuses on single futures cotton contracts.
- iPath Dow Jones-UBS Softs Subindex Total Return ETN (NYSE: JJS): Up about 33% year-to-date, this one devotes 27% of its portfolio to cotton, 29% to coffee and 44% to sugar.
Until farmers start planting more or people stop needing less, smart investors should pick cotton...The potential profits could easily pay for a whole new wardrobe.
