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Cotton has been acting as a general of the commodity markets in recent times with prices running at record highs (reaching its highest price level in 15 years) amid tightening global supplies after the devastating floods in Pakistan, one of the world's largest cotton growers and continued wet weather in China. With a weak US Dollar, higher demand and expectations of a severe shortage of supplies have together kept cotton futures prices at record highs but some analysts warn the bubble in prices they've seen could burst with the end of the December futures contract.

Even if prices have risen on purely fundamental demand and supply reasons, such high prices for raw materials may break the delicate balance of pricing products consumers can or are willing to buy. Analysts believe that the 50% jump in cotton prices over the past year will be impetus enough for farmers to ramp up production, hopefully driving prices down. Not to mention cotton, like many other commodities, is also driven by global demand. When we humans are happy and making money, we are probably going to feed and clothe ourselves well; right now the world still has some tough times to overcome. Some experts in cotton are calling for a price correction in the coming months.

Short-term drivers of the cotton market have been overplayed. It has led to an over exuberance in cotton futures, and created a bubble. Sharon Johnson, analyst with First Capitol Group in Atlanta believes that Cotton futures prices rose to levels not seen since the end of the U.S. Civil War on the notion that China's harvest was in fact poorer than even previously thought, based on the fact Chinese buyers seem to be willing to pay any price for the fibrous crop but such record high prices are also leading some mills to switch from 100% cotton to blended products as fast as they can.

Falling US Dollar: The US dollar has been under immense pressure in recent times and not only witnessed its worst month since May 2009 against a basket of currencies, but was sliding lower relentlessly on speculation that the Federal Reserve would have to embark on a further stimulus program to liven up the flagging US economy. It was then not much of a surprise that as the dollar weakened, commodity prices witnessed a surge in the recent past.

USDA Estimates: The U.S. Department of Agriculture's World Agricultural Supply and Demand Estimate released Tuesday, helped fuel the updraft of commodities prices this week, and especially cotton futures. It estimated U.S. ending stocks of cotton at 2.2 million bales their lowest since 1925. It also said supply reductions from previous estimates exist in China, Turkey and Pakistan.

Cotton Prices Driving Retail Price Hike: Apparel manufacturers may be forced to raise prices on their products, as it may become too costly to produce items such as T-shirts with cotton with the current rising prices. This price jump trickles down to retailers who then have to sell the item for more, which finally hits the consumers, who now have to pay more for cotton-based products. If consumers cut their spending habits, this then can trickle down to hurt the retail industry as a whole.

Meanwhile British Fashion and home wares group Next has warned that it is likely to raise prices of its clothes by up to 8% early next year due to “speculative bubble” in cotton prices. The company informed, “As a result of further rises in the price of cotton, retail price rises are likely to be at the top end of our previously stated 5% to 8% range for the first quarter of next year.” “The longevity of what appears to be a speculative bubble in cotton prices will be critical in determining prices for the second quarter,” it added further.

Cotton Investment Options: Cotton is currently the king in the commodities market. It is trading near a 15-year high in price, with growing demand and a lack of near-term supply. Some of the cotton investment options include:

The iPath Dow Jones-AIG Softs Total Return Sub-Index ETN (NYSEARCA:JJS): The Dow Jones-UBS Softs Subindex Total Return is a multiple-commodity sub-index consisting of the contracts included in the Dow Jones-UBS Commodity Index Total Return related to soft products. Contracts for three commodities are currently included in the Dow Jones-UBS Softs Subindex Total Return: coffee, cotton and sugar.

Expense Ratio: 0.75%

The iPath Dow Jones-AIG Cotton Total Return Sub-Index ETN (NYSEARCA:BAL): The Dow Jones-UBS Cotton Subindex Total Return is a single-commodity sub-index currently consisting of one futures contract on the commodity of cotton.

Expense Ratio: 0.75%

Disclosure: No positions

Source: Cotton: Commodity King on a Shaky Throne - Two ETN Plays