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COTTON

Analysis of the cotton price before investing

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Before launching into speculating on the price of cotton, you should know the major stock market characteristics of this popular commodity as well as the factors that influence movements in its price, both major and minor.  

Elements to consider before investing in this asset

Analysis N°1

Demand from the textile industry worldwide.

Analysis N°2

The appearance and popularity of new textile materials (for this, you will need to follow the market trends and the major fashion designers collections).

Analysis N°3

The climatic conditions that affect the producing countries.

Analysis N°4

For the largest consumer countries that are also producers, such as China, it is important to study the difference between imports and exports.

Analysis N°5

The quality of the harvest, in terms of fibre quality, is also an important criterion.

Analysis N°6

Finally, to trade in cotton from the American agricultural sector it is also important to take into account government assistance and therefore the price that is specific to this production.

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General presentation of cotton:

Cotton is an agricultural commodity used principally in the textile industry for the creation of material. Although the use of cotton in the textile industry has dropped from 71% to 40% since 1950 it is still a favoured material in this industry.

Concerning production, several large countries share the honour with China at the head followed closely by the United Sates, India and Pakistan. In total 30 million tons of cotton are produced each year. It is however China that produces a quarter of the global production as the market leader. This country therefore plays a primordial role in the quote of the cotton price as a commodity.

 

What actually determines the price of cotton?

The price of cotton, like that of any commodity traded on the stock markets, is primarily fixed by calculating the difference between the strength of supply and demand. It is therefore the limited availability of this agricultural product that causes its price to rise when the demand is higher than supply as traders seek to buy more of this asset, and the contrary also holds true when supply is higher than demand.

But other fundamental factors also influence the price of cotton by acting on this difference between supply and demand.

 

Quotes and historical rates for the price of cotton:

As with all commodities, cotton is traded in the form of ‘futures’ and options. It is mainly quoted on the NYBOT (New York Board of Trade) in the United States of America. But it is important to note that the way in which the price of cotton is fixed does not uniquely depend on supply and demand as the American market includes subventions from the government on this sector of production.

This is why the prices paid to American cotton producers are often higher than those paid to other international producers. In any case the American government decided to decrease the amount of this assistance from 2013.

There is currently no reference contract that contributes to a standard for the international price of cotton. This is in fact too complex due to the different types of cotton products and their quality.

Historically the price of cotton rose until reaching its peak in 1995 before falling until 2002. It then started to rise again. Nowadays cotton remains a highly popular commodity in the textile industry as it is easy to produce and used to make material.

 

Fundamental analysis of cotton in real time:

The price of cotton is also influenced by so called ‘fundamental’ factors which can inversely affect a trend or cause its acceleration. A fundamental analysis here can assist in taking the climatic events into account that could affect production and the economic health of the cotton production industry.

 

Supply and demand in cotton worldwide:

Let us examine the two major factors that primarily influence the price of cotton, global supply and demand.

Frequently Asked Questions

What drives up the price of cotton on the stock market?

The price of cotton on the stock market is influenced by various factors. Recently, we have seen a significant increase in the price of cotton with a 45% increase in 2022 and a ten-year high in February. This is largely due to an increase in demand but also to weather conditions that have curbed production recently.

Where and how is the price of cotton set?

Cotton is currently priced in different ways. Indeed, the futures prices of this commodity are still determined by auction in the basket for a part while the other part is set by computerised public auction. It should also be noted here that the computerised part is becoming increasingly important and that futures prices will also depend mainly on the type of cotton, its quality and its delivery date.

Where and how to invest in cotton?

Cotton is not a commodity reserved for traders and institutional investors and individuals can also speculate on the price of this asset on the stock market. One way to do this is to use derivatives such as CFDs or Contracts for Difference, which are offered by online brokers and involve trading on whether the price of cotton will rise or fall.

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