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How to Trade Cotton Futures

March 29, 2021 10:30 UTC

Cotton has been a staple in the textile industry for many years. In fact, there is evidence that cotton was being grown and woven into cloth over 5,000 years ago. Although its use in clothing has fallen in recent years due to the emergence of substitutes, cotton is still a multi-billion dollar industry and is one of the most traded commodities in the world.

In this article, we will take a look at this commodity, discuss what factors can alter its price and explain how you can start trading cotton futures with Admirals (formerly Admiral Markets)!

Trading Cotton Futures

What Are Futures Contracts?

Before taking a deeper look into the commodity cotton, it is worth quickly recapping what futures contracts are.

A futures contract is an agreement between two parties to exchange an underlying asset at a predetermined price on a fixed date in the future.

Futures can be used by both consumers and producers of cotton, seeking to hedge their risk against future movements in price. However, they are also heavily used by speculators, who buy and sell futures contracts to attempt to take advantage in movements in the price of the underlying asset without ever taking or delivering ownership of the asset in question.

Futures are bought and sold on future exchanges. They are regulated and all contracts are standardised for both quantity and quality.

Cotton Futures Explained

Cotton futures are bought and sold on various exchanges, including the Intercontinental Exchange.

Contract size is set at 50,000 lbs and prices are shown in US cents (USX) per lb.

What Affects the Price of Cotton?

The price of cotton is determined by the global levels of its supply and demand, which in turn can be influenced by different factors, some of which we will look at in this section.

When trading an agricultural, or soft, commodity such as cotton, it helps to be aware of the countries where the majority of production is taking place. 

In the 2019/2020 season, India, China and the US accounted for around 65% of total global production. These figures tell us that any events which disrupt the supply chain in these three countries will have a significant impact on the global supply and, therefore, price of cotton.

In the next few sections, we will look at a few examples of events which can influence global demand and supply, before turning our attention to current events in China which could have a significant impact on the cotton industry in the near future.

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Weather

As with every soft commodity, weather plays the most important role in production. A season with adverse weather can destroy crops, hindering production and lead to a fall in global supply and a subsequent rise in prices.

On the other hand, ideal weather conditions can lead to a bumper crop, increasing global supply and subsequently causing prices to fall.

For example, thus far in 2021, there has been a lack of rainfall in the so-called “cotton belt” of the US, the southern states which are responsible for the majority of the country’s cotton production. 

This has led to concerns about a fall in global supply in 2021, which contributed to cotton prices reaching their highest level in over two years.

Cotton Daily ChartDepicted: Admirals MetaTrader 5 - Cotton Daily Chart. Date Range: 21 January 2020 - 26 March 2021. Date Captured: 26 March 2021. Past performance is not necessarily an indication of future performance.

On the other hand, if we go back to 2014, we can observe a collapse in cotton prices, which followed a season of abundant rainfall in Texas. These ideal conditions contributed to a bumper US crop and an increase in global supply.

Cotton Daily Chart MT5Depicted: Admirals MetaTrader 5 - Cotton Daily Chart. Date Range: 2 January 2014 - 15 May 2015. Date Captured: 26 March 2021. Past performance is not necessarily an indication of future performance.

Chinese Stockpiles

In 2011, China set a cotton price floor in order to help improve domestic industry and thus embarked on a policy of purchasing the commodity, which it began stockpiling due to a fall in global prices.

In 2013, amid huge stockpiles, China reversed this policy and began instead to subsidise cotton farmers. This reversal caused fears of a sell off by China of their vast cotton reserves and subsequently led to a fall in price.

Cotton Daily Chart MetaTrader 5Depicted: Admirals MetaTrader 5 - Cotton Daily Chart. Date Range: 19 October 2012 - 25 March 2014. Date Captured: 26 March 2021. Past performance is not necessarily an indication of future performance.

Despite ending their policy of stockpiling, China has struggled to sell their cotton and in 2019 it was estimated that they still held in excess of 9 million metric tons of cotton. To put this figure into perspective, total global production in the same year was an estimated 26.1 million metric tons.

Although unconfirmed, there are suspicions that the quality of the reserve cotton is poor. However, whilst China continues to hold such large reserves, any concerns of them being dumped into the market is likely to translate into a fall in price.

Similarly, if China decides in the future to re-embark on a policy of stockpiling cotton, expect global demand and subsequently price to increase.

