This article is a part of an ag commodities series prepared by Doug Christie, an agribusiness executive and author of the newsletter Agricultural Commodities Focus. For more in-depth analysis of ag commodities, visit the newsletter today.
Cotton is unique as a crop in that it is grown for textile use, not for food, feed, or fuel. The plant produces flowers and fruit which then mature into a cotton boll. The cotton fiber and seed are encased in the cotton boll. In the harvesting process, the boll is removed from the plant and the fiber and seed are separated from the boll. The post-harvest process of ginning separates the seed from the fiber to produce a bale of cotton lint. The baled lint is the globally tradable commodity while the remaining cottonseed is sold as a by-product to be further processed for vegetable oil or fed directly as a cattle feed.
What are the key drivers shaping the futures prices of cotton? In this article, Doug Christie, an agribusiness executive and author of the newsletter Agricultural Commodities Focus, provides an overview of cotton as a commodity.
Key Trading Parameters
Exchange Traded: Intercontinental Exchange (ICE), ICE Futures US
Price Quote: US cents per pound
Unit of Trade: 500-pound bale
Futures Contract size: 100 bales
Contract Months: Jan, March, May, Jul, Sep, Dec
Settlement: Physical Delivery
Market Drivers
Global Supply and Demand Dynamics: Cotton is produced in multiple countries with China, India, US, and Brazil the largest producers. Demand is concentrated in Asia with China, India, Vietnam, Pakistan and Bangladesh among the biggest users. Roughly 40% of annual production is traded cross-border.
Read More: How Weather Drives Ag Futures
Fragmented Supply Chain: The textile production process is highly fragmented with multiple steps (cotton growing, yarn spinning, fabric production, and apparel creation) often happening in multiple locations. This fragmentation creates unique trade flow. For example, the US is a major exporter of cotton fiber and a major importer of textiles. China is a large producer of cotton fiber, a large importer of cotton fiber and a large exporter of textiles. The fragmented supply chain creates challenges in sending and receiving supply, demand, and pricing signals.
Competing Fibers: While global textile demand is growing steadily, cotton’s share of total textile consumption has declined, with man-made fibers displacing cotton in many applications. The price and availability of man-made fibers, as well as consumer acceptance of synthetic fabrics, have fueled this trend.
Product Quality: Cotton has multiple quality parameters which impact how it is valued and where it can be used. Among the most important are fiber length, strength, color and purity. The method of harvesting - machine or manually picked - can also influence quality. Variability in quality can create surpluses and deficits for particular types of cotton within the overall supply and demand.
Read More: Global Ag Trade: A Fundamental Analysis
Data to monitor
USDA Cotton World Markets and Trade: This monthly report includes data on U.S. and global trade, production, consumption and stocks, as well as analysis of developments affecting world trade in cotton.
Read More: Commodity Supply-Side Information Sources
USDA Cotton and Wool Outlook: Published nine times annually, the report presents world cotton supply and demand projections. It is a valuable resource for traders, producers, and processors. By providing insights into the factors that are shaping the cotton and wool markets, the report helps these market participants to make informed decisions.
Cotton Incorporated Monthly Economic Letter: Published by Cotton Incorporated, a non-profit organization funded by cotton growers in the US, this newsletter provides research on fundamentals and price outlook for the cotton market.
CBOT Commitment of Traders Report: The Commitment of Traders Report provides insights into the positioning of futures traders. This report features information on the net positions held by different categories of traders, including commercial hedgers, large speculators, and small speculators.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
