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Why is Cotton Valuable?
Cotton is a fluffy natural fiber that grows on shrubs in tropical and subtropical regions around the world. The commodity is a staple in the textiles industry.
Historians don’t know the precise origins of cotton, but cloth found in caves in Mexico proves that the crop was around more than 7,000 years ago. Since the Age of Antiquity, civilizations around the world have spun cotton fibers into cloth garments.
However, two events in history – the Industrial Revolution in England and the invention of the cotton gin in the United States – profoundly changed the role cotton plays in world markets. These events led to widespread production of cotton garments and turned cotton into a multi-billion dollar global industry.
How is Cotton Grown?
Cotton plants grow in warm regions of the world where there is ample sunshine and limited frost.
Cotton farmers plant their crop in the spring and harvest it in autumn. Prior to planting, farmers prepare the land using either the no-till method, where they use special equipment to deposit the seeds on the soil’s surface, or the till method, where they plow the land into rows forming seedbeds for planting.
About two months after tilling, tiny flower buds appear on the green, bushy shrubs that grow from the ground. In another three weeks, the flowers begin to blossom.
The flower petals will begin to change color – from white to yellow to pink and finally red – and then fall off the shrubs. What remains are tiny green pods called cotton bolls. These bolls ripen further and develop small fibers inside of them. As these fibers expand from sunshine, they burst out of the pod in the form of fluffy cotton.
Machines then harvest the fully ripened cotton into conveying systems that process the crop for consumption.
Over 80 countries cultivate one or more of the four species of the crop, but the main production crop is the Upland cotton variety:
|Species||Common Name||Native Region||% of Global Output|
|Gossypium arboreum||Tree cotton||India and Pakistan||Less than 2%|
|Gossypium barbadense||Extra-long staple cotton||South America||8%|
|Gossypium herbaceum||Levant cotton||Southern Africa and Arabian Peninsula||Less than 2%|
|Gossypium hirsutum||Upland cotton||Central America, Mexico, the Caribbean and Florida||90%|
The largest cotton producing county is China. It has 100,000 cotton farmers, 7,500 textile companies and $73 billion in annual cotton cloth production.
Top 10 Cotton Producing Countries
|Rank||Flag||Country||Cotton Produced (1000 480 lb. Bales)|
|#3||United States of America||21,377|
China is also the largest importer of cotton. The country imports over $7.5 billion of cotton annually (about 17% of global production). Other large importers of the commodity are Bangladesh, Vietnam, Turkey and Indonesia.
Cotton is known as a versatile fiber that is comfortable to wear. However, its applications extend beyond its use in clothing.
4 Main Uses of Cotton
|Use of Cotton||Description|
|Cotton Fiber||Woven or knitted into a variety of fabrics used to make clothing and household items. These fabrics include:|
Used in other miscellaneous products including:
|Cottonseed||Used as a feed for livestock.|
|Cottonseed Oil||Used as a cooking oil. Cottonseed oil is also found in many consumer products including:|
|Linters||These are small fibers that remain on cottonseed after processing. Linters are used to make:|
What Drives the Price of Cotton?
The price of cotton is driven mostly by these seven factors:
- Global Stockpiles
- Government Policies
- Global Demand
- Price of Substitutes
- Oil Prices
- The US dollar
In the recent past, China has engaged in enormous stockpiling to ensure they have an adequate supply of cotton.
These actions have often resulted in higher domestic prices for cotton in China than in the rest of the world. If China were to sell off all of its stockpiles because of weak domestic demand, then prices for cotton would likely go lower.
On the other hand, if Chinese hoarding creates global shortages, prices could go higher.
Numerous governments including the United States heavily subsidize cotton farmers. Subsidies have the effect of keeping the supply of cotton artificially high and its prices artificially low.
Brazil has pursued and won cases against the United States through the World Trade Organization to stymie these subsidies. However, a recent US farm bill increased subsidies for cotton. The prevalence of subsidies can have a meaningful effect on cotton prices.
The global demand for cotton is mostly a function of the overall health of the economy. Cotton is largely a discretionary item, and consumers can choose other cheaper synthetic fabrics, such as polyester, if the economy is weak. China plays such a key role in the cotton market that its economy in particular bears watching.
As with all agricultural commodities, climate plays an important role in driving cotton prices. Cotton needs warm weather, adequate rainfall and little or no frost to grow properly. Poor weather conditions in key growing regions in India or China, for example, could create supply shortages and prices spikes. On the other hand, ideal weather conditions could create bumper crops.
Price of Substitutes
The production and price of substitute fabrics such as polyester can play a key role in determining cotton prices. China is a major producer of purified terephthalic acid (PTA), which is the raw material used to make polyester. Historically, production decisions related to PTA can dramatically impact its demand. These decisions, in turn, can affect cotton demand and prices.
Cotton traders should pay close attention to the market dynamics of PTA.
Cotton is an expensive crop to produce. The machinery and motor vehicles needed to operate farms represent a significant component of overall costs. Machines and equipment require fuel, so crude prices can greatly impact cotton production.
In addition, PTA is produced from oil, so a rise in crude prices could make polyester more expensive and raise demand for cotton.
The US Dollar
Most commodities, including cotton, are priced in US dollars. When the value of the dollar drops against other currencies, it takes more dollars to purchase cotton than it does when the price is high. Buyers purchasing cotton in other currencies see their purchasing power increase when the dollar is weak and decline when the dollar is strong.