Why the Cotton ETN Isn’t Shrinking

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Includes: BALB, DBA
by: Tom Lydon

Global cotton consumption is estimated to outstrip output this year, giving the exchange traded note (ETN) something to rally about.

Cotton prices have soared to a 25-year high, and demand is expected to outstrip supply this year for three key reasons:

  • On the supply side, Pakistan, the world’s largest cotton grower, suffered heavy crop losses from flooding.
  • India recently imposed a prohibitive tax on cotton exports to protect domestic textile manufacturers, reports The Wall Street Journal.
  • Demand surged from textile makers and excessive rain also damaged crops in China, the world’s largest buyer of the fiber.

Leslie Patton For Bloomberg reports that the reduced supply could mean that cotton prices would jump another 32% this year.

Neil Saunders for MarketPlace reports that the whole supply chain in clothing is so interconnected and so global now that even if the United States has a relatively good crop of cotton, a huge portion of it is still imported from China.

  • iPath Dow Jones-AIG Cotton Total Return Sub-Index ETN (BAL) is up 22.8% year-to-date.
  • PowerShares DB Agriculture (NYSE:DBA) also holds 2.9% of cotton futures.

Tisha Guerrero contributed to this article.

Disclosure: None