Cotton is a soft, fluffy natural fiber that grows in a boll around the seed of the cotton plant. The plant is a shrub grown in the tropical and subtropical regions of the world. Cotton fiber consists almost purely of cellulose, and it is heavily used in the textile industry.

Cotton futures track the price of cotton and trade on ICE. Cotton futures are great for traders or hedgers who want to gain exposure to the cotton market in an easy and cheap manner. 

Production and use of cotton date back to ancient times — around 6,000 BC. It is thought that the first place the cotton plant was grown was in the Indus delta, in present-day Pakistan and India. The invention of the spinning machine and cotton gin during the industrial revolution brought a great boost in cotton production and the use of cotton in making cloths, vegetable oil, and linter.

As a very important commodity, cotton futures contracts are hugely traded on several commodity exchanges around the world.

Cotton Futures Specifications

 

Cotton Futures Contract Specifications
Symbol
CT
Exchange
ICE
Tick Size
$5
Point Value
$500
Contract Size
50 000 pounds (around 100 bales)
Contract Months
March, May, July, October, December
Trading Hours
8:00p.m. - 1:20p.m. (Settles 1:15p.m.) CST
Settlement
Physical Delivery
Grade
Quality : Strict Low Middling Staple Length: 1 2/32nd inc
First Notice Day
Five business days before the first delivery day of the spot contract month, which is the first business day of that month.
Last Trading Day
Seventeen business days from end of spot month.
Last Notice Day
Twelve business days from end of spot month.
Position Limit

Source

Uses of cotton

 

Cotton has become a very important part of our daily lives — from the moment you dry your face with a cotton towel in the morning to the time you retire to cotton-covered bed at night, you never cease from using cotton products. Its usefulness has made it one of the most-traded futures contracts in the commodity market.

Apart from its use in making a variety of fabrics, other components of the cotton plant are useful in many other ways. Here are the main uses of the various cotton products:

The fiber: Cotton fiber is used — alone or in combination with synthetic fibers — in making all sorts of textile products including terrycloth for towels and robes, denim for jeans, and cambric for corporate shirts. The fiber is also used to make bed linen, underwear, socks, T-shirts, curtains, and tablecloths. Apart from textile products, cotton is used in making coffee filters, fishing nets, tents, explosives, cotton paper, bookbinders, and blotting paper.

The linters: These are the by-products of the spinning and ginning process. They are short cotton fibers left on the cottonseed after processing, and they are used in making swabs, bandages, wads, tampons, and banknotes.

Cottonseed oil: Up to 60 percent of the weight of harvested cotton is made up of cotton seeds. The seeds are processed into cottonseed oil, which can be used for cooking or as an ingredient in many products, such as margarine, cosmetics, soap, emulsifiers, plastics, rubber, and even in certain pharmaceuticals.

Cottonseed meal: The leftover after extracting the cottonseed oil is used to make feed for ruminant livestock.

Where is Cotton Produced? 

Where is Cotton Produced?

Where is Cotton Produced?

Cotton is grown some 80 countries around the world, with an annual production of more than 26 million tonnes as of 2015. About 90 percent of the world’s cotton supply is gotten from the Gossypium hirsutum species. The top producing countries include India, China, USA, Pakistan, Brazil, and Uzbekistan.

Despite being one of the top producers, China is the largest importer of the commodity, importing about 17 percent of the global production. The US and Africa are the largest exporters since, unlike the East and Southeast Asian nations, they don’t have big domestic textile industries. Both the cotton farmers and the textile companies often transact via futures contracts to hedge against future price fluctuations.

Why Trade Cotton Futures Contracts

Why Trade Cotton Futures?

Why Trade Cotton Futures?

Of course, there are several reasons to trade cotton futures contracts. For each individual, the reason will depend on the person’s relationship with the cotton industry. While a cotton farmer may be in the futures market to secure a good price for his produce, a textile company comes to the market to ensure a stable supply of raw materials at a fair price. In addition, there are outside investors and speculative traders who play the cotton futures market just to make money. Here are the common reasons to trade cotton futures contracts.

Hedge against price fluctuations: For cotton farmers, futures contracts present a unique way to secure reasonable profit even before the cotton is harvested. All a farmer needs to do is to sell the number of contracts that is equivalent to his usual production volume.

Ensure a stable supply of cotton: Textile companies, who make use of cotton, approach the futures market to secure deals for the future delivery of the cotton they need for making their products. What they do is to buy cotton futures contracts that will be settled by physical delivery on expiration.

