The Case For Cotton: Contango, Droughts And Chinese Demand

Includes: BALB, BALC
by: Hard Assets Investor

Prices are rising and contango is plunging in cotton.

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CONTANGO WATCH: A roughly $5 rise in prices has led cotton's current roll cost to plunge 9% last week toward its backwardated five-year average historical roll cost for this date. The three-week high was brought on by concerns over reduced output from a continuing drought in Texas, Bloomberg reports.

Agrimoney reports that over at the Macquarie Group, analyst Kona Haque is bullish on cotton from a Chinese angle as well. China has been encouraging its mills to import at high prices due to setbacks from a government farm support program.

Demand for cotton was also strong from "countries that are enjoying surging exports of cotton yarn to China", thanks to the high-price regime that China's own mills are operating at.

Plexus Cotton Limited notes that "[w]hile China has been actively buying the recent dips in the market, many mills around the globe seem to be a bit too nonchalant in covering their remaining needs for the second and third quarters, believing that there will be plenty of supplies to choose from once they finally make up their mind." They project that investors short on cotton will see a very different market come July.

Investors should take note, for in the midst of all of this speculation, the iPath Dow Jones-UBS Cotton Total Return ETN (BAL) has quietly made the Top 5 Weekly Performers list in HAI's Commodity Flows Report. The fund returned a solid 5.23% last week.

ROLL COSTS: It costs investors 4.36% annualized to roll front-month cotton contracts, down from a cost of 13.37%.


Has oil moved into backwardation yet? What does corn's roll yield look like? How do you know when it's time to buy-or sell?

Data as of close on June 7, 2013
Data courtesy