Cotton futures offer market participants a way to hedge their risk and regain control over their cotton investments. Producers and Marketers of cotton can minimize the risk of price fluctuations in the cotton market by using a short hedge, which locks in a fixed selling price for the cotton that they produce. Thus, futures allow them to get the specified amount in the contract, even if prices fall in the future. Consumers of cotton, like textile companies, can use a long hedge to set a fixed purchase price for a specified quantity of cotton as per their need.
Cotton futures are also traded by speculators.
Speculators have no vested interest in the underlying asset, that is, they will neither deliver cotton nor take delivery for cotton. They trade in and out of cotton futures only based on speculations about the price fluctuations of cotton over the trading period. They take on the price risk that hedgers are trying to avoid, because they hope to profit from the price movements.
Historically, cotton has shown very low correlation to both stocks and bonds. This attracts investors who wish to manage their overall portfolio volatility and risk. It is also used to hedge against inflation, since it is widely used in textiles.
Cotton Futures Contracts
Cotton futures are traded on the ICE under the symbol “CT.” Each contract represents 50,000 pounds in net weight of cotton that meets certain minimum requirements of grade and staple length. The contracts are quoted in cents and hundredths of a cent per pound, and minimum price fluctuations are 0.01 of a cent. They are traded in March, May, July, October and December.
Cotton No. 2 futures trade on the New York Mercantile Exchange (NYMEX), under the symbol “TT.” Each contract is for 50,000 pound by weight of cotton. The basic grade for futures is strict low middling quality with 1 2/32nd of an inch staple length. Trading is carried out in March, May, July, October and December for the next 24 months and settlement is financial. The minimum price fluctuation is $0.0001 per pound.
Cotton futures also trade on the Brazilian Mercantile and Futures Exchange (BM&F), India’s Multi Commodity Exchange (MCX), and China’s Zhengzhou Commodity Exchange (CZCE).