Cotton trading is a huge, global industry and, while it may not be the first thing on many investors’ minds, it presents lots of opportunities to make profits. There are many different cotton trading companies and brokers available in the UK, US, Pakistan, India, Malaysia, Switzerland, Singapore and all around the world, so you can benefit from this exciting industry no matter where you are. This article aims to guide you through cotton commodity trading, including its history, the different instruments available and typical trading hours. We will also provide a manual with useful tips to get you started and check out our list of the best brokers for cotton trading below.
Top Cotton Trading Brokers
Forex.com boast a global reputation. Regulated in the UK, EU, US and Canada they offer a huge range of markets, not just forex, and offer tight spreads on a cutting edge platform.
One of the largest discount brokers in the US, with a fixed trading commission and access to a large array of trading products and securities.
What Is Cotton Trading?
When people and investors look to get into the commodities markets, they usually look to precious metals, such as silver, and energy sources like oil and natural gas. The soft commodities markets, on the other hand, are often overlooked. Soft commodities are made up of perishables like cocoa, coffee, sugar and cotton, which are some of the oldest tradable commodities still around today. Their commerce roots can be traced back over thousands of years.
Cotton trading is popular largely due to the material’s range of uses. While cotton candy is not one of these, there are several others, many of which are in the textile and clothing industries, such as t-shirts and garments. You do not have to look far to find a cotton trading company or business, the market is full of them. These companies and firms span the world and include Cotton Trading Ltd., Cotton Mount (Mallusk), Cotton Rag Trading, Cotton Tree Trading Pty Ltd., Cotton Knit Trading Inc., OSC Cotton Trading LLC, Duluth Trading (Underwear), Cotton Pro Trading (S) Pte Ltd., Cotton Trading Corporation of Pakistan (Pvt) Ltd., All-Cotton Trading Company, Cotton Home Trading LLC, Cotton Zone General Trading LLC and Cotton Trading International Limited.
The cotton trading industry is harnessed by producers, consumers and investors alike. Producers use it to sell their stock at suitable prices throughout the year and consumers use it to purchase cotton. Investors aim to profit from the fluctuations in the price of cotton by investing in cotton futures, options and CFDs.
Cotton trading occurs on markets all around the world. Some of the most popular are the Chicago Mercantile Exchange, the Multi Commodity Exchange and the New York Mercantile Exchange. Trading times and hours vary between each exchange, as does the price of cotton, which is influenced by several different factors. Today, trading does not just occur in-person inside exchanges. Investors can trade remotely through their monitors and trading platforms in the US, UK and around the world.
History Of Cotton Trading
The trading of cotton goods was taking place between India and Persia as early as the fifth century BC. Around the ninth and tenth century AD, cotton was brought to southern Europe (Greece, Sicily and Spain) on a large scale by Arab traders, before being imported to North Europe in the thirteenth century. Cotton was then brought to the New World (the Americas) when Christopher Columbus discovered the Bahamas. The cotton trade experienced considerable growth in production towards the end of the eighteenth century and the beginning of the nineteenth. The advances of the industrial revolution lowered the costs of manufacturing cotton, as did the invention of the saw gin by Eli Whitney in 1793.
Cotton futures trading started in the mid-nineteenth century. The first exchange was set up in Alexandria (Egypt) and another shortly followed in New York (USA). By the 1880s, there were five cotton futures exchanges in operation (Alexandria, New York, Liverpool, Le Havre and New Orleans) spanning three continents and connecting the trade of cotton futures contracts by cable. Throughout the nineteenth and twentieth centuries, at least 15 cotton futures exchanges were in operation around the world. Futures, unlike forwards contracts, gave buyers the option to not receive said cotton, instead receiving a cash settlement of the difference between the agreed price and spot price at contract expiration.
Who Are The Biggest Producers Of Cotton?
China and India are by far the biggest producers of cotton and the largest contributors to the cotton trading industry. The two countries produce a whopping 6.42 million metric tons (MMT) and 6.16 MMT per year, respectively. After these, the next biggest producer is the United States, which produces 3.18 MMT per year, largely from the southern states, followed by Brazil, which produces 2.34 MMT per year.
What Influences The Price Of Cotton?
Many factors affect the price at which cotton is listed for sale in the trading industry. The economics are complex but some factors have more impact than others. These range from political and economic influences to uncontrollable things like the weather. Here, we will cover a few of the main factors that impact the price of cotton.
