July 28

Cotton Trading – 30 Things I Wish I Knew Before I Started

Last Updated on 28 July, 2022 by Samuelsson

Here is some information about Cotton trading. Stuff I wish I knew before I started trading the Cotton futures. 

Cotton futures market 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. 

1. What is cotton trading?

Cotton trading is the buying and selling of cotton contracts or instruments in order to make a profit. As a very important commodity, cotton futures contracts are hugely traded on several commodity exchanges around the world.

2. What are cotton futures?

The term cotton futures refers to futures contracts that allow traders to buy or sell a contract today to be settled at a future date. Cotton futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of cotton (eg. 5000 bushels) at a predetermined price on a future delivery date.

3. How is cotton traded?

Cotton futures contracts are offered on the ICE Exchange, and they can be traded from any part of the world through the Globex electronic trading platform. One cotton futures contract is equivalent to 50000 pounds (about 100 bales) of cotton, and the price quotation is in cents per bushel

4. How do you start trading cotton futures?

To start trading cotton futures, all you need to do is to create an account with the exchange through your futures broker and deposit the required margin. Since it is a leveraged instrument, you need not have the full dollar worth of the contract before you can trade it. However, you have to be cautious about leveraged instruments — while you can make more money with them, you can also lose more.

5. What is cotton trading at?

Prices of cotton can be found here.

6. What is the current price of cotton and cotton futures?

You can also find the current cotton prices here.

7. When does the Cotton contract expire?

Cotton futures trade for delivery or expiration during the months of March, May, July, October, and December.

The last trade date is Seventeen business days from the end of the spot month.

8. Whats cotton futures trading hour?

8:00p.m. – 1:20p.m. (Settles 1:15p.m.) CST
 

9. Where can I find trading charts?

Here you can find cotton trading charts.

10. 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 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. 

11. What are the trading symbols for cotton?

CME Globex: CT=F
CME ClearPort: CT
Clearing: CT

 

12. What are the Cotton Futures Contract Specifications?

Cotton Futures Contract Specifications?

13. Why Should You 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, that 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 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 portfolios and spread their risk exposure. This way, a selloff in one market won’t have an overbearing effect on their holdings.

14. What are cotton used for?

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.

15. What is cotton?

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.

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.

16. How do you invest in cotton?

You can invest in cotton via futures contracts, options, CFDs, or ETFs.

How do you invest in cotton?

17. Are there an ETF for investing in cotton?

Yes, the ETF BAL is a good option. It is called iPath Dow Jones-UBS Cotton Subindex Total Return ETN (BAL).

18. Where can I find news about cotton futures?

Here is a good source for cotton news.

19. What factors affect cotton prices?

There are many factors that make the cotton market go up and down and that change the price. Here 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.

20. Are cotton a commodity?

Yes, cotton is a commodity.

21. What is the all-time high of cotton?

Historically, cotton reached an all-time high of 227 in March 2011.

22. Who are the Largest Producers and Consumers of Cotton

 

[22. Who are the Largest Producers and Consumers of Cotton
Where is Cotton Produced?
 

Cotton is grown in 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.

23. How do you trade cotton futures?

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.

24. What is the seasonality of cotton?

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

 

cotton seasonality

25. How does cotton trading work?

Cotton is traded in 50,000-pound contracts. It is also traded in cents per pound, so if the market is trading at 53 cents per pound, the contract will have a value of $26,500 ($0.53 x 50,000 pounds = $26,500). The minimum tick size is $0.0001 or $5 per contract.
 

26. How do I buy stock in cotton?

You cannot buy cotton stock. However, you can buy an ETF (Symbol: BAL) that is following the prices of Cotton. ETFs are traded on the stock markets.

27. Is it risky to trade cotton?

Yes, trading cotton can be risky. A strong US dollar could make cotton prices go lower. Overproduction by large suppliers could also make it go lower.

28. What is the contract size for cotton futures?

It is currently: 5,000 bushels (~ 86 metric tons)

29. What is the tick size of cotton futures?

The minimum tick size is $0.0001 or $5 per contract.

Contract Size

50,000 pounds net weight

30. What is the Daily Limit on Cotton Futures?

Futures contracts are subject to a daily price limit that can range from 3 to 7 cents per pound. Please consult Rule 10.09 for details (Click here for Cotton Rules.pdf)

Limit-down refers to the maximum amount the price is allowed by an exchange to fall in one trading day. In other words, it is the maximum decline in price permitted before trading is curbed.

Final thoughts

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.

Cotton is an edible legume used for extracting vegetable oil, producing protein-rich diets for vegans, and making livestock feed. The best way to trade cotton is via the futures market, and cotton futures contracts trade on many commodity exchanges around the world.

Here is our archive with articles about other tradeable futures markets.


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