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How to trade cotton futures and the risks involved

You can trade futures by opening a trading account with a trusted broker who handles futures trading. CME Globex, CME Clear Port, TradeStation and Etrade are some well known online platforms for trading futures.

Most brokerages will charge the National Futures Association fees, which is roughly around $0.02 per side, along with a commission (which can range from $0.025 to $3 and more, per contract per side). You will also have to pay an exchange fee, which will vary depending on the exchange and the specific contract you are trading. Be sure to look at the fine print and add up all the fees into your cost.

Risks with Trading Cotton Futures
Cotton gives long term traders an opportunity to profit from price swings since it is a global commodity that can often experience large price movements in a short period of time.

However, these price swings are a double-edged sword and Cotton futures trading is accompanied by several risks affecting the underlying commodities, such as:

  • Changes in Government Policies: In the United States, which is a large producer of cotton, the cotton industry has been heavily subsidized by the government since the 1930s. Cotton growers receive more than five times the subsidies given to other grain growers.

    The U.S. subsidies also affect the trade of cotton around the world, since it is estimated that around 68% of U.S. cotton is sold below the production cost in the international markets. The WTO has already declared that U.S. subsidies are illegal and there have been many protests against these policies from developing countries like Brazil. Many African countries have formed co-operatives as a response; Cameroon, Mali and Senegal also joined together in 2005 to protect their domestic cotton from U.S. subsidies.

    With increasing international pressure and the slowdown in the U.S. economy, the government could change its subsidy policy, which would likely cause huge price swings in the global cotton market.

  • Water shortage: Cotton requires intensive irrigation, but with the world’s looming water shortage, the industry could witness quite erratic prices., such as it did in 2006, when droughts in southern U.S. decreased cotton yield and lead to rising prices.

  • Weather abnormalities: Weather poses a constant risk to all agricultural commodities, and cotton is no exception. Cotton production is affected by weather changes in different regions. If there are heavy rains or droughts in countries like China or the United States, cotton harvests will be affected and the supply of cotton in the global markets will suffer.

  • Threat from synthetic fibers: Newer, synthetic fibers like Nylon, Acetate and Rayon have greater flexibility and often have better appearance than cotton—which is considered a bland material by some in the fashion industry. With big textile manufacturers gravitating towards synthetic fibers, cotton prices could see price swings.

  • Acreage in the United States: Cotton growers allot cotton a lower acreage than most other grains. With the prices of grains soaring in international markets, farmers could further reduce the land allotted for growing cotton—which could lead to a sharper drop in cotton supply.

  • Emerging Market Instability: If you study the production and consumption patterns of the cotton market, you will see how crucial emerging markets are to the industry. These emerging nations however can have unstable governments, changing industrial policies and other economic challenges that can impact cotton prices unexpectedly.

  • Leverage: Cotton futures have a lot of leverage, which allows traders to control a large amount of commodities for a small amount of investment. However, it also means that even a small, unfavorable change in the prices of cotton can drastically impact a traders’ entire equity.

The cotton market is smaller than the market for other commodities, yet it has sufficient liquidity for experienced traders to make good profits, if they manage their risks wisely.

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