By Noble Drakoln

"King Cotton" has been around for thousands of years. Independently discovered in both the Old World and New World, no other commodity has created more controversy, built more nations, enriched more lives and caused more suffering. Extensively cultivated in India for 6,000 years, cotton became the darling of the British Empire via the Dutch East India Company during the 18th century.

As slavery began to take root in the U.S., cheaper and heartier cotton from the South began to supplement and later replace Indian cotton. This coincided with Britain's desire to de-industrialize India's cotton industry and expand its own during the 19th century.

With the start of the U.S. Civil War, Britain, which at the time was the world's largest importer of cotton, turned its attention to Egypt. Britain encouraged huge investments in cotton production, only to abandon Egypt and refocus its attention on the U.S. when the Civil War subsided. Today, cotton remains a significant global commodity and the U.S. is a frontrunner in its production. (Find out about globalization and why some oppose it, in What Is International Trade?)

A sample commodity futures contract for cotton is shown in the following table.

Cotton Contract Specifications
Ticker Symbol Open Outcry: CT (ICE)
Electronic: ECT
Contract Size 50,000 pounds net weight
Deliverable Grades Basic Grade: Strict low middling quality and 1 2/32nd of an inch staple length.
Contract Months March, May, July, Dec
Trading Hours Monday-Friday 2:30am-3:15pm EST
Last Trading Day Third to last business day of the contract month. Trading terminates at the close of business on the third business day prior to the end of the delivery month
Last Delivery Day Last business day of the contract month
Price Quote Cents and hundredths of a cent per pound
Tick Size $0.0001 = $5
Daily Price Limit
(Not applicable in electronic markets)
Three cents above or below previous day\'s settlement price. Whenever any of the two futures contract months with the highest open interest settle at 84 or higher, then all months may trade at four cents above or below the previous session\'s settlement price.

Understanding Cotton Contracts
Like every commodity, cotton has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss.

For instance, if you buy or sell a cotton futures contract, you would see a ticker tape handle that looks like this:

CT8Z @ 70.39

This is just like saying "Cotton (CT) 2008 (8) December (Z) at $.7039 per pound (70.39)." A trader buys or sells a cotton contract according to this type of quotation.

Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the cotton contract equals the equivalent of 50,000 pounds multiplied by our hypothetical price of $70.39, as in:

$0.7039 x 50,000 pounds= $35,195

Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a cotton contract on the Intercontinental Exchange (ICE) requires a margin requirement of $4,900, which is approximately 14% of the face value.

Calculating a Change in Price
Because commodity contracts are customized, every price movement has its own distinct value. In a cotton contract, a $.0001 cent move is equal to $5. When determining cotton profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $5. For example, if prices move from $70.93-90.02, you multiply the difference, which is $19.09, by $5 to yield a contract value change of $9,545.

- Buy Sell Total Value
Cotton Contract Price
(0.0001 cent move = $5)
$0.7093 $0.9002 $0.1909 or $9,545


Cotton Exchanges
The futures contract for cotton is traded at the Intercontinental Exchange, Brazilian Mercantile and Futures Exchange (BM&F), Multi Commodity Exchange (MCX), National Commodity Exchange Ltd. (NCEL) and Zhengzhou Commodity Exchange (CZCE).

Facts About Production
The cotton plant or shrub has the unique ability to produce a cellulose fiber, similar in texture to wool, without the livestock component. Historically called the wool plant, it is a perennial shrub in many parts of the world that can be grown throughout the year. As a perennial, the need to reseed every year is not necessary, but the plant must be tended to year after year to ensure successful harvests. Cotton requires plenty of sunshine, fertile soil and preferably no frost. Because it needs 24-48 inches of water annually, transplanting cotton from its original subtropic habitat is difficult. As cotton production has progressed around the world, adequate irrigation has become essential in growing robust plants.

Planting in the U.S. typically begins in February and ends with autumn harvesting. In this region, mechanical harvesters play a significant role in keeping production costs low; however, many top foreign exporters, such as Uzbekistan, still rely heavily on manual labor.

The three top cotton producing countries are China, India and the U.S.. In fact, these three countries alone are responsible for 50% of the world's cotton use. In 2007, they produced over 79 million 480-pound bales of cotton. When it comes to cotton exports, the U.S. and Africa lead the world in exports totaling over $6 billion dollars. Much of this goes to feed China's manufacturing industry.

Factors That Influence Cotton Price
The price of cotton is influenced by the following factors:
  • The U.S. government has provided cotton subsidies to farmers since 1930, which directly hinder trade agreements around the world. In 2005, cotton subsidies averaged $230 per acre of cotton farmland, amounting to $3.3 billion in subsidies. This is five times more than the subsidies offered to grain producers.
  • Directly because of subsidies, an estimated 68% of U.S. cotton is sold internationally below production costs. This led Brazil to launch a formal complaint with the World Trade Organization (WTO) in 2004, and the following year, the WTO sided with Brazil and claimed that U.S. subsidies were illegal.
  • In 2000, China was considered a net exporter of cotton. By 2008, China became the largest net importer of cotton, with no end to the demand in sight.
  • Worldwide water shortages are being exacerbated by changing weather patterns and potential global warming. Cotton's intensive need for water pushed the industry to the forefront of the debate over water rationing and drought management. In 2006, droughts throughout Texas and the southern belt forced cotton farmers to ration water and yielded smaller-than-expected crops. In Uzbekistan, a leading cotton exporter, entire areas have experienced desertification in order to supply enough water to grow cotton crops.
  • As with many agricultural products, genetic modification has been applied to cotton in order to help it resist various pests. As of 2003, 73% of U.S. cotton was genetically modified. As genetically modified cotton crops become more common, some pests, particularly the cotton bollworm that genetic modification was meant to fend off, have developed resistance, leading scientists to develop new strains.
  • The backlash against U.S. subsidies and their impact on cotton prices worldwide has led to the development of fair trade cooperatives in Africa. In 2005, Cameroon, Mali and Senegal combined forces to help protect their farms in the global marketplace.
Conclusion
Cotton's long and varied history makes it one of the world's most intriguing and enduring commodities. In the years ahead, U.S. subsidies, China's insatiable demand and ongoing water shortages will continue to play significant roles in cotton's advancement. The goal of the individual trader is to understand these fundamental factors enough to make intelligent trading decisions.


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