The Learn About Futures Insider for September 15, 2011: Cotton

This soft staple fiber from the bolls of the cotton plant has been cultivated since about 3000 BC in the Indus Valley - part of modern-day India and Pakistan - and as early as 5000 years ago in the Americas. Ancient cultures spun cotton to make fine garments and textiles. Wild, uncultivated cotton has been found in Australia, Africa, Arizona, Central America, California, Brazil, and Mexico - and through breeding and selection, wild cotton plants were developed into the processing-friendly varieties grown today.

Contract Size: 50,000 pounds

Price Quote & Tick Size: Cents and hundredths of a cent per pound; minimum fluctuation is 1/100 of a cent per pound = $5.00 per contract

Contract Months: March, May, July, October, December

Trading Specs: Futures electronically only on the Intercontinental Exchange 21:00-14:30 ET. Options floor trading hours are 10:30 AM to 2:15 PM ET

Daily Price Limit: Futures contracts are subject to a daily price limit that can range from 3 to 7 cents per pound.

Trading Symbols: CT


Past performance is not indicative of future results.
***chart courtesy of Gecko Software

Cotton Facts
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Commercially grown cotton is normally one of five varieties; Egyptian, Sea Island, American Pima, Asiatic, or Upland. In the United States, the "cotton belt" growing region includes Alabama, Arizona, Arkansas, California, Georgia, Louisiana, Mississippi, Missouri, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia. A cotton crop needs a long frost-free period, a lot of sunshine, and moderate rainfall - it normally takes around 150 days from planting to harvest. Most dry tropic and sub-tropic areas across the globe can produce cotton.

Cotton’s lengthy growth cycle is detailed in the following illustration:


Cotton bolls are processed usually by use of a cotton gin (short for engine) which separates the lint from the seeds. Cotton is normally classified according to the fiber length or “staple”. The fiber is compressed into bales which the cotton industry has dictated standards for. Each bale is 55 inches tall, 28 inches wide and 21 inches thick.

The following charts show the top countries in production, imports, and exports of cotton for a recent crop year:


***data courtesy of USDA

The following graph shows the overall production of cotton in the US since 1960, the earliest year for which the USDA has available data:


***data courtesy of USDA

Price highlights for this market include:

* In 1973, the Agriculture Department announced a price support level for cotton for 1974 to guard against drops in price, and perhaps boost production. The move was in response to subsidy issues. By August this news coupled with concerns over a supply shortage had caused prices to move nearly 150 percent higher towards $1 per pound from less than 40 cents a pound.
* By 1975 prices had retreated back below 60 cents a pound, going under 40 cents a pound for a time.
* '76, '80, and '81 brought prices peaks above 90 cents a pound, boosted by a mixture of fundamental stories ranging from smaller crops to higher projected demand. '77, '79, and '85 would all see dips in price to 60 cents or lower per pound. A general rise in some commodity prices through the end of the 1970s was also attributed to imports by China.
* The real drop in prices - below 40 cents a pound - came in mid-1986 following strong production numbers and a move by the government to lower price support levels to spur export sales.
* Prices spiked again in 1990 and 1991 on headlines of increased demand, particularly for denim, and lower inventories. Prices were back below 60 cents a pound in 1992 and 1993.
* Prices surged above $1.00 per pound in 1995 on supply issues, domestic pest concerns, and generally bad harvests the previous year. At one point the New York Times reported that, "There are only 6,291 bales of cotton in the cotton exchange's warehouses, compared with 234,173 bales a year ago," NYTimes.com
* Prices continued lower in the intervening years, eventually heading below 30 cents a pound at the end of 2001. Beneficial weather brought a record crop that year of more than 20 million bales, according to November crop estimates.
* In 2010 and 2011, cotton prices marched through all time highs and headed to a new record price of more than $2.20 per pound before turning back below $1.00 per pound. The rise was fueled by a forecast for increased imports and demand from China, coupled with lower production levels.


Key market terms include:

Ginnings - A USDA report that has the number of bales that are ginned by state. This can be monthly or annual.
Bt cotton - Genetically modified cotton with Bacillus thuringiensis (Bt) to kill susceptible pests when they eat the GM plants. Accounts for around 13 percent of the world crop.
Staple Length - the length of the fiber. In most fibers, longer staple length is preferred and can produce a smoother thread.

Key Uses
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Cotton is a valuable source of fiber, and the obvious end-use for the crop is as a textile. However, cottonseed oil is also an important and valuable product. After the seeds are de-hulled, the meat of the seed is pressed to extract the valuable oil. Leftover meats and hulls are sold as livestock feed and the refined oil is used in foods, cosmetics, rubber, soaps, and even explosives.

Key Concerns​

Like most agricultural products, cotton depends on a delicate balance of ideal weather and irrigation. In addition, concerns for cotton may include the following:

Pests and Disease - Cotton crops require a high volume of pesticides and insecticides. One of the most destructive pests in North America is the boll weevil, responsible for devastating the cotton industry in the 1920s. The boll weevil feeds on immature cotton bolls; females can lay about 200 eggs in less than two weeks, and the larvae, in turn, will feed on flower buds. Diseases include various types of root rot, boll rot, rust, and mildew.

Competition - Since the end of the nineteenth century, the manufacture of synthetic fibers or alternative cellulose fibers has caused direct competition with cotton. The introduction of polyester and nylon caused hardship on cotton exporting economies and began a battle to re-establish markets for cotton in the late 1960s.

Fair Trade - Since cotton is grown throughout the world, some farmers in developing nations have difficulty competing with developed nations; and in 2002, Brazil took issue with the United States regarding subsidies paid to US cotton producers. Aside from issues with subsidies, many countries are criticized for employing child labor or exposing workers to dangerous pesticides - issues which have pushed forward the "ethical fashion" movements.

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