Cotton ETN Rallies as Prices Hit Highest in a Decade | ETF Trends

A cotton ETN surged on Tuesday with cotton prices touching their highest levels in a decade due to a quirk in U.S. government policy and a surge in Chinese demand.

Among the best-performing non-leveraged exchange traded products of Tuesday, the iPath Series B Bloomberg Cotton Subindex Total Return ETN (NYSEArca: BAL) was 5.6% higher. BAL has increased about 25% since its mid-September lows. Meanwhile, ICE cotton #2 futures were up 3.8% to $1.0893 per pound.

The most active U.S. cotton futures trading on the Intercontinental Exchange (ICE) hit their highest level since September 2011, the Wall Street Journal reports. Cotton futures have increased 18% over the past 10 sessions alone.

The prices of raw materials have surged this year due to pent-up demand after the coronavirus pandemic pressured the global economy last year, and ongoing supply chain problems kept goods from reaching consumers in a timely fashion.

Cotton prices, though, reflect the unexpected effects of trade policy on the commodities space. In 2020, President Donald Trump banned U.S. imports of clothing and other products made of cotton produced from the Xinjiang region, China’s largest cotton-producing area, due to accusations of human rights violations. The administration pointed to evidence that the products were made with forced labor from the Uyghur ethnic group.

However, U.S. companies can still bring in cotton products made in China if the cotton itself is sourced from anywhere but the region in question. Consequently, China is importing cotton, with most of it from the U.S., to make goods and then ship it right back around.

According to the U.S. Department of Agriculture, U.S. export sales of cotton to China since the start of the new marketing year on August 1 surged 83%, compared to the same time last year.

“If you cannot use Xinjiang cotton, you have to import a lot more cotton and yarn,” Peter Egli, the director of risk management for Plexus Cotton Ltd., told the WSJ.

According to the USDA, Chinese cotton consumption for the current marketing year is projected to be 41 million bales (roughly 8.9 million metric tons) and up 24% over the past two marketing years. The agency attributed the gains in demand to a post-pandemic surge for consumer goods.

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