Because cotton has universal appeal and can be used in many different products, it has been one of more influential commodities. Discovered more than 5,000 years ago, cotton has played a vital role in the rise and fall of many countries.
Cotton
Cotton is a fiber that is most commonly used in the production of textiles. The commodity Cotton grows in a ball around the seeds of the cotton plant. The cotton plant can be found in (sub)tropical regions in the Americas, Africa and Asia. The biggest producers of cotton are China, India and the United States, although the United States are the biggest exporter of cotton and China produces the cotton mostly for domestic use.
History of cotton
Cotton is being employed by mankind for over 7000 years. This fabric has been first found and cultivated in India and later on in Mexico. Through the years cotton would find its way to Europe and other parts of the world through exploration and increasing trading activities. During the industrial revolution, cotton would become an icon of these events. Cotton production would increase significantly during this period due to the use of new machines and the increasing demand for cheap textiles. Besides textiles, the commodity cotton has also been used in the first types of paper.
Production of the commodity cotton
The production time of cotton can take up to seven months which means it is important to plant cotton as early as possible. The first step of cotton production is planting of the cotton seeds. The seeds can be planted in so-called clumps or will be planted singularly. The seeds will be placed either in shallow or deep ground depending on the temperature of the region. Approximately nine weeks after planting the cotton balls will be fully grown and the fiber inside each cotton ball will start to ripen and push outward. After six weeks the fibers will have grown sufficiently. The next step is the harvesting where the leaves of the cotton ball are removed from the fiber and the fiber is collected. After the harvesting the fiber, the seeds and other trash is removed in a machine called a stripper. Afterwards the cotton fiber is compressed into bales for efficient storage.
Applications
The most common use of cotton is for the production of various textile products. These products range from numerous types of clothing to bath towels to bed sheets. Cotton is also used to produce yarn, which in turn can be used in knitting. Apart from the use in textiles, cotton is also being used in coffee filters, fishing nets and tents.
The seeds that are gathered during the harvest are being used to create cottonseed oil. This type of vegetable oil is mostly used in the feeding of livestock.
Trading
Cotton trading takes place mainly on the New York Mercantile Exchange (NYMEX). On this exchange the prices are based on the equilibrium of supply and demand. Future Contracts are traded daily and numerous time each day. By obtaining futures positions it is possible to minimize your price risk exposure.
Price factors of the commodity cotton
There are a number of factors which play a role in the realization of cotton prices on the futures exchange. A common price factor for many agricultural commodities is the weather. The weather can have a great impact on the harvest and subsequently the supply of cotton. Weather conditions are therefore an important factor in the pricing of cotton futures contracts. Traders must understand upcoming weather conditions in order to obtain an accurate prediction of the upcoming prices.
Grain prices can impact the price of cotton. When prices of grain, corn or soy beans grow higher than cotton, producers will be more encouraged to plant these products as they will produce a higher profit.
The rise of synthetic fabrics like polyester are influencing the demand for cotton. Due to the better quality and easy to maintain state of polyester many manufacturers are switching to this fabric, causing a significant decrease in the demand for cotton.
Why is Cotton Valuable?
Cotton is a fluffy natural fiber that grows on shrubs in tropical and subtropical regions around the world. The commodity is a staple in the textiles industry. Historians don’t know the precise origins of cotton, but cloth found in caves in Mexico proves that the crop was around more than 7,000 years ago. Since the Age of Antiquity, civilizations around the world have spun cotton fibers into cloth garments. However, two events in history – the Industrial Revolution in England and the invention of the cotton gin in the United States – profoundly changed the role cotton plays in world markets. These events led to widespread production of cotton garments and turned cotton into a multi-billion dollar global industry.
Main Uses of Cotton
Use of Cotton Description Cotton Fiber Woven or knitted into a variety of fabrics used to make clothing and household items. These fabrics include: Corduroy Chambray Velour Jersey Flannel Used in other miscellaneous products including: Fishnets Coffee filters Book binding Archival papers Cottonseed Used as a feed for livestock. Cottonseed Oil Used as a cooking oil. Cottonseed oil is also found in many consumer products including: Soap Margarine Emulsifiers Cosmetics Pharmaceuticals Rubber Plastics Linters These are small fibers that remain on cottonseed after processing. Linters are used to make: Bandages Swabs Bank notes X-rays
How is Cotton Grown?
Cotton plants grow in warm regions of the world where there is ample sunshine and limited frost. Cotton farmers plant their crop in the spring and harvest it in autumn. Prior to planting, farmers prepare the land using either the no-till method, where they use special equipment to deposit the seeds on the soil’s surface, or the till method, where they plow the land into rows forming seedbeds for planting. About two months after tilling, tiny flower buds appear on the green, bushy shrubs that grow from the ground. In another three weeks, the flowers begin to blossom. The flower petals will begin to change color – from white to yellow to pink and finally red – and then fall off the shrubs. What remains are tiny green pods called cotton bolls. These bolls ripen further and develop small fibers inside of them. As these fibers expand from sunshine, they burst out of the pod in the form of fluffy cotton. Machines then harvest the fully ripened cotton into conveying systems that process the crop for consumption. Cotton is known as a versatile fiber that is comfortable to wear. However, its applications extend beyond its use in clothing.