Oil Prices

The process of farming cotton is expensive and a large part of production costs come from the cost of running machinery and motor vehicles essential to the farming process. 

Machines, equipment and vehicles are all powered using fuel meaning that the price of crude oil can have a direct impact on the production costs and, therefore, price of cotton.

Because of this, one can observe a positive correlation between the price of crude oil and the price of cotton.

International Relations

As with all trade, international relations can play a role in determining the global price of cotton. Of particular importance is the relationship between China and the US, respectively the world’s second and third largest producers of cotton.

This is due to the fact that, as well as being a major producer of cotton, China is also both the world’s largest consumer and importer of cotton. The US, on the other hand, is the world’s largest exporter of cotton and China imports a lot of its cotton from the US. 

The relationship between China and the US saw significant tension during Donald Trump’s tenure in the White House, although relations are expected to improve under Joe Biden’s presidency.

However, this is definitely worth keeping an eye on. If there is a deterioration in their relationship which impacts their trade, the cotton market could be impacted. 

Xinjiang: Forced Labour Allegations and Global Sanctions

We have already looked at how international relations can play a part in impacting the price of cotton futures. In this section, we will briefly look at the situation in Xinjiang, China, which has been gaining an increasing amount of press over the last year and how this might affect the cotton market going forward.

There have been increasing reports coming out of China that allege ethnic minority groups are being interned in Xinjiang and forced to work in the region's cotton industry.

Xinjiang is responsible for 85% of China’s total cotton production and 20% of total global production.

The increased exposure of these allegations has led to increasing numbers of global retailers moving to ensure none of their products had been produced with cotton from the region and ultimately to the US imposing a ban on imports of cotton goods from Xinjiang in January 2021. It is possible that other countries will follow suit.

This has led to a growth in demand for cotton from other sources, contributing to a rise in the price of cotton at the beginning of 2021.

It will be important to keep an eye on the situation in Xinjiang going forward, as, given the proportion of cotton produced in this region, any further developments could have significant ramifications on the global cotton market.

Cotton Daily ChartDepicted: Admirals MetaTrader 5 - Cotton Daily Chart. Date Range: 21 January 2020 - 26 March 2021. Date Captured: 26 March 2021. Past performance is not necessarily an indication of future performance.

How to Trade Cotton Futures CFDs With Admirals

Whilst it is not possible to trade futures with Admirals, it is possible to trade Contracts For Difference (CFDs) on cotton futures and cotton!

Cotton futures CFDs track the price of the underlying futures contract. Like futures, CFDs allow traders to attempt to profit from both rising and falling prices as well as benefiting from the use of leverage.

However, unlike futures where you are bound by contract sizes of 50,000 lbs, you can trade CFDs on cotton futures in increments of 1,000 lbs.

In order to start trading CFDs on cotton futures, follow these steps:

  1. Open a Trade.MT5 account with Admirals
  2. Download the MetaTrader 5 trading platform
  3. Open your trading platform and press Control + U to open the ‘Symbols’ window, as shown below. Locate the symbol for cotton futures which is in the ‘Commodity Futures CFDs’ section and select ‘Show Symbol’ and then ‘OK’

MetaTrader 5 SymbolsDepicted: Admirals MetaTrader 5 - Symbols

  1. Head to the ‘Market Watch’ tab on the left hand side of the screen, locate the symbol which you just added, right click it and select ‘Chart Window’ in order to bring up its price chart.

Cotton Futures CFD Daily ChartDepicted: Admirals MetaTrader 5 - Cotton Futures CFD Daily Chart. Date Range: 2 January 2020 - 26 March 2021. Date Captured: 26 March 2021. Past performance is not necessarily an indication of future performance.

  1. Now that you have opened a price chart, you can review the historical price information for the instrument and use a range of technical indicators to aid in your analysis. In order to place your first trade, right click anywhere on the chart, select ‘Trading’ and ‘New Order’. Here you can fill out the desired volume of your trade as well as setting a stop loss and a take profit.

New Order MetaTrader 5Depicted: Admirals MetaTrader 5 - New Order. Date Captured: 26 March 2021.

Final Thoughts

Commodities present traders with a great opportunity to diversify their portfolio, which is an essential part of good risk management

You should now be familiar with the commodity cotton and have a better understanding of the factors which can cause movements in its price. Like many other commodities, the price of cotton can be quite volatile, which, although increasing risk, also presents a savvy trader with opportunities to profit from rising and falling prices. 

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About Admirals

Admirals is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.