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.
- The supply: Cotton is grown in areas with a certain climate featuring alternating periods of dryness and humidity. The cotton fibres are generally separated from the seeds. The fibre is used as thread in the textile industry and the seeds for the production of alimentary oil and animal protein. India is actually the largest producing country worldwide at 6.6 million tons, just above China which boasts a production of 6.5 million tons. In third position is the United States with n annual cotton production of 3.5 million tons then there is Pakistan, Brazil and Turkey. However, the leading global exporter of cotton is the United States partly due to the fact that its agriculture is heavily subsidised thereby enabling production that is higher than its actual requirements.
- The demand: A significant fall in the use of cotton by the textile industry can be noted over the last few decades, particularly since the 1950s, due to the appearance of synthetic fibres on the market. However, the demand remains fairly stable due to population growth which compensates for the former. The major consumers of cotton are the developed countries with a significant textile industry such as China which is also the leading cotton importer worldwide but also India, Pakistan and Turkey.
How to invest in cotton online?
There are several options for investing in cotton online. The choice of one or the other of these methods that we will present here will depend mainly on your knowledge and your level of risk aversion. It is also possible to diversify your cotton investments by choosing several of these investment methods. Here are the main ways to invest in cotton online:
- Cotton futures: Cotton futures are used to speculate on the future price of cotton. Investors buy or sell futures contracts for a certain quantity of cotton at a pre-agreed price. Futures contracts are traded on commodity markets around the world. However, it is important to note that futures contracts are a risky investment and require in-depth knowledge of the market.
- Exchange-traded funds (ETFs): Cotton-related ETFs offer a simpler and more accessible way to invest in cotton. ETFs allow investors to buy a share of a portfolio of shares of companies involved in the cotton industry, or a cotton futures fund. ETFs can be bought and sold on exchanges like stocks.
- Shares of cotton-related companies: Investors can also buy shares of companies involved in the cotton industry, such as producers, processors or distributors. Before investing in shares, it is important to understand the company's business, financial health and potential risks.
- CFDs (contracts for difference): Cotton CFDs allow investors to speculate on cotton price fluctuations without having to physically own the commodity. CFDs are financial instruments that allow investors to trade up or down in the financial markets. Cotton CFDs are offered by many online brokers, but it is important to note that CFDs are a risky investment and require a thorough knowledge of the market.
It is important to note that investing in cotton can be risky due to price volatility and market risks. It is therefore recommended to do thorough research and consult a financial advisor before making an investment decision.