Let’s Talk Cotton Futures

Cotton futures may not be as popular as other, more well-known commodities like gasoline and crude oil, but they are still a key player in the commodities markets and have a broad reach in the global community.

The purpose of cotton futures is the same as any other agricultural commodity: to take advantage of bumper crops and/or increased demand for textiles and other cotton-based products, as well as to hedge against a poor crop and/or decreased demand for cotton-derived products. As with other futures, cotton futures give you the opportunity to leverage cotton using only a relatively-small margin – without having to store thousands of bushels of soft, fluffy white material.

In this article, I’ll cover cotton futures, including how cotton futures prices are determined and how the market for cotton works. I’ll also give you the specifications for cotton futures contracts and what is available in the market for you.

Details About Cotton Futures Contracts

The cotton futures symbol is CT, and they are traded on the IntercontinentalExchange (ICE), which is primarily an online marketplace for commodities. You can also trade cotton futures on the New York Mercantile Exchange (NYMEX); the symbol there is TT. With the exception of trading hours, all other contract specs are the same for the two exchanges.

Each cotton contract you purchase gives you control of 50,000 pounds of net weight, which works out to roughly 1,562 bushels (each bushel contains 32 pounds of cotton) or 100 bales. Contracts are denominated in U.S. dollars and cents per pound of cotton, and the minimum price fluctuation is $0.0001 per pound – equal to $5.00 per contract per tick.

Contracts are listed for expiry in March, May, July, October, and December.

Trading Hours for ICE

New York: 9:00pm to 2:30pm (pre-open 7:30pm)

London: 2:00am to 7:30pm (pre-open 12:30am)

Singapore: 9:00am to 2:30am (pre-open 7:30am)

Trading Hours for NYMEX

Sunday-Friday 6:00pm to 5:15pm

Initial and Maintenance Margin

For NYMEX, margin requirements are $3,300 per contract from October, 2012 to July, 2014, with a maintenance requirement of $3,000. For ICE, there is an initial margin requirement of $2,750 for American markets, with a maintenance margin requirement of $2,500.

There are no mini contracts for cotton futures offered on any exchange at this time. Mini contracts allow for smaller contract sizes and are more affordable; not all commodities have them available.

What Influences Cotton Future Prices?

Cotton futures prices are like other agricultural prices in that they are subject to factors outside of our control.

The main threat to the price of cotton is weather. Cotton is an extremely thirsty crop, so any threat of drought in primary cotton-producing regions can send the price upward. The main cotton-producing areas of the world are China (33 million bales/7.5 million metric tons), India (27 million bales/6.1 million metric tons), and the United States (18 million bales/4.1 million metric tons). The United States, however, is the leading exporter, and when supplies are short in China and India thanks to drought or other weather disruptions, prices for American cotton tend to rise.

Pay attention to Texas and the Mississippi delta, where the majority of American cotton is grown. In China, over a third comes from the Xinjiang province. In India, Gujarat, Maharashtra, and Andhra Pradesh are the leading cotton-producing regions. Severe weather in these areas, especially drought, can impact the price of cotton.

Insects also damage cotton production, specifically the boll weevil. The boll weevil has been largely eradicated in the United States,

For up-to-date information on American cotton production, including export sales and prices in the global market, check the Weekly Cotton Market Review from the USDA.

Cotton is also subject to seasonal variation. The highest prices tend to happen in the spring and summer, between March and July. Prices begin to drop significantly in September and bottom between September and November.

Historically, cotton prices have risen dramatically from their value after the turn of the 20th Century. This cotton futures price chart shows the gradual rise that culminated in a massive uptick in the 1970’s:

The main contributing factor to the rise of cotton from the 1970’s onward has been the rapid expansion of global population and demand for cotton to create fabric and clothing for the world’s population. Demand has more than doubled since 1980, and prices responded accordingly – culminating with a sharp spike in 2011 that saw the price of cotton rise to over $210 a pound.

Since then, though, the price of cotton has fallen dramatically to just over $75 per pound. Most of the decline can be blamed on overly-optimistic traders who thought global demand for cotton would be sky-high. An over-production of cotton ensued; when the aforementioned demand didn’t exactly materialize, cotton traders realized they had overshot their mark.

The main concern with cotton is this: when the price of cotton peaked, other materials became much cheaper to use for manufacturers and producers. Even with prices (relatively) low, it is possible that cotton lost vital market share that can’t be easily regained.

Volatility is expected for the foreseeable future until the market rights itself and achieves a stable balance between production and consumption.

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