"I have just been examining the recent archives for Cotton and find that the asset class has not had a mention just recently. There is an interesting article on Bloomberg 20.09.2010 - "Cotton Exceeds $1 for the First Time since 1995 on Supply concern" This may give subscribers pause for thought on another agricultural asset class to consider investing in. Just wondered what your views were on this subject."

Eoin Treacy's view Thank you for highlighting this article and cotton's relative strength. The last time cotton was commented on specifically was in Comment of the Day on June 3rd when it was still unwinding an overextension relative to the 200-day MA.


Here is a section from the article you mentioned:

Supplies will remain tight until late October or early November, when farmers in the U.S., the world's largest exporter, will have most of their crops harvested, Reardon said.

Cotton for December delivery jumped 1.15 cents, or 1.2 percent, to settle at 99.37 cents a pound at 2:38 p.m. on ICE in New York. Earlier, the fiber advanced to $1.0198, the highest price for a most-active contract since June 19, 1995. Cotton has surged 31 percent this year.

"Mills are sweating blood over both prices and shortage of supplies," Mike Stevens, an independent trader in Mandeville, Louisiana, said in a note that was e-mailed yesterday. Prices are being "fueled by solid fundamental news," he said.

Cotton bottomed from late 2008 and has sustained a progression of higher reaction lows since early 2009. It has found support in the region of the 200-day MA on a number of occasions and is currently quite overextended compared to that mean. Nevertheless, the current acceleration remains in motion and a clear downward dynamic would be required to check momentum.

Cotton is currently trading in a backwardation which is an indication of a near-term supply shortage. In such circumstances trackers such as the UK listed ETFS Cotton (COTN), the ETFS Leveraged Cotton (LCTO) or the US listed iPath DJ-UBS Cotton Total Return ETN (BAL) tend to perform in line with investor expectations because the trend and roll costs are in favour of long positions. When prices move back into contango, this will offer a headwind for such tracking funds.

While all of these funds share cotton's uptrend consistency over the last year, they do not resemble the relationship of cotton to its historic highs. This reflects the tendency of such funds to underperform considerably when demand dominance is replaced by supply, suggesting they are more suitable as trading vehicles, when the timing is right, than passive investment vehicles.