Cotton

Cotton trading can be used to bet on global stockpiling, hedge against inflation, and speculate on oil prices. Its widespread application in the textile industry makes it a popular soft commodity with online traders. This manual unpacks key manufacturing countries and companies, strategy considerations, market economics, and cotton trading vehicles. Our experts have also reviewed and ranked the top cotton brokers: 

Cotton Trading Basics

Cotton is primarily used in the textile industry to make clothing, bedding, and curtains. Its application also extends to a variety of other items, including tents, book binds, bank notes, and even gear for astronauts.

The price of cotton can fluctuate for a variety of reasons, including government subsidies, an increase or decrease in the production of competing materials, plus sales of stockpiles by key suppliers like India and China.

The Intercontinental Exchange (ICE) plays an important role in trading futures and options in the soft commodity. Futures are standardised agreements to buy or sell an asset at a predetermined price and date in the future. ICE cotton futures are a key benchmark for the global cotton industry.

Traders can speculate on the price of the cotton through a variety of vehicles, from futures and options to CFDs and stocks in companies involved in the cotton industry.

History

Cotton trading dates back centuries and was one of the first commodities traded on a global scale. Initially, it was mainly produced in India and exported to Europe. The market was dominated by British companies, who played a significant role in shaping the global cotton trade.

By the mid-1800s, the United States had surpassed India as the world’s largest cotton producer, and cotton trading had become a global industry.

Between 2000 and 2010, world cotton production increased from 89 million bales to 117 million bales, a 32% increase. During this time, China emerged as the largest consumer of cotton, consuming over 50% of the world’s supply. Additionally, the use of technology in cotton trading increased, with electronic trading platforms such as ICE becoming popular.

Post-2000s, cotton trading continues to be a vital part of the global economy. Cotton is still one of the world’s most important cash crops, with an estimated 20 million people involved in its production.

The market is highly competitive, with companies from around the world involved in cotton trading. Technological advancements have further increased the efficiency of cotton production and investment, with the use of blockchain technology and artificial intelligence becoming more prevalent.

Cotton is still mainly produced in countries with weather that accommodates cotton crops, such as India or Pakistan, however it is traded globally including in the UK.

Price Chart

Factors That Influence The Price Of Cotton

• International demand and supply: The global supply and demand of cotton is a major factor in its price, and fluctuations in demand from major importers such as China play a key role.
• Economic indicators: Inflation rates, exchange rates, and interest rates can impact the price of cotton. If the value of the dollar rises against other currencies, this can lead to a decrease in the price of cotton as it becomes more expensive for foreign buyers.
• Weather patterns: If weather conditions are unfavourable for cotton crops, such as droughts or heavy rains, this can limit the supply of cotton and increase its price.
• Government policies: Trade agreements and subsidies can influence the price of cotton. If a government provides subsidies to cotton producers, this can increase supply and lower prices.
• Technology: Technological advances in cotton production can impact the price of cotton. If new technology makes it easier and more cost-effective to produce cotton, this can increase the supply and lower prices.
• Production costs: If companies face pressure from high production costs, this can limit the supply of cotton and increase its price.

Benefits Of Trading Cotton

• Cotton is volatile which opens up opportunities for profit
• It can be used to speculate on rising oil prices due to a high correlation
• Similar to other commodities, it can be used as a hedging tool against inflation
• Cotton trading is available through various vehicles, including leveraged CFDs, futures and options

Risks Of Trading Cotton

• High volatility also increases the chance of large losses
• Cotton is heavily influenced by weather conditions which can be hard to predict
• Cotton is primarily traded by large firms and institutions so the choice of retail brokers is limited

How To Trade Cotton In The UK

There are several ways for UK traders to participate in the cotton trading market:

• Stocks: Buying and selling shares of companies in the cotton industry, either through the production or sale of related items like clothes, is another way to bet on cotton prices. Importantly, share dealing is a more indirect way to speculate on the price of cotton. Popular cotton stocks include Deere & Company and FMC Corporation.
• ETFs: Cotton ETFs provide exposure to the soft commodity, alongside other assets, such as agricultural commodities. They are essentially a group of assets traded on an exchange, reducing risk through diversification. Popular cotton ETFs include the iPath Series B Bloomberg Cotton Subindex Total Return ETN.
• CFDs: A popular choice among UK retail traders who want to speculate on cotton prices without taking ownership of the physical commodity. By using CFDs, traders can open positions that bet on the future direction of cotton prices. With the use of leverage, traders can also amplify their potential profits or losses. CFDs do not have a fixed expiration date, so traders can hold their positions for as long as they want, though they are typically used for short-term trading strategies.
• Futures: Cotton futures are contracts that allow traders to buy or sell cotton at a predetermined price and date in the future. These contracts are primarily traded on commodity exchanges such as the Intercontinental Exchange (ICE). Futures contracts are commonly used for hedging, a risk management strategy that allows traders to protect themselves from price fluctuations in the cotton market. They can also be used for speculative purposes.
• Options: Cotton options are contracts that give the holder the right, but not the obligation, to buy or sell a specific amount of cotton at a predetermined price and time in the future. They provide traders with the flexibility to limit their potential losses to the premium paid for the option.

Comparing Cotton Trading Brokers

• Fees: Compare the fees charged, including spreads, commissions, and any payment fees. Pepperstone, for example, offers cotton CFDs with a 0.16 minimum spread, 1:50 leverage, and a contract size of 10,000 lbs.
• Trading platform: Look for cotton brokers with a user-friendly trading platform that has advanced charting tools and technical indicators. Make sure the platform is stable and fast, and that it can be accessed on different devices, such as your mobile phone via an app. MT4, MT5 and TradingView are popular picks.
• Range of assets: Check the range of cotton contracts and other commodities offered by the broker, as well as other markets such as stocks and forex. This will allow traders to build a diverse portfolio. XTB, for instance, offers 28 commodities (including cotton), plus thousands of stocks CFDs, indices, ETFs, forex, and cryptos.
• Demo account: Beginners should check if the broker provides a demo account or virtual trading environment. This allows traders to practice trading cotton without risking real money. Also, look for educational materials such as webinars, video tutorials, and eBooks.
• UK regulation: Verify that the brokerage is regulated by a reputable authority, such as the FCA. Also ensure that the broker has a strong track record and positive reviews from other traders. Also check for contact number details in case of any issues.
• Additional tools: The best cotton brokers offer expert insights and data into the soft commodity. They will also provide an economic calendar with upcoming events and news that could impact cotton prices.

Cotton Trading Hours

Investors can trade cotton futures on multiple exchanges, such as the Singapore Exchange (SGX), however, the Intercontinental Exchange (ICE) is typically the exchange of choice for UK traders. The trading hours of the ICE for cotton traders are:

• Sunday to Friday: 8:00 PM to 7:00 PM GMT
• Last trading day of the month: 8:00 PM to 3:00 PM GMT on the next day

Bottom Line On Cotton Trading

Cotton trading provides exposure to a volatile soft commodity with widespread applications, including in textiles, homeware and industrials. It can be used to hedge against inflation, speculate on oil prices, and profit from supply and demand imbalances caused by the sale of global stockpiles, for example. Our list of leading cotton brokers offers trading through multiple vehicles, such as CFDs, ETFs, futures, and options.

FAQ

Article Sources

Cotton facts and figures

Cotton outlook across prices, production, consumption and trade 

Cotton trading conditions at Pepperstone