Cotton – Commodity

Instrument description

Cotton is one of the most fundamental crops that is primarily known for its wide usage in the textile industry. Almost 75% of the clothing products developed and used by people contain cotton. Cotton is the leading textile fibre in the world. Nearly 85% of men clothing contains cotton, and almost 40% of women apparel is made from cotton.

Cotton is a natural fluffy fibre that is grown in regions that have tropical and subtropical climates. Cotton is a necessary element of the textile industry, although it is also used for other purposes. Almost 64% of cotton is utilized in apparel, while 28% is used in furnishings and the remaining 8% is used for other industrial products. Only in the United States alone, the cotton usage in different businesses generates $120 Billion in revenue.

China is regarded as the biggest producer and consumer of cotton. China accounts for 29% of total cotton production, while cotton consumption is 43%. There is always an increase in demand for cotton, which is popularly traded on the global commodity market and trades with a symbol of C.T. and name of Cotton No.2 on the New York Board of Trade. The global leader in cotton is China with 100,000 farmers, 7500 textile companies, and annual revenue of more than $70 Billion. The top five cotton-producing countries according to 1000 metric tons are

1. India – 5770
2. United States – 4000
3. China – 3500
4. Brazil – 2800
5. Pakistan – 1670

China is also the largest imported of cotton with 17% of global production, other big importers of cotton include Bangladesh, Turkey, Vietnam, and Indonesia. Cotton is widely used in making clothes for both men and women. Cotton is favoured as a fabric because it is light, absorbs moisture, and durable. Apart from clothes, cotton is also used in making bed linens and towels. The uses of cotton consists of

• The cotton fibre is knitted to make Corduroy, Flannel, and Chambray, along with fishnets, bookbinding, and coffee filters.
• The cotton seed is used as feed for livestock
• The cotton seed oil is used in making soaps, margarines, plastics, rubber, and cosmetics
• The cotton linters are used in making swabs, bandages, and bank notes.

The industrial revolution in the U.K. and the invention of the cotton gin in the U.S changed the dynamics of cotton, and the use of cotton in apparel has inspired cotton to become a multi-billion industry.

History of Cotton

The exact origin of cotton is still not confirmed, but historians suggest that a cloth found in caves of Mexico tells that the cotton crop is as old as 7000 years. There have been many civilizations of ancient times who have used cotton to make clothes. Cotton is mostly grown in regions that have plenty of sunshine and no frosty temperatures.

Cotton is a natural fibre that grows on the seed of the cotton plant. The cotton fibre is obtained from the cotton plant and then spun into a yarn, and from yarn, a fabric is knitted or woven. The cotton farmers plant the crop in the spring season, and harvesting is done in autumn. To prepare the land for growing cotton, the farmers either use a ‘no-till method’ or a ‘till method’. A ‘no-till method’ is a method where special equipment is used to deposit the seeds in the soil. The ‘till method’ is a process where the land is ploughed into rows and seedbeds are marked for plantation of cotton plants.

The tiny flower buds appear after two months of tilling, and after three more weeks, the cotton flowers become to blossom. The blossoming stage is indicated by a change in color of cotton petals. The color changes from white to yellow, then pink and red at the end, and petals fall off the shrubs. The tiny green pods left behind are called ‘cotton bolls’, and these bolls blossom further, and small fibres develop inside them. The constant sunshine expands the fibres and gives them the fluffy form which we called ‘cotton’.

The machines harvest the ripened cotton and deliver them to systems where the cotton is processed for further consumption. The four types of cotton that are cultivated in more than 80 countries include

1. Upland cotton is grown in Central America, Mexico and the Caribbean and accounts for 90% of Global output
2. Extra-long staple cotton is grown in South America and contribute 8% of Global output
3. Levant cotton is grown in Southern Africa and the Arabian peninsula and contribute less than 2%
4. Tree cotton is grown in Pakistan and India and accounts for less than 2%.

Supply and Demand of Cotton

Commodities such as cotton always have an increase in demand when emerging-market countries improve their economy. The developing countries with positive growth rate required to increase cotton supply to meet the growing demand. Cotton is used in the production of numerous types of apparel of men and women, which means there is a constant demand for cotton fibres. The planting and harvesting cycles significantly affect the supply and demand for cotton in the global market.

