Deciding Whether to Buy Cotton This Month: The Chinese Factors

Deciding Whether to Buy Cotton This Month: The Chinese Factors

  • Price is fairly low just now, with high volatility seen in the past
  • Chinese production has stagnated but trade war has stopped them buying more from US
  • Look for prices to rise if trade war ends and global economy improves

Cotton has long been seen as a good commodity investment. Despite there being more types of material than ever before, this is still one of the most common raw materials for making clothes and other products.  

The History of Cotton Prices

The price of cotton is affected by a number of factors. The following are some of the main ones that you need to know about.

  • Stockpiling of the material by countries. For instance, the trend for China to stockpile cotton keeps the market strong even when demand from other sources is weak. We will look at this point later on, as it could be the most crucial factor.
  • Economic growth. Cotton will tend to be in more demand and more expensive in periods of economic growth.
  • The price of crude oil. These commodities are closely linked, so if oil goes up then so does the price of cotton. Indeed, cotton often rises more dramatically than oil.
  • Climate change. It is feared that changing climatic conditions could hamper the production of cotton, with droughts especially feared.
  • The cost of rival materials. If the cost of other, similar materials falls then it will affect cotton prices too.

Right now, cotton is priced at $0.67 per pound. A look back at the prices over a few years tells the story of a highly volatile commodity. It fell to $0.29 in October 2001 and peaked at over $2 in 2011. More recently, in mid-2018 it sat at close to $1.

The general trend has been downwards, as production has out-stripped demand. Yet, it could be that the price of cotton has now reached a low point and will bring to climb again.

Buy Cotton or Choose a CFD

There are two ways to invest in cotton. One is to directly buy the commodity. The other is to put money into a CFD. The latter is generally considered to be more convenient for most investors.

Either way, this is an investment that diversifies a portfolio and also gives a safe haven. It is generally done by someone who is feeling fairly confident about global economic growth and oil prices. Investors may also be banking on the climate playing a part in lowering production.  

Future Price Expectations

The big unknown here is China. This Asian country produces and consumes a huge amount of the material. The prediction for 2019/20 production is 6 million metric tons, which is down slightly from the previous year.

It was also reported a couple of years ago that China will increase its cotton imports to up to 3 million tons by 2020. This suggests that national production isn’t meeting demand. Some reports talk of them closing mills due to energy inefficiency concerns.

China uses around a third of the cotton produced in the world. Their trade war with the US has meant a huge decline in the amount they get from America. This has led to a reported drop in their previously huge stockpiles.

If the trade war is resolved and China starts stockpiling again, expect the price of cotton to rise. This is particularly true if the global economy picks up at the same time.

By Robert Bell
Having worked for years in the UK banking industry, I began writing and reporting financial markets after migrating abroad to Bolivia. My interests include learning new ways to make money and learning to speak Spanish.

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