Emerging economies have caused natural commodities like cotton to soar in price. Despite the decrease in production levels for countries like Australia, the demand for agricultural commodities has not dropped. Consumers in countries like Latin America, China, and India are buying more hats, shirts, and jeans, so the cotton ETF is rising at an unprecedented rate.

The increase for demand with agriculture has caused farmers to alternate their crops to suit whichever commodity is most sought after on the market. The higher demand a commodity has, the higher the farmer will be able to sell it for. Some examples of profitable crops are soybeans and corn, which rose in demand when ethanol prices increased.

It is estimated that cotton farmers in the US have greatly reduced their acres over the past decade, which is why the prices are continuing to rise. If the acres continue to decrease, the price will continue to go up. China has immediately begun to create stocks of cotton and has been buying commodities while they are still cheap. Additionally China is creating a futures market for cotton.

The cotton ETF (BAL) has gone up a record 204% over the past year, which is close to 171% more than the previous six months. So far, it is the best performing 2011 commodity in the ETF category. Nobody knows what will happen to BAL in the future, especially since it has had a history of high volatility.

The BAL will likely be affected by the Chinese government’s attempts to slow down their economy to a level that is more manageable. It remains to be seen whether BAL will continue to rise or if it will crash back down. The recent momentum has been almost unbelievable, so many investors are fearing a sudden plummet in the months to come but at the same time, others see it rising further.

Filed under: General Options Trading Information

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