Types of Cotton Plants
The main production crop is the Upland cotton variety:
Species Common Name Native Region % of Global Output
Gossypium arboreum Tree cotton India and Pakistan Less than 2%
Gossypium barbadense Extra-long staple cotton South America 8%
Gossypium herbaceum Levant cotton Southern Africa and Arabian Peninsula Less than 2%
Gossypium hirsutum Upland cotton Central America, Mexico, the Caribbean and Florida 90%
World’s Biggest Cotton Producing Countries
The largest cotton producing county is China. It has 100,000 cotton farmers, 7,500 textile companies and $73 billion in annual cotton cloth production.
Rank Flag Country Cotton Produced (1000 x 480 lb. Bales)
#1 India 30,000
#2 China 25,000
#3 United States of America 21,377
#4 Pakistan 9,150
#5 Brazil 7,800
#6 Australia 4,800
#7 Turkey 3,800
#8 Uzbekistan 3,700
#9 Mexico 1,500
#10 Burkina Faso 1,420
China is also the largest importer of cotton. The country imports over $7.5 billion of cotton annually (about 17% of global production).
Other large importers of the commodity are Bangladesh, Vietnam, Turkey and Indonesia.
What Drives the Price of Cotton?
The price of cotton is driven mostly by these seven factors:
Global Stockpiles In the recent past, China has engaged in enormous stockpiling to ensure they have an adequate supply of cotton. These actions have often resulted in higher domestic prices for cotton in China than in the rest of the world. If China were to sell off all of its stockpiles because of weak domestic demand, then prices for cotton would likely go lower. On the other hand, if Chinese hoarding creates global shortages, prices could go higher.
Government Policies Numerous governments including the United States heavily subsidize cotton farmers. Subsidies have the effect of keeping the supply of cotton artificially high and its prices artificially low. Brazil has pursued and won cases against the United States through the World Trade Organization to stymie these subsidies. However, a recent US farm bill increased subsidies for cotton. The prevalence of subsidies can have a meaningful effect on cotton prices.
Global Demand The global demand for cotton is mostly a function of the overall health of the economy. Cotton is largely a discretionary item, and consumers can choose other cheaper synthetic fabrics, such as polyester, if the economy is weak. China plays such a key role in the cotton market that its economy in particular bears watching.
Climate As with all agricultural commodities, climate plays an important role in driving cotton prices. Cotton needs warm weather, adequate rainfall and little or no frost to grow properly. Poor weather conditions in key growing regions in India or China, for example, could create supply shortages and prices spikes. On the other hand, ideal weather conditions could create bumper crops. Cotton field being watered by drones by DJI-Agras from Pixabay
Price of Substitutes The production and price of substitute fabrics such as polyester can play a key role in determining cotton prices. China is a major producer of purified terephthalic acid (PTA), which is the raw material used to make polyester. Historically, production decisions related to PTA can dramatically impact its demand. These decisions, in turn, can affect cotton demand and prices. Cotton traders should pay close attention to the market dynamics of PTA.
Oil Prices Cotton is an expensive crop to produce. The machinery and motor vehicles needed to operate farms represent a significant component of overall costs. Machines and equipment require fuel, so crude oil prices can greatly impact cotton production. In addition, PTA is produced from oil, so a rise in crude prices could make polyester more expensive and raise demand for cotton.
The US Dollar
Most commodities, including cotton, are priced in US dollars. When the value of the dollar drops against other currencies, it takes more dollars to purchase cotton than it does when the price is high. Buyers purchasing cotton in other currencies see their purchasing power increase when the dollar is weak and decline when the dollar is strong.
Commodity in focus
Cotton is the most important of the natural fibres due to its rapid growth rate and wide range of applications in apparel and home furnishings. Demand for cotton is a derived demand, as it depends on global demand for textile products. Competition from substitutes such as polyester and other synthetic fibres also influences the performance of the sector. Over the last decade, textiles utilisation has risen steadily mainly driven by population and income growth mostly in developing countries, particularly in Asia. Moreover, demand for natural fibres has expanded quite markedly in recent years, sustained by a growing trend for sustainability.
Takeaways:
| Cotton contributes significantly to the economies of many developing countries and to the livelihoods of millions of rural smallholders worldwide. |
| The performance of the cotton sector is influenced by cotton policies and programmes implemented at country level. |
| Cotton faces a number of challenges such as climate change, low productivity, and the price-cost squeeze faced by actors along the value chain. |
| The mobilisation of innovative technologies and resources is vital to ensure that the sector remains viable and sustainable. |
Did you know?
- The largest cotton producing countries are China and India, followed by the United States of America and Brazil.
- Around 80 percent of cotton is used in apparel, 15 percent in home furnishings and the remaining 5 percent mostly accounts for non-woven applications, such as filters and padding.
- Many countries implement policies and programmes to support the cotton sector, including direct support paid to producers, border protection, crop insurance subsidies and price support mechanisms.
- The cost pressure on manufacturers throughout the apparel value chain is leading to consolidation in textile and apparel production among countries and companies.
- World Cotton Day (WCD) is celebrated on the 7th of October and it represents an opportunity to promote cotton, share knowledge and showcase cotton-related activities and products.
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