Cotton is the most widely used natural fibre worldwide for clothing and accounts for 35% of the world’s textiles. Plus, it is a very versatile agricultural commodity.
Besides fabric, cotton seeds are crushed to make cakes for feeding livestock. And cottonseed oil is the fifth most significant edible oil in the world. But how are its prices decided, and should you invest in this commodity? Continue reading to find out!
How are Cotton Rates Decided?
Cotton quality classifications measure the grade, staple, length, micronaire, uniformity, and strength. And these are the factors that decide the rates of cotton.
1. Cotton Quality: The better the cotton quality, the higher its price. The cotton crop is divided into classification grades based on colour and trash content. To determine the critical fibre properties and decide on quality control and standardisation, the high-volume instrument (HVI) system is used. The HVI system is a testing machine that measures the properties of cotton fibre, such as its length, fineness, uniformity, strength, and colour.
2. Cotton Colour: Cotton comes in the following colours– light spotted, white, tinged, and yellow stained. White cotton represents purity and is very much in demand by consumers, making it pricier. Non-white cotton is used in products where cotton cannot be seen.
3. Staple Length: Much of the cotton fabric’s feel comes from the staple or fibre length of every cotton ball or plant. Now, the length of this staple plays an important role in deciding cotton rates. As the length of the staple increases, so does its silky feel. The more luxurious a cotton cloth is, the more is the size of its staple and the more is its price.
4. Micronaire: Microniare refers to the permeability of compressed cotton fibres. The higher the permeability, the more breathable the fabric is.
5. Strength: The higher the strength of the fibre, the pricier it is since such fabrics are not prone to tearing or wasting away.
6. Trash Content: Regardless of the quality of cotton, every type of cotton contains some trash. Trash generally refers to the lint particles (like bark and leaf) found in cotton. The greater the content of trash per bale, the less actual cotton the fabric has, which lowers the price of the fabric.
What are the Factors that Influence the Cotton Price?
While cotton yarn prices vary across the country, it shows a high correlation (>90%) with raw cotton prices. The pricing for cotton is affected by factors like weather, seed pricing, planting decisions, and acreage. If less acreage is available for planting cotton, the more would be the price. Some other factors that influence cotton prices are as follows:
1. Government policies on the import and export of cotton and the minimum support price given to the farmers also determine cotton prices. Since the incentives given to farmers create artificially high levels of supply, these incentives are introduced to encourage farmers to grow more cotton and keep the prices low.
2. A few factors unique to the farming industry impact cotton prices. For one, weather conditions can have a significant impact on the production of cotton, which affects its price. A decrease in rainfall or high frost can impact the ability of the crop to grow and harvest. This results in supply disturbances while the demand remains high, propelling prices.
3. Along with the weather, pests, diseases, and related risk factors also affect cotton production, which in turn affects the cotton price.
4. The inter-crop price parity and the global economic situation also affect the demand and supply of cotton, which decides whether the price will rise or fall.
5. Global commodity markets, where cotton is bought and sold, affect its prices. It is a clear indicator of real-time price fluctuation based on several global factors. For example, Hurricane Harvey in the US in 2017 devastated the cotton crop. The effect was observed worldwide as the demand exceeded supply and prices rose.
6. China comprises nearly one-eighth of the world’s population– it is a big consumer of cotton. So the supply and demand of cotton from China can impact the prices worldwide.
Why Should You Invest in Cotton?
One of the major reasons why people invest in commodities is because they protect investors from the effects of inflation. The demand for commodities is usually high when inflation is high, which boosts commodity prices. This gives the investors an excellent opportunity to place a bet against the US Dollar, so commodity prices would rise when the currency eventually declines.
Another reason to invest in commodities like cotton is that cotton is grown—which means there will always be a finite supply of cotton in the market. This means that cotton will always hold its value, even when inflation erodes the currency’s value.
Another reason to add cotton to your portfolio is diversification. When other industries are not doing well, commodities can protect your portfolio from significant losses since commodities behave differently from other asset classes.
Plus, when crude oil prices rise, chances are cotton prices will follow since cotton production requires oil, as compared to other agricultural commodities. This makes cotton a good investment option.
Advantages of Trading in Cotton
Like any other commodity, cotton can help you diversify your portfolio and protect against inflation.
As the economies around the world recover from the impact of inflation, the consumer demand for cotton and cotton products is bound to rise. The rising demand tends to push the prices higher, making cotton a good bet. At the same time, cotton is also bound to benefit from the crude oil price rise.
Another advantage of trading in cotton is the incentives the government provides to the farmers. As cotton stockpiles deplete and the demand rises, governments will consider policies to replenish their reserves. This is another factor which will push the prices higher.
Plus, cotton is an agricultural commodity–there will always be a fixed amount of cotton in circulation, whether the inflation is high or low. This means cotton’s value will never really go down.
How to Invest in Cotton?
Investing in cotton is very similar to investing in any other commodity; there are some necessary steps you must follow:
Research: Before investing, it is prudent to research and study the factors that affect the supply and demand of cotton and other factors that influence its price. This will help you gauge when global factors affect cotton prices.
Investment Strategy: Next, you want to decide how much risk you are prepared to take. This is also the time to decide if you wish to be actively involved in cotton or would rather invest in mutual funds or ETFs.
Budget: Depending on your investment strategy, you want to set a specified budget from your portfolio for cotton. You must stick to it; otherwise, futures trading can get tricky if you think you have money to spare.
Time Frame: If you are looking to make a quick buck from the market and don’t care about the long-term outlook, familiarising yourself with technical analysis is a good idea. Technical analysis involves analysing price trends and patterns seen on charts to make a trading decision. However, if you have a longer-term outlook, conducting fundamental research would go a long way in keeping you safe.
Investment Platform: Now that the preliminary things are out, you should look for a commodity trading broker that trades in cotton. Not all brokers facilitate trading in commodities, so do your research.
