Renowned for its versatility, cotton serves as a manufacturing staple in everything from medical supplies to t-shirts. Odds are that you use it on a daily basis. The robust consumer-producer relationship surrounding cotton promotes international commerce and the need for standardized futures contracts.
As with any other crop, the price of cotton is representative of evolving supply-demand levels and various market drivers. Tariffs, weather patterns, and spikes in consumption all have the potential to influence pricing dramatically. For 2018, producers and investors will be monitoring several cotton futures news stories very closely:
- Shrinking global stocks
- Extreme weather in U.S. producing regions
- Large purchases from China
Given the collective tone of these items, the intermediate-term prognosis is positive for cotton growers. USDA estimates have U.S. prices rising to an average of $0.70 per pound for the 2018/19 marketing year. This represents a $0.02 gain over 2017/18 — a potential boon for producers.
Trading Cotton on ICE
The Cotton No. 2 futures contract offered by the Intercontinental Exchange (ICE) is the premier cotton derivatives product in the world. Textile companies, growers, hedge funds, and retail traders engage the market in the hopes of achieving their individual financial objectives.
Here are the contract specifications for Cotton No. 2 available on ICE:
|Size||50,000 pounds net weight|
|Denomination||U.S. cents and hundredths of a cent per pound|
|Tick Size||1/100 of one cent|
|Expiry||March, May, July, October, December|
If you’re just getting started in cotton futures, being aware of key fundamentals is critical to approaching the market competently. Reports from the USDA, as well as the monthly WASDE release, are great places to scan for cotton futures news items that may be influencing trader sentiment.
Global Production Is Down
Statistics from the June 14 U.S. Department of Agriculture (USDA) Wool and Cotton Outlook have the world’s producers showing weakness. Global output for 2018/19 is estimated at 120.4 million bales, off 2.4 million bales (2%) from 2017/18. Here are the report’s projections for leading cotton producing nations:
|Country||2018/19 (Year-over Year Change)|
|United States||-1.4 million bales|
|Chine||-1.0 million bales|
|Australia||-1.1 million bales|
As a result of the yearly production gap, supply has suffered. USDA projections from early June have 2018/19 global cotton stocks at 83.0 million bales. This figure is down 5.2 million bales, almost 6% year-over-year. In the aggregate, estimates for 2018/19 have stocks at seven year lows.
The U.S. cotton futures news story grabbing the attention of traders has been the inclement weather cycle of 2018. Drought conditions in the Southwest, specifically West Texas, have been detrimental to Spring planting. Producers in the Southeast have experienced challenges posed by excessive rainfall. The result has been a drop in U.S. crop estimates, with 2018/19 yield at 19.5 million bales, down 7% from 2017’s final tally.
Led By China, Demand Remains Strong
Global demand appears to be holding steady. June USDA estimates for U.S. cotton demand 2018/19 come in at 18.9 million bales, with 80% heading for the export sector. World cotton mill use is forecasted to post a record 125.4 million bales for 2018/19, a growth of 3.8% year-over-year.
The primary demand-side cotton futures news headline for summer 2018 has been the aggressive buying by China. According to the Wall Street Journal, China has gone long 2019/20 cotton futures equal to 361,000 bales of U.S. cotton. This is a mammoth position, the largest advanced booking on record (1998).
The huge futures play from China, as well as the global economic expansion of the last 24 months, has boosted the outlook for demand. When coupled with lagging production and stocks, it’s not surprising that cotton futures are in the midst of a significant bull run. At press time, December 2018 Cotton No. 2 futures have posted June monthly highs above 92.00. This represents a 25+ percent bump in pricing since June 2017.
Trading Cotton Futures
Aside from the basic supply-demand dynamic, cotton futures are filled with nuance. From contract liquidity levels to simply placing orders on ICE, there is certainly a learning curve involved with trading cotton.
For more information on how to become active in cotton futures, check out the resources available at Daniels Ag Marketing. Whether you are a producer addressing risk or a commodities trader looking for an exciting new frontier, Daniels Ag can help remove some of the guesswork from global cotton.