Woah, that’s all I can say. I never expected the price of cotton to sky-rocket like this. The image above is the 1-year chart of Cotton #2 futures contract. For those who do not know, a “futures contract” is a contractual agreement made in the futures exchange to buy or sell a particular financial instrument of standardize quantity and quality at a specified future date with the price agreed today. Cotton #2 futures contracts are traded on the New York Board of Trade (NYBOT) under the ticker symbol CT. In case you purchase them, they are delivered every year in March, May, July, October, and December. A contract size for this is 50,000 pounds net weight.
Technical-wise, cotton broke out from a 2-month ascending triangle last month. Gauging the height of the base of the ascending triangle added to the breakout point, we get a minimum upside target of 200 US dollar. It was reached within a month and even exceeded to an all-time high yesterday. Its value tripled up from $70 to over $200 in just a year. The most likely reason for this is China’s over-demand for cotton.
China has been the main cotton producer in the world but because of the recent banking crisis worldwide, many apparel-related-businesses were and are being outsourced in China since labor cost is way cheaper. In that case, China needed more cotton supply. This also caused them to buy from other nations like the US and India who are part of the top 5 cotton producers in the world. In case you do not know, most cotton is used in the textile industry. These include the clothes we wear, the bedsheets we use and the towels in our bathroom. Cotton is used in making fishnets, coffee filters, tents and gunpowder as well. Around 25% is used for home furnishings and the rest for other products. The cottonseed which is a byproduct of cotton is used in agriculture for animal feed. When extracted, you get the cottonseed oil which is used as cooking oil.
Some reasons that are driving cotton prices to soar higher are climate change, higher grain prices and increase in human population. Draughts, snow storms and other extreme weather conditions that are taking place in most countries have devastating effects to cotton crops and actually to all agricultural products like wheat, oats, corn and soybeans. So if you take a look at their charts, they’re all rising. Higher grain prices became more attractive to cotton farmers in the US back in 2008 which led the cotton production to decrease. Thus the supply in cotton seed, a by product of cotton and used in agriculture for animal feed, also decreased. Human population has also been multiplying in a fast rate recently and since mostly everyone wear clothes made from cotton, the demand for cotton has been increasing.