Speculate on price changes: There are many traders in the cotton market, who are there to just benefit from changes in cotton prices. These are called speculators, and they trade in either direction, depending on which side they think that the price will go.

Hedge against inflation: Many investors use commodities to hedge against inflation, and cotton is not an exception. As paper currencies lose their value due to increasing inflation, agricultural commodities like cotton tend to increase in value. Moreover, since the demand for cotton-based products is increasing due to population increase, cotton price is likely to rise in the future.

Diversification purposes: Investors and asset managers use the cotton market to diversify their portfolio and spread their risk exposure. This way, a selloff in one market won’t have an overbearing effect on their holdings.

Cotton Trading Strategies

Cotton Trading Strategy

Cotton Trading Strategy

Building trading strategies in cotton is possible and provides nice diversification in a portfolio. For example, have a look at this post, where where we showcase a robust trading strategy in the cotton market

Now, the cotton market is quite a tough market to develop trading strategies on, when compared to other futures markets. As such, a beginner should perhaps focus his efforts on other markets, where trading strategies are easier to find. 

How to Play the Cotton Market

While there are other ways to trade the cotton market, such as cotton options, cotton exchange-traded funds, and cotton CFDs, the best way to trade cotton is through the futures markets.

Cotton futures contracts trades on several futures exchanges around the world, including the Intercontinental Exchange (ICE), the Central Japan Commodity Exchange, Osaka Mercantile Exchange, Bolsa der Mercadorias & Futuros, and the New York Mercantile Exchange (NYMEX), which is a member of the Chicago Mercantile Exchange (CME) Group.

On the ICE and NYMEX, a cotton contract is settled for 50,000 pounds of the commodity and can be traded on their electronic trading platforms. Cotton contracts usually expire in the months of March, May, July, October, and December. On the NYMEX, the contracts are settled with cash at expiration, while on the ICE, they are settled by physical delivery.

One of the interesting things about trading futures contracts is that they are leveraged instruments — a trader only needs to deposit a small fraction of what a contract is worth (margin) to trade the full contract. However, depending on whether a trade is moving against, or in favor of, the trader, he may be required to make some additional deposits.

Comparing Cotton Futures Contracts With Other Options for Trading Cotton

Basis Cotton Futures Cotton Options Cotton ETFs Cotton CFDs
What it is
Agreement to exchange the asset at expiration
A right to buy or sell the asset on or before the expiration
Instruments that tracks the price of cotton but trades like stocks
Contract to exchange the difference in the price of the asset, from the time the trade is entered to the time it is closed
Where it trades
Commodity futures exchanges
Commodity exchanges
Stock exchanges
Online CFD brokers
Availability of leverage
Yes
Yes
Only with a margins brokerage account
Yes
Extra management cost
No
No
Yes
No
Expiration
Yes
Yes
No
No

Factors that Can Affect the Price of Cotton

There are many factors that affect the price of cotton, and these are some of them:

  • Changes in demand
  • Trade policies
  • China stockpiles
  • Energy prices
  • The price of substitutes

The demand for cotton-based products: If there is an increasing demand for cotton and cotton products, the price of cotton will rise, but when the demand for cotton-based products is on the decline, cotton prices fall. The situation may be complicated in cotton futures contracts where the future demand expectations are priced in.

Trade policies: Different government policies can affect cotton prices. Subsidies can lower the price of the commodity, while a ban on importation or an outright trade war can increase prices.

China stockpiles: China is the biggest consumer of the commodity, and of recent, they have been stockpiling cotton, creating higher cotton prices in their domestic market. If China decides to sell off their stockpile, cotton prices would decline.

Energy prices: Commercial cotton production is very expensive and requires big machines that use fuel. Increasing prices of crude oil will increase the cost of cotton production.

The price of substitutes: Substitute fabrics, like polyesters made from purified terephthalic acid (PTA), can have some effects on cotton prices. Increasing prices of PTA will increase the demand for cotton and push cotton prices up. Conversely, decreasing PTA prices will drag the price for cotton futures contracts lower.

Seasonality in Cotton

Here is a chart that shows the seasonality in the cotton market over the last 20 years.

Cotton Futures - Futures Contract Specifications and Cotton Facts

Source

Conclusion

Cotton is a very important commodity that is used in the production of different fabrics, hospital items, cooking oil, cosmetic products, banknotes, and livestock feed. It is mostly produced and utilized in the East and Southeast Asian regions. The best way to trade cotton is through the futures contracts, which are offered by the ICE and the CME Group.

You can find more info about futures market here.

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