When the economy struggles, consumer spending decreases, which has an impact on the cotton trading industry. This reduces the rate of spending and amount spent on cotton items such as sheets, shirts and jeans. Generally, this reduces the price of cotton, as there is less demand. It can also lead to substitutions by companies, which may look to use synthetic materials instead of cotton. Equally, a booming economy can have the opposite effect and increase the cotton price.
Government policies can have a big impact on the price of cotton. Many cotton-producing countries look to implement policies to insulate their farmers and the textile industries from external competition. However, this can harm other global cotton producers. For example, since the 1930s, the US has subsidised cotton farmers, leading to more crops being grown and thus increasing the supply. This drives the overall price of cotton down and impacts other cotton-producing countries.
The weather can have a great impact on the price of cotton. Changes in weather patterns can cause a lack of rainfall, which can devastate production if it occurs during the planting cycle. If there is particularly bad weather, the overall production of high-grade cotton will decrease. This reduces the supply and results in the price rising.
China implemented a cotton stockpiling program between 2011 and 2013. During this time, the country would purchase cotton fibres if stock prices fell below a certain price floor. The aim was to ensure Chinese farmers received a minimum price for their cotton harvest. China constructing this stockpile was a leading factor in a surge in global cotton trading prices and any attempt to offload the stockpile will likely have a further impact.
The Price Of Synthetic Fibres
Cotton competes with polyester and synthetic fibres in the world’s fibre and apparel markets. When cotton jumps in price, countries like China look to expand their capacity for synthetic fibres like purified terephthalic acid (PTA), the oil-based raw material for polyester. The price for PTA has been declining sharply since 2014, improving the price competitiveness of polyester against cotton. This forces cotton prices to drop as manufacturers switch to cheaper synthetic fibres, reducing the demand for cotton.
Of all the agricultural commodities, cotton has the highest per-acre energy costs. Changes in the price of oil can have a direct impact on the price of cotton. A recent report found the correlation between cotton and crude to be the highest across all commodities at 0.45:1. As a result, if oil goes up in price, cotton also increases due to higher production costs. Additionally, changes in oil prices affect the price of polyester.
The US dollar is the most stable currency of all and many countries hold dollars as reserve assets. The dollar has a large impact on the price of all internationally traded commodities, as it is usually the exchange mechanism used. If the value of the US dollar decreases relative to the cotton buyer’s currency, that trader will need to spend less of their own currency to buy the cotton. This makes the commodity less expensive, which increases demand and thus the price of cotton. Cotton has a high inverse correlation against the US dollar of around -0.47:1.
The Price Of Competing Crops
The land that cotton is grown upon is also used for other crops like corn and wheat. If the price of these crops increases, farmers may be inclined to grow more as they can fetch a higher price and higher returns. This results in less cotton being planted, reducing supply and driving cotton trading prices up.
How To Trade Cotton
There are many different instruments that allow you to trade cotton. We have run through them all here so you can find the most suitable one:
- Spot: Spot trading is a popular way for investors to trade cotton. Spot trading refers to the purchase of an amount of cotton for instant delivery on a specified date. If you are looking to purchase cotton and sell it on, this instrument could work for you. However, if you just want to speculate on price movement, you should look elsewhere.
- Futures: A commodity futures contract is an agreement to buy or sell cotton at a future date. The price and amount of cotton are fixed at the time of the agreement. Most contracts contemplate that the agreement will be fulfilled by the delivery of the commodity, so if you are looking to speculate on price movement, this might not be the instrument for you. It is possible to sell the contract at a later date before having to accept delivery of the product or receive a cash settlement as is commonly agreed.
- Options: Options contracts are very similar to futures contracts in that the price and amount are fixed during the agreement. However, with an options contract, you are not obliged to purchase the cotton, you can turn the offer down if you wish (if the markets go against you).
- Spread: A spread involves the simultaneous purchase and sale of a commodity, like cotton. Cotton spread trading is suitable for those looking to benefit from price movement. If they purchase an options contract and the price increases, they can activate the contract and sell the cotton instantly for profit, without having to accept delivery of the amount of cotton.
- Cotton Stock: There is a range of cotton related stocks and shares available for traders to invest in. These generally fluctuate in value with the price of cotton. The stocks provide a great way for investors to profit off or hedge against the price movement of cotton, without purchasing an amount of the commodity.
- CFDs: CFDs are derivative products that allow traders to speculate on the price movements of cotton without taking ownership of the underlying asset. Traders can aim to profit off the price either moving up or down. This instrument is perfect for traders who want to speculate on which direction the price of cotton will move.
