Cotton is one of the most critical crops in the world, mainly for the fashion industry, clothing production, and the making of other manufactured goods. Due to its adaptability, it can be grown in different regions, and is responsible for many jobs around the world.

The production of any commodity involves a complex system requiring many steps, from planting to harvesting and processing the final product. This method generates jobs at all stages, from farmers to clothing manufacturers.

Cotton is grown in over 100 countries around the world and is an export crop in many of them. With annual global production exceeding 25 million tons on average, the cotton market generates millions of dollars in revenue annually, showing its importance to global financial markets.

In this post, I’ll talk a little more about the current scenario for the cotton market, and its perspectives for the future.

How does the cotton market work?

The main difference between cotton and other agricultural commodities is that it’s not a food item. While grains, sugar, coffee, and others grown on land are mostly used in the food industry, cotton is mainly used by the textile and pharmaceutical industries.

Cotton is considered a “soft commodity” along with coffee, sugar, cocoa, and FCOJ. But, unlike other soft commodities, it’s a row crop. In most areas where it’s grown, it competes annually for area with corn, wheat, soybeans, and other crops.

Cotton seed can be consumed by some animals as protein and transformed into oil used for frying food. The plant seed is the by-product of the ginning process, in which the lint (fiber) is separated from the seed.

However, the main product of this process is lint, which is consumed by the global spinning industry. After the cotton is spun into yarn, it’s either knitted or woven. From the textile industry, fabric is cut and sewn into clothes or textiles for home use (such as sheets, pillowcases, curtains, and material for sofas).

Thus, cotton is an agricultural product that’s used industrially. Within the global textile chain, it mainly competes with man-made fibers like polyester and nylon.

Which are the major countries involved in the cotton market?

The world’s main cotton players are China, India, the United States, and Brazil. The U.S. plays a significant role in the global cotton market as it’s the home of the benchmark futures contract known as ICE #2.

Unlike some other soft commodities, such as coffee and sugar, the ICE #2 contract is a U.S. cotton delivery contract only. This means that the convergence of the ICE #2 contract considers the U.S. price. China and India have also adopted this futures contract format, but only for local use.

Both China and India are major producers and consumers of raw cotton. Clearly other countries produce cotton but have textile industries that consume part or all their local production, and hence don’t end up being part of the global market.

As exporters, we can single out Brazil and the U.S., which are also consumers. Others are almost exclusively exporters, including Australia, Greece, Spain, Argentina, and Paraguay.

In addition, there are numerous countries in West Africa that produce and export cotton. They’re referred to as the WAF, and include Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Cote d’Ivoire, Mali, Niger, Senegal, and Togo.

What’s the current scenario in the cotton market?

After a very volatile year for the cotton market in 2022, recent prices are quite weak. The market has been flat since the end of October 2022.  However, with an extremely tight trade balance in the U.S., the potential for another bullish move is real. Recently, midway through the 22/23 business year, U.S. supplies were about 90% committed.

In addition to numbers, it’s important to note that this market needs to be increasingly aware of new sustainable practices and synthetic products that are arising to meet demand, as well as seeking alternatives to preserve the environment.

How can you manage risks in the cotton market?

With so many aspects directly influencing the cotton market, it’s vital to have a plan that provides more predictability and security for the future of your business.

Using a hedging strategy is a great option available to avoid unpleasant surprises in the financial planning of those working in the commodity chain.

hEDGEpoint’s specialty, these hedging mechanisms operate as a kind of insurance against market price variation, thus reducing transaction risks.

hEDGEpoint combines the knowledge of specialists, who understand the field and its many variables, with risk management products through technology and personalized service, to always offer you the best experience in futures operations.

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