Beware: Cotton May Be Heading for a Dip

By Commodity HQ  MAY 17, 2013 12:00 PM

Although cotton prices are up 14% for 2013, five- and 10-year seasonal charts suggest the fluffy commodity is due for a dip in the coming weeks.

 


While many traders primarily focus on resources like gold or oil, there are plenty of other opportunities in the commodity space. One such opportunity lies in cotton, which can be found in almost every textile product around the world. But as a soft commodity, this constant demand does not always translate into consistent returns. The fluffy crop has enjoyed a strong start to 2013, but it is well known for its large movements from day to day and for keeping investors on their toes.

Cotton’s Performance in 2013

2013 has been kind to cotton, with prices up 14% since the start of last winter, making it one of the best performing commodities this year. Before investors get too excited, it is worth looking further back at the historical price of this fickle commodity to see the familiar ebb and flow that comes with agricultural investments. Cotton has historically seen some huge price jumps during volatile weather patterns in its key growing regions. The seasonal slump in prices historically starts around mid-spring, which happens to be right now.


Courtesy of Signal Financial Group

Both the five- and ten-year seasonal pattern charts suggest cotton is due for a dip in prices for a few weeks. This historical returns also allow investors to predict some short-term relief  to come in June before prices fall again to bottom out  in August.

How to Make a Play on Cotton

Cotton price volatility makes it a prime target for investors looking for a trading instrument and there are a number of different ways to play this fluffy commodity.
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Editor's note: This article by Carolyn Pairitz was originally published on Commodity HQ.
No positions in stocks mentioned.