Beware: Cotton May Be Heading for a Dip

While many traders primarily focus on resources like gold or oil, there are plenty of other opportunities in the commodity space. One such opportunity lies in cotton, which can be found in almost every textile product around the world. But as a soft commodity, this constant demand does not always translate into consistent returns. The fluffy crop has enjoyed a strong start to 2013, but it is well known for its large movements from day to day and for keeping investors on their toes.

Cotton's Performance in 2013

2013 has been kind to cotton, with prices up 14% since the start of last winter, making it one of the best performing commodities this year. Before investors get too excited, it is worth looking further back at the historical price of this fickle commodity to see the familiar ebb and flow that comes with agricultural investments. Cotton has historically seen some huge price jumps during volatile weather patterns in its key growing regions. The seasonal slump in prices historically starts around mid-spring, which happens to be right now.

Courtesy of Signal Financial Group

Both the five- and ten-year seasonal pattern charts suggest cotton is due for a dip in prices for a few weeks. This historical returns also allow investors to predict some short-term relief to come in June before prices fall again to bottom out in August.

How to Make a Play on Cotton

Cotton price volatility makes it a prime target for investors looking for a trading instrument and there are a number of different ways to play this fluffy commodity.

  • Cotton Futures : Cotton futures are traded on the Chicago Mercantile Exchange, with prices quoted in dollars per pound. A single contract represents 50,000 pounds of cotton with a minimum fluctuation of $0.0001 per pound. With planting generally done by mid-June and harvesting usually occurring in September, contracts conduct trading in the March, May, July, October, and December cycle for the next 24 months.

  • iPath DJ-UBS Cotton ETN (NYSEARCA:BAL): Launched in June 2008, this ETF is the oldest and largest pure way to play cotton prices, delivering returns through an unleveraged investment in the futures contracts on cotton. The fund has about $43 million in assets and features an average daily trading volume of 41,000 shares.

  • Monsanto ( MON ): Home to a market cap of $58.3 billion and trading approximately 2.5 million times per day, Monsanto is one of the best known firms in the agricultural chemicals industry. The company produces a wide variety of seeds including corn, soybean, canola, and of course cotton. In addition, Monsanto develops biotechnology traits to help farmers control insects and weeds, and also produces several different herbicides.

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Editor's note: This article by Carolyn Pairitz was originally published on Commodity HQ .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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