- ETFs: An ETF is an exchange-traded fund, which can be invested in physical commodities, such as cotton. It tracks the price and performance of the commodity or commodities it accounts for. ETFs are a great instrument for those that do not want to own the underlying cotton assets. It is possible to purchase ETFs that track the performance of a range of soft commodities, including cotton, coffee, sugar and others.
Pros Of Cotton Trading
- Range of instruments available to suit your trading needs
- Price is linked to other commodities like oil
- Cotton price experiences large fluctuations
- Worldwide market
- High liquidity
Cons Of Cotton Trading
Our research flagged these as potential drawbacks to trading cotton:
- Unpredictable events like bad weather can impact the price
- Rapidly changing synthetic world can affect prices
Cotton Trading Strategies
Finding a good cotton trading strategy can be difficult. We will provide details on some interesting cotton trading strategies that will hopefully mean you do not have to scroll through internet posts to find a suitable one.
Range trading is a strategy used in all types of financial market trading and it can easily be applied to cotton. This method is built around cotton trading charts with data provided by the Intercontinental Exchange (ICE), among other exchanges. The user sets up support and resistance levels. When the price is at the support level, the bottom of the range, the investor purchases cotton. Then, when the price hits the resistance level, at the top of the range, the investor sells.
For example, let us say cotton is trading currently at $0.6500. This is believed to be the middle of the range. The investor can set a support level of $0.6000 and a resistance level of $0.7000. When cotton hits the support level, the investor buys, when it rises to the resistance level, they sell. Traders can use algorithmic trading to automate this process. The risk with range trading is that the cotton could move beyond the expected support and resistance levels.
A breakout trading strategy is designed to capitalise on short term price movements. The trader will seek to buy cotton just before the price jumps significantly higher or sell before it drops substantially. The key to this approach is identifying when the breakout will occur. The strategy works best when trends are strong and long-lasting. The direction of the trend does not matter. One warning is that it performs poorly when markets are not able to establish strong short-term trends.
How To Start Trading Cotton
So, you want to start cotton trading. We are here to help. W have created this manual, so you do not have to find books or PDFs online to get going:
- Choose A Broker: The first step is to choose a broker that offers cotton instruments. There are several important factors to consider in your decision. Compare the fees, instruments, platforms, payment methods and regulation. Also, check that customer support contact numbers and emails are listed, this will be vital if you encounter any issues. You can find a complete guide to finding a broker here.
- Open & Fund An Account: Once you have chosen a broker, open an account with them and fund it.
- Open A Position: The next step is to take a position. Research the market and make your prediction as to which way the price of cotton will move. Once you are ready, purchase a contract or take a position on the market.
- Monitor & Close: Monitor your open position, checking the market regularly. When it is favourable and suits you, close your position and take your profit. If things aren’t going your way, you can also close the position to mitigate losses.
Trading Cotton Tips
These handy tips could help give your cotton trading output a boost:
Charts, Data & Graphs
Keeping an eye on market data is important for trading any commodity and cotton is no different. There are lots of charts and graphs provided by companies and platforms like TradingView that track the performance and price of cotton. Make sure to check historical data too, trends often repeat themselves.
Read The News
Always stay up to date with the latest agricultural news when cotton trading. Any updates could indicate how good the next crop is likely to be or it could indicate whether farmers will be turning to other crops. Also, news updates could indicate changes in policy by China, India or other leading producers of cotton.
Final Word On Cotton Trading
Cotton and other soft agricultural commodities are often overlooked by investors but they provide an exciting way for investors to diversify their portfolios. The markets are active worldwide, with large price fluctuations presenting opportunities for short and long-term profit. As one of the most widely produced crops in the world, we recommend cotton as a gateway to soft commodities. Follow our step-by-step guide above to get started today.
What Is The Last Trading Day For Cotton Instruments?
The last trading day for cotton assets is the final day of a futures or options contract. On this date, the trade is settled, either with the delivery of an amount of corn or a cash settlement.
What Are The Cotton Trading Times For The MCX?
The MCX is the Multi Commodity Exchange. Cotton trading occurs between 09:00 and 21:00 GMT + 5:30.
What Are The ICE Cotton Trading Hours?
The ICE is the Intercontinental Exchange. Cotton trading occurs between 02:00 and 19:20 GMT.
What Is Cotton Trading At Today?
The price of cotton fluctuates all the time. If you want to find the current price, visit the ICE website, or visit sites like Trading Economics.
Who Produces The Most Cotton?
China is the biggest producer of cotton in the world, followed closely by India. The US and Brazil are the next largest cotton producing countries.