Cotton Demand to Boost Commodities ETFs

NEW YORK (TheStreet) -- iPath DJ-UBS Cotton Total Return Sub-Index ETN (BAL), ELEMENTS Rogers International Commodity Agricultural ETN (RJA) and iPath DJ-UBS Agriculture Total Return Sub-Index ETN (JJA) should all benefit from rising cotton demand.

Demand in China and India for cotton has surged and is expected to remain robust. The world's largest cotton consumer, China, has seen demand for the commodity jump nearly 24%, and trends in in India are similar.

An expanding middle class in both nations is starting to spend more, particularly on clothing. In fact, retail sales of garments, hats and knitwear in China have jumped by 24% from a year earlier, according to Bloomberg.

In India, the Cotton Advisory Board recently announced that mill use is expected to increase by 8.9%, pushing total demand for cotton up nearly 26% year over year.

On the supply side, the U.S. Department of Agriculture says that cotton production is expected to fail to keep up with demand for a fifth straight year. This trend has started to eat away at inventories. As of July 31, U.S. stockpiles as of July 31 were at their lowest levels in the past 14 years.

Meanwhile, supplier warehouses monitored by the IntercontinentalExchange are down 98% as of Aug. 12. And worldwide stockpiles of the cotton are expected to decrease by 4.1%, to roughly 38% of demand, the lowest ratio since 1994.

Moreover, crop damage is expected to take its toll. Floods and landslides in China have destroyed cotton crops, and Pakistan, the world's fourth-largest grower and importer of cotton, has had floods that have destroyed nearly 30% of its crop.

In conclusion, imbalances in global supply and demand may result in positive price support for cotton. Some ways to play the commodity include:

iPath DJ-UBS Cotton T Sub-Index ETN.

ELEMENTS Rogers Intl Commodity Agri ETN, which allocates nearly 12.03% of its assets to cotton.

iPath DJ-UBS Agriculture TR Sub-Idx ETN, which allocates nearly 7.1% of its assets to cotton.

Although supply and demand imbalances indicate that positive price support is likely to occur in cotton, it is important to consider the inherent risks involved with investing in commodities. To help protect against these risks, it's important to use an exit strategy that identifies specific price points at which downward pressure is likely to occur. Such a strategy can be found at www.SmartStops.net.

-- Written by Kevin Grewal in Houston.

At the time of publication, Grewal had no positions in securities mentioned.

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Kevin Grewal is the founder, editor and publisher of ETF Tutor and serves as the editor at www.SmartStops.net , where he focuses on mitigating risk and implementing exit strategies to preserve equity. Additionally, he is the editor at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Prior to this, Grewal was a quantitative analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.