How to invest in cotton
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.
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.
The indicators to follow for trading in cotton:
There are only a few agricultural commodities that unite as many pertinent indicators as cotton. If you are thinking of beginning trading in this commodity you will need to mainly take into account the following elements:
- Demand from the textile industry worldwide.
- The appearance and popularity of new textile materials (for this, you will need to follow the market trends and the major fashion designers collections).
- The climatic conditions that affect the producing countries.
- For the largest consumer countries that are also producers, such as China, it is important to study the difference between imports and exports.
- The quality of the harvest, in terms of fibre quality, is also an important criterion.
- 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.
Where and how to trade in cotton online?
Cotton, as with many other assets in the agricultural commodities sector, can be traded directly online using CFDs or Contracts on the Difference. You simply need to create your online trading account with a reputable broker such as the one we recommend here.