Clothing manufacturers around the around are feeling cost pressures from rising raw materials costs. Look at the price of cotton which recently – for only the second time since the Civil War – rose above $1 per bale.
Natural fiber prices are rising fast as production cuts triggered by more than a decade of low prices filters into the supply chain just as global demand for the natural fibers is reviving. The surge in prices for these commodities stems from years of declining production. Artificial fibers such as nylon and polyester have displaced natural fibers in clothing, furnishings,etc.
This has led to disillusioned producers globally switching to other, more profitable crops such as corn and wheat. According to the US Department of Agriculture(USDA), cotton farmers around the world will this year harvest the lowest acreage in more than 20 years.
In addition, the largest grower of cotton, China, has had problems with their crop due to first drought and then heavy rain. Its 2009 crop output fell 14.6 percent to 6.4 million tons. Other major producers of cotton – India and Pakistan – have also had their cotton crops affected by heavy rains.
While supplies of cotton are dwindling, the demand for it has picked up, particularly from China. It has reopened its doors to cotton imports after import restrictions last year cut into its inventories. This lifting of restrictions is likely to lead to a third more cotton imports into China this year according to the USDA. In fact, earlier this year we saw some traders take actual physical deliveries of cotton as settlement for cotton futures contract. Final destination for the cotton? China.
Overall, the USDA estimates about a 3 percent rise in world cotton consumption for the year which began August 2010. This will lead to emptying warehouses and a further drawdown in global inventories. This will make a bad situation worse as the ratio of cotton inventories to global consumption is already at the lowest level it has been in 15 years.
According to Gary Raines, an economist at futures broker FCS-tone, “Consumption is going to outpace production for the fifth straight year.” All of these factors have led to the front month futures prices for cotton doubling in the past year.
For investors looking to cash in on cotton, there is an exchange traded note which is linked to the price of a cotton futures contract. It is the iPath Dow Jones-UBS Cotton Subindex Total Return ETN (NYSE: BAL) and may provide investors with a healthy return in the months ahead.
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