A beginner’s guide to cotton: Price, uses & market overview

Explore a thorough overview of the cotton market, learn how it works in simple terms and get to grips with its significance as a popular global commodity.
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Updated: Dec 19, 2023
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On this page, we explore everything you need to know about cotton. Gain insights into cotton market trends, pricing mechanisms, and the environmental impact of cotton. 

Read on to learn more about this popular commodity and find links to beginner friendly guides explaining how you can get involved in cotton. 

What is cotton?

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Cotton is a staple fibre that grows around the seeds of cotton plants. Primarily used for textiles and clothing, the agricultural commodity is traded around the world. Approximately, 35% of all garments made today are manufactured using cotton fibers. Many value cotton for its comfort, breathability, and durability. 

Cotton cultivation dates back centuries and trade only started in the 1800s. For many years, cotton was the backbone of economies across the world. Recent shifts in the global market have steadied prior volatility experienced in the cotton industry. Today, around 115 million bales of cotton are produced each year, with China and Southeast Asia driving demand. 

Environmental issues have seen a shift and adaption of the cotton market. Organic cotton and recycling have addressed some environmental issues, while new applications from other industries have helped steady demand. 

Cotton market overview

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Although cotton has been traded for centuries, the modern futures market only came around following the American Civil War when the New York Cotton Exchange was created. Cotton futures now trade on various global exchanges including the New York Stock Exchange (NYSE) and the Zhengzhou Commodity Exchange. 

Contracts are traded in both US dollars and RMB. The cotton market is worth approximately $12 billion annually thanks to flows between exporting giants like India, the US, Africa, and Asia. Similar to other commodity markets, demand fluctuates cyclically, but thanks to apparel sales, long-term growth is predicted. 

Production costs increasing and syntietic fibers posing competition has resulted in a few challenges for the cotton industry. However, its durability and green credentials bode well for longevity. 

Is cotton valuable? 

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Yes, cotton is a valuable commodity and there are numerous reasons why investors are attracted to the market. We have highlighted some of these key fundamentals below, explaining what they are and why they matter.

  • Production. Half of the world’s cotton production occurs in India and China. A further 25% is produced in the United States and Brazil. Any political instability, exporting issues, or other significant events in any of these countries will most certainly affect the price of cotton. 
  • Stockpiling. Many countries hold commodities for their economies. However, between 2011 and 2013, China started a cotton stockpiling program to support local farmers and artificially inflated prices. At its peak, China held about 60% of the world’s cotton. If it suddenly starts to sell its stockpile, its likely prices will fall. 
  • Weather. Like many agricultural commodities, climate plays a big role in yields, and it’s the same with cotton. Too much sun or rain in countries like China or India could lower crop outputs and lead to higher prices. 
  • U.S. Dollar. Cotton is priced in U.S. dollars, and any changes in the currency’s value can impact its price. A stronger dollar could result in greater supply as fewer buyers would be buying. A weaker dollar may increase demand, as foreign buyers could take advantage of a favourable exchange rate. 
  • Alternatives. Although cotton is widely used in the textiles industry, other materials are often used in its place. The price of materials like wool and polyester directly impacts cotton demand. The raw material used to make polyester, purified terephthalic acid, can have the greatest impact as it is mostly produced in China.  

How to invest in cotton

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You can invest in cotton by using a commodity trading platform. These platforms offer a range of commodities and are very easy to use. There are different platforms suitable for specific requirements. 

Some let you buy cotton, others let you trade cotton, and many are designed for investing in the commodity. Visit our dedicated guide to discover how to invest in cotton.

Cotton in your investment portfolio

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A diverse investment portfolio can help protect you during market uncertainty, and the inclusion of cotton can add value while allowing you to spread your money across various markets. 

Cotton often moves independently to traditional investments like stocks and bonds. You can include cotton in your portfolio as a hedge against potential losses. During times of economic uncertainty, investors view commodity grains such as cotton as attractive options. 

Cotton’s long history and the fact it is a necessary commodity for various industries, make it a good long term play.

Cotton vs other commodities

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Cotton is an agricultural commodity and is part of the seeds and grains family, including wheat, corn, and rice. Each commodity is unique in its own way and offers different features for investors and traders. You can learn more about specific commodities using our dedicated guides below. 

  • Wheat. Wheat is a grain that is grown around the world and is used for various foods. 
  • Corn. Corn is one of the most versatile commodities with many uses, including livestock feed, biofuel, oil, and food. 
  • Rice. Rice is the most popular grain commodity and a staple for half the world’s population 
  • Soybean. Soybean is a major global commodity used for livestock feed and cooking oil.

FAQs

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Risk disclaimer
Prash Raval
Financial Writer
Prash is a financial writer for Invezz covering FX, the stock market and investing. For over a decade he has traded spot FX full time while... read more.