by Michael Chechnev | Feb 10, 2020 | Trading articles

Cotton is a fluffy natural fiber that grows on shrubs in tropical and subtropical regions all over the world. The goods are an essential raw material in the textile industry. A detailed description and important facts about cotton futures trading.

How is cotton grown?

Cotton plants grow in warm regions, where there is a lot of sun and little frost. Cotton farmers plant their crops in spring and harvest them in autumn. Before planting, the farmers prepare the land either by the direct seeding method, in which they put the seeds on the soil surface with special equipment, or by the till method, in which they plow the land in rows to form the seed beds for planting.

About two months after the crop planting, on the green bushy shrubs that grow out of the ground appear tiny flower buds. In another three weeks, the flowers will start to bloom. The petals will change their color – from white to yellow, then to pink and finally red – and then fall off the bushes. What remains are tiny green pods, called cotton capsules. These capsules continue to mature and develop small fibers inside. When these fibers get bigger in the sunshine, they burst out of the capsule in the form of fluffy cotton. Machines then harvest the fully mature cotton in conveyor systems that prepare the crop for consumption. The largest cotton growing area is China. It has 100,000 cotton farmers, 7,500 textile companies, and annual cotton cloth production worth 73 billion dollars.

The 10 most important cotton producers

China is also the largest importer of cotton. The country imports over $7.5 billion of cotton annually (about 17% of world production). Other large importers of this product are Bangladesh, Vietnam, Turkey and Indonesia. Cotton is known as a versatile fiber that is comfortable to wear. However, the application goes beyond the use in clothing.

The main use of cotton

Product Use
Cotton fiber

Woven or knitted in a variety of fabrics that are used to make clothing and household items. These materials include:

  • Cord
  • Chambray
  • Velours
  • Jersey
  • Flannel

Used in other different products including:

  • Fishnets
  • Coffee filter
  • Bookbinding
  • Archiving documents
Cotton seeds

Used as feed for farm animals.

Cottonseed oil

Used as cooking oil. Also found in many consumer goods, such as:

  • Soap
  • Margarine
  • Emulsifiers
  • Cosmetics
  • Pharmaceutical products
  • Rubber
  • Plastic

These are small fibers that remain on the cotton seed after processing. Linters are used in the manufacture of:

  • Bandage
  • Swabs
  • Banknotes
  • X-ray equipment

What affects the price of cotton?

The cotton price is mainly influenced by these seven factors:

1. Global stocks
In the recent past, China built huge stocks to ensure that it has a sufficient supply of cotton. These measures often led to higher domestic prices for cotton in China than in the rest of the world. If China sold all of its stocks due to weak domestic demand, cotton prices would probably fall. On the other hand, if hoarding of Chinese goods led to global bottlenecks, prices could go higher.

2. Government policies
Numerous governments, including the United States, strongly subsidize cotton farmers. The subsidies results in the supply of cotton which is artificially high and the prices which are artificially low. Brazil initiated and won lawsuits against the United States through the World Trade Organization to prevent these subsidies. However, a recent agricultural law in the United States has increased subsidies for cotton. The granting of subsidies can have a significant impact on cotton prices.

3. Global demand
The global demand for cotton depends primarily on the general economic situation. Cotton is a largely interchangeable commodity, and when the economy is weak, consumers can choose other cheaper synthetic materials such as polyester. China plays such an important role in the cotton market that its economy needs to be monitored in particular.

4. Climate
As with all agricultural raw materials, climate plays an important role in the development of cotton prices. Cotton needs warm weather, sufficient rainfall and little or no frost to grow properly. Bad weather conditions in important growing areas such as India or China can lead, for example, to supply shortages and price peaks. On the other hand, ideal weather conditions can lead to a record harvest.

5. Price of substitutes
The production and price of substitutes such as polyester can play a key role in determining cotton prices. China is a major producer of purified terephthalic acid (PTA), the raw material for polyester production. In the past, production decisions related to PTA could have a dramatic influence on demand. These decisions could then affect cotton demand and prices. Cotton traders should pay particular attention to market dynamics of PTA.

6. Oil price
Cotton is an expensive crop. The machinery and vehicles, necessary to operate agricultural production, make up a significant part of the total costs. Machinery and equipment require fuel, that’s why crude oil prices can have a great impact on cotton production. Moreover, PTA is made from oil, so an increase in crude oil prices can make polyester more expensive and raise the demand for cotton.

7. The US dollar
Most commodities, including cotton, are traded in US dollars. If the dollar’s value declines against other currencies, it will take more dollars to buy cotton. Buyers who buy cotton in other currencies see their purchasing power increase when the dollar is weak and decrease when the dollar is strong.

Cotton and futures markets

The New York Mercantile Exchange (NYMEX), which is part of the Chicago Mercantile Exchange (CME), and the Intercontinental Exchange (ICE) each offer a cotton contract worth £ 50,000.

Both contracts are traded electronically and expire in March, May, July, October and December.

The Cotton # 2 contract specification

The price development Cotton # 2 on the spot market 2000 – 2020

To interactive COT chart

Earning money with cotton futures

In 2019, cotton gave us a profit of + $20,265 with just one trade.

In calendar week 17 after a correction of several weeks, we received a sell signal. This indicated a continuation of the downward trend that had been going on for months.

We placed our short order in the market and were triggered on May 01. We were in position with 15 contracts and the next few days brought us a profit of $20,265.

This trade – like all our actions on the market – was discussed and showed in detail in our trading group “COT Trading”.

If you would like first-hand information about our trading planning, trades and results, become a member of our trading group “COT Trading”.

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