Cotton Ice Futures Contract
The Cotton No. 2 futures contract is the global benchmark for cotton. Cotton futures have traded in New York since 1870. The futures market was initially introduced on the New York Cotton Exchange which morphed into the New York Board of Trade which was purchase by the Intercontinental Exchange in 2007 making it the largest soft product futures exchange in the world. The exchange is used by global and domestic cotton consumers and producers to manage their price risk. Cotton is at the heart of the textiles industry making the ICE contract the preferred mechanism for commodity trading.
The ICE Cotton futures contract requires the physical delivery of cotton of certain minimum standards of basis grade and staple length, according to the ICE web site. Delivery points in the United States include: Galveston, TX, Houston, TX, Dallas/Ft. Worth, TX, Memphis, TN and Greenville/Spartanburg, SC.
The contract prices in cents and hundredths of a cent per pound. The minimum price movement is 1/100 of a cent, which is equivalent to 1-points per pound which equals $5.00 per contract. Each ICE Cotton Contract requires the delivery of 50,000 pounds net weight. The active contract is for delivery in March, May, July, October, December. Futures contracts are subject to a daily price limit that can range from $0.03 to $0.07 per pound.
How to Trade Cotton
Despite growing demand for cotton, the long-term changes in cotton prices are subject to supply constraints due to competition for acreage with soybeans. U.S. cotton production is also affected by the battle for acres between corn and soybeans in the Midwest, of the United States. Soybeans as a crop are more attractive in the U.S. South, and if corn prices are elevated soybean will be diverted taking acres away from cotton planting.
The transfer of risk from growers of cotton to the consumer or speculator is prevalent in the cotton futures market. Any grower of cotton, or holder of cotton inventories, can find protection in the futures markets. Producers and inventory holders are naturally long the market and can offset risk by selling short a futures contract. Any textile mill or consumer that is at risk if the price of cotton increasing can offset risk by purchasing a cotton futures contract.
In the short term, cotton prices are subject to supply disruption from weather in the same way as other crops like coffee. Rainy weather during the harvest season will delay production. Hot oppressive weather, while crops are in the ground, can damage plants, reducing potential production which could drive prices higher.
One way to figure out how the futures market players are positioned is to analyze the weekly commitment of trader’s report released nearly every week on Friday (unless there is a holiday), for the period ending the prior Tuesday.
The Commodity Futures Trading Commission, issues its Commitment of Traders Report, and describe positions held by commercials, managed money and smaller traders. Many traders look to see the size of the open interest held by managed money, since this is the speculative money trading the cotton futures market, and is subject to change if there is a large price move. Generally, commercials that are selling cotton futures will not repurchase these contracts if the price moves higher because the short positions are offset by long position from their crops or inventories.
Managed money positions, on the other hand, with fluctuate when cotton prices are volatile, as the goal is strictly to capture the change in prices where you are generating a profit, or minimizing losses. When open interest that is long futures and options is much larger or smaller than open interest that is short futures positions, you can anticipate a reversal, especially if managed money is on the wrong side of the trade.