A surge in demand by emerging markets, depletion in inventories and Mother Nature may paint a rosy picture for cotton in the near-term future.
Demand in China and India for cotton has surged and is expected to remain healthy. The world’s largest cotton consumer, China, has seen demand for the commodity surge nearly 24% and demand growth in India is similar. Both of these nations have seen a surge of wealth and an expansion of the middle class which have started to spend more, in particularly on clothing. In fact, retail sales of garments, hats and knitwear in China have jumped by 24% from a year earlier, reports Jennifer A. Johnson and Elizabeth Campbell of Bloomberg.
In India, home to the world’s largest maker of denim and a major supplier to clothing companies, the Cotton Advisory Board recently announced that mill use is expected to increase by 8.9%, pushing total demand for cotton up by nearly 26% over the last year.
On the supply side, the US Department of Agriculture says that cotton production is expected to fall short and fail to keep up with demand for a fifth straight year. This trend has started to eat away at inventories as US stockpiles as of July 31, were at their lowest level in the past 14 years. To further support the notion that inventories are being depleted, supplier is warehouses monitored by the ICE are down 98% as of August 12th. Aggregately speaking, worldwide stockpiles of the cotton are expected to decrease by 4.1%, or roughly 38% of demand, the lowest ratio since 1994.
To put a further constraint on the supply of cotton, crop damage is expected to take its toll. Floods and landslides in China have destroyed cotton crops and Pakistan, the world’s fourth-largest grower and importer of cotton, have witnessed floods which have destroyed nearly 30% of its crop.
In conclusion, imbalances in global supply and demand may result in positive price support for cotton. Some ways to play the commodity include:
•iPath DJ-UBS Cotton TR Sub-Idx ETN (BAL: 40.944 -0.396 -0.96%)
•ELEMENTS Rogers Intl Commodity Agri ETN (RJA: 8.07 -0.12 -1.47%), which allocates nearly 12.03% of its assets to cotton.
•iPath DJ-UBS Agriculture TR Sub-Idx ETN (JJA: 45.66 -0.8401 -1.81%), which allocates nearly 7.1% of its assets to cotton.
Although supply and demand imbalances indicate that positive price support is likely to occur in cotton, it is important to consider the inherent risks involved with in vesting in commodities. To help protect against these risks, the use of an exit strategy which identifies specific price points at which downward pressure is likely to occur is important.
