Cotton Prices Hit a 10-Year High: ETFs to Gain/Lose

Cotton prices jumped to a 10-year high, touching the highest levels since July 2011. Cotton had skyrocketed above $2 a pound, as demand for textiles surged due to the global economic reopening, while India — a major cotton exporter — constrained shipments to help its domestic partners, per a CNBC article.

There are a few more reasons for the rally in cotton prices. Inclement weather, including droughts and heat waves, have weighed on cotton crops across the United States, which is the biggest exporter of the commodity in the world. In India, insufficient monsoon rains have also been playing foul with the country’s cotton output. The ongoing supply chain issues due to COVID-19 also had a role in tightening up inventories.

Plus, last December, the Trump administration barred U.S. companies from importing cotton and other cotton products that originated in China’s Western Xinjiang region over issues that it was being produced using forced labor by the Uyghur ethnic group, the CNBC article pointed out.

The ruling, which has remained in place during the Biden administration, has now forced Chinese companies to buy cotton from the United States, manufacture goods with that cotton in China, and then sell it back to the United States.

Against this backdrop, below we highlight a few ETFs that could gain/lose amid surging cotton prices.

Winner

iPath Series B Bloomberg Cotton Subindex Total Return ETN BAL

The underlying Bloomberg Cotton Subindex Total Return reflects the returns that are potentially available through an unleveraged investment in the futures contracts on cotton. The fund charges 45 bps in fees.

Loser

SPDR S&P Retail ETF XRT

Though apparel retailers have passed on the rising cotton prices to consumers, investors need to be watchful about the pricing power of the apparel retailers. The price of a cotton T-shirt rose about $1.50 to $2, on average, National Retail Federation Chief Economist Jack Kleinhenz said, as quoted on CNBC, indicating retailers’ power to maintain the margins. However, if cotton prices continue to go upward, things may turn sour for apparel retailers.

The underlying S&P Retail Select Industry Index represents the retail sub-industry portion of the S&P TMI. The S&P TMI tracks all the U.S. common stocks listed on the NYSE, AMEX, NASDAQ National Market and NASDAQ Small Cap exchanges. The Retail Index is a modified equal-weight index. Apparel retail (19.83%) takes about one-fifth of the portfolio.

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