ETF Investing: Surging prices lift cotton-futures ETN

By John Spence, MarketWatch

BOSTON (MarketWatch) — An exchange-traded note indexed to
cotton-futures contracts has jumped about 15% so far this year and
remains a top-performing product in the commodity complicated despite
a pullback late last week.

The iPath Dow Jones-UBS Cotton Subindex Total Return ETN
 has surged 156% for the 12 months through Feb. 3, according
to investment researcher Morningstar Inc. It sports the highest return
for any exchange-traded product for the period with the exclusion of
ProShares Ultra Silver
, a leveraged fund.

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The spike in cotton prices, as with many other soft and agricultural
commodities, is "like nothing we have ever seen before," said Dan
Wantrobski, director of technical research at Janney Montgomery Scott

Cotton prices are at their highest levels since the 1860s and there
are reports that some businesses are hoarding the material. Futures
tracking the commodity have approached $1.80 a pound in the latest
push, fueled by rising demand and dwindling supply. Rising prices are
pressuring mills and crimping profit margins at retailers and clothes
companies that use cotton in their products.

"Any commodity market where one has to go back in time to the U.S.
Civil War to find higher prices has to be considered one of the
classic bull markets in recent description," said Mike Zarembski,
older commodity analyst at optionsXpress.


Limiting Speculation


IntercontinentalExchange Inc.
 last week took steps to rein in speculation in
cotton-futures markets. Participants who expect to involve positions
in surplus of 300 contracts will need to file an exemption request and
must show the requested spot limit is "economically appropriate,"
ICE said in a proclamation. See previous tale on ICE's moves at

The announcement on Thursday hit prices, and the cotton ETN shed more
than 3% in Friday's session. The note is managed by Barclays
 and is relatively tiny in terms of assets with a market
capitalization of about $78 million. It charges a yearly fee of 0.75%
and was launched in June 2008. ETNs are debt instruments issued by
financial institutions, so they involve credit risk. The products are
calculated to provide the return of an index, minus fees, taxes and
other costs.

The remarkable rally in the cotton ETN has pushed the portfolio more
than 60% above its 200-day moving average, the highest level of
separation from this indicator for any exchange-traded fund or note.

Cotton has been leading the surge in soft commodities such as coffee,
sugar and cocoa. The iPath Dow Jones-UBS Total Return Subindex ETN
 was up 71.4% for the 12 months finished Feb. 3, according
to Morningstar.

The soft and agricultural commodity sector is "set to be one of the
largest tales of 2011," said Wantrobski at Janney.

"Some have become ridiculously overbought by technical standards —
but momentum remains strong and as we all know, the global central
banks continue to flush unprecedented amounts of liquidity into the
system," the strategist wrote in a Feb. 2 note.

Therefore, this corner of the commodities markets "could continue to
daze watchers in the months ahead," he added.



Sugar high

For traders, the inquiry is whether prices will right or continue to
march higher. "In any consequence, the stage is set for fireworks in
this sector — this year," Wantrobski predicted.

On the supply side, poor weather in Plates, India, Pakistan and
Australia has contributed to rising cotton prices. Egypt, which has
been racked by anti-government protests, is also an exporter.

Meanwhile, rising demand from the world's emerging economies such as
Plates could continue to fuel further price gains, analysts say.

Yet some observers reckon prices are stretched too far and due for a

"The cotton-price rally looks like it contains elements of panic
now," wrote commodity analysts at Commerzbank in a note last week.
"We believe the price of cotton is already in a phase of
exaggeration and expect a sharp fall in price in the coming

John Spence is a reporter for MarketWatch in Boston.

Source: Marketwatch.Com