How to read the price change of Cotton

The price of corn is quoted USD/lbs., where USD stands for U.S Dollar, and lbs. stands for pounds. If we examine the Cotton Future Contact chart, we see the Index trades from the range of $57.50/lbs. To $72.50/lbs. From September 2019 to the last week of February 2020. The highest cotton price recorded was $68.93/lbs. on February 21, 2020, and the lowest recorded value was $47.98/lbs. on April 1, 2020. The index graph is struggling to move in an upward direction since April 2020, and currently, the cotton trades at $64.55/lbs. The Bid price is $$64.74/lbs., while the Ask price is $64.45/lbs.

How to trade Cotton

Cotton is traded on the New York Board of Trade exchange (NYBOT), and other exchanges such as the InterContinental Exchange (ICE), Chicago Mercantile Exchange (CME), and Zhengzhou Commodity Exchange (ZCE).

Investing and trading cotton is termed as useful for hedging against inflation, trying to take advantage of price swings, and diversifying a portfolio. There are five ways to trade cotton are Futures, Options, and Contract for Difference (CFD), Exchange Traded Funds (ETFs) and Shares. The cotton prices are quoted in USD, and the unit is lbs. (100) and trading hours 01:00 -18:19 (GMT). The contract size is 50000 pounds and the contract months are March, May, July, October, and December.

In a Futures contract, you can place leveraged bets on cotton prices, and if the cotton prices fall, then you have to pay an additional amount to maintain your trading position. On the expiration dates, the contracts of corn are settled physically on ICE and financially on NYMEX. Using Futures contract comes with certain risk and you have to consider interest rates and storage costs.

One of the common ways to trade cotton is through CFD, which you can use leverage and speculate on the price difference of underlying asset. You do not have to worry about buying or storing cotton as you don’t actually own the asset. With CFDs, you can trade in both directions, which is going Long or Short. You can magnify your gains by correctly speculating, but there is also a certain degree of risk if your speculation is wrong and losing your invested capital.

There are no companies that allow direct investment in cotton; however, traders can get indirect excess to movements in cotton prices by buying shares of companies that provide different products such as feeds and fertilizers to farmers. You can buy shares of Origin Agritech Ltd, Mosaic, and Monsanto.

What causes the price change of Cotton?

The numerous factors that influence the price of cotton in the global market include

• Global demand

The quality of fabric depends on the quality of cotton and high-quality garments made from cotton are expensive as compared to clothes made from other synthetic fabrics. The consumers in developed countries can afford to buy expensive clothes while people living in a country with a weak economy may tend to look for other fabrics such as polyester.

• Climate

Like every other agricultural commodity, cotton production is also heavily influenced by climate changes and prevailing weather patterns. The cotton plants need warm temperatures, and a sufficient amount of rainfall to grow properly. Extreme weather conditions in China, India, and Pakistan, such as droughts or floods, can lead to shortages in cotton supply and lead to an increase in cotton prices. In suitable climates, cotton is also regarded as ‘Bumper crops’ which means yield is more than expected, but storage can become a problem

• Global stockpiles

In recent years many countries have accumulated vast amount of cotton and example is China, who has stockpiled cotton to ensure a constant cotton supply for its demand. The process of stockpiling results in the increase in the domestic price of cotton in China and stockpiling can also lead to global shortages of cotton and an increase in cotton prices.

• Price of substitutes

The production and widespread use of substitute fabrics such as polyester and other synthetic fibres also play a crucial role in determining the price of cotton. China leads the world in making PTA (Purified Terephthalic Acid) which is a key raw material used in producing polyester. The decision related to PTA and polyester can directly impact the demand and prices of cotton.

• Government policies

There are many governments that provide subsidies to cotton farmers, and the U.S is one of them. The subsidies have an artificial effect on the cotton market, showing a high supply and a low price.

• Value of U.S Dollar

Most of the popular global commodities are valued in Dollar, such as oil, gold, coffee, and also cotton. The value of U.S Dollar against other currencies is key to know the cotton prices. The purchasing power of buyers is more when the USD is weak and buying power is less when the value of USD is strong

• Oil prices

There are dozens of machines involved in the harvesting of cotton, and the machines and motor vehicles require oil to run. Overall, the production of cotton can be costly if the fuel cost is included. The prices of crude oil also influence cotton production.

The cotton market is quite volatile, and investing in cotton can be effective to diversify an investment portfolio. However, an experienced investor should look to invest in cotton along with other agricultural commodities. Traders and investors should keep themselves updated on the current and trending commodity news and other financial news and events that can impact the cotton prices.

The information above is for education purposes only and cannot be considered as investment advice. Past performance is not reliable indicator of future results.