In Focus: Cotton

On May 11, the U.S. Department of Agriculture forecast global cotton consumption of 115.9 million bales for the 2009/2010 season ending July 31, 2010. While this level of consumption is considerably lower than the 2006/2007 record of 123.6 million bales, it represents an increase from 2008/2009, when consumption fell more than 10% to 109.7 million bales as a result of the global economic crisis.

China is the world’s leading importer and consumer of cotton, accounting for more than 40% of global cotton consumption in 2009/2010 and more than half of the increase in global consumption from 2008/2009. India and Pakistan rank second and third, respectively, together accounting for more than 25% of total cotton consumption. The U.S., by comparison, is expected to account for just 3% of global cotton consumption in 2009/2010 and less than half its 7.5% share in 2002/2003.

The United States is the world’s third largest producer of cotton (behind China and India) and its largest cotton exporter. The USDA’s May report estimated the 2009/2010 U.S. cotton crop at 12.2 million bales. With exports of 12 million bales in 2009/2010, the USDA forecasts U.S. share of the global cotton trade at 35% this year, compared to 44% in 2008/2009 (when global exports/imports were lower) and in-line with 2006/2007 and 2007/2008.

For 2010/2011, the USDA estimates that U.S. cotton acreage will increase for the first time in three seasons, with harvest acreage increasing 15% from the current year and production and export forecasts to be 16.7 and 13.5 million bales, respectively. U.S. ending stocks are forecast to be 3 million bales in 2010/2011, the lowest level since 1995/1996. Global consumption is estimated to be 119.1 million bales, with exports/imports of 35.7 million bales. Global ending stocks are forecast to decline to 50.1 million bales, as consumption exceeds production for the fifth consecutive year — which is rare, as a five year streak of consumption exceeding production has not occurred for 50 years.

Cotton futures began trading on the New York Cotton Exchange in 1870. Options on cotton futures were introduced in 1984. Today, ICE Futures U.S. is the exclusive global market for Cotton No. 2, the benchmark contract for pricing and risk management by U.S. and international cotton commercial sector.

On April 26, futures prices on Cotton No. 2 reached a two-year high, with the May and July contracts reaching 85.10 and 87.10 cents per pound, respectively, before closing at 84.02 and 85.89 cents per pound. Average daily volume in Cotton No. 2 has increased more than 40% from a year ago, and open interest in up more than 30% as of May 11.

Because global textile production is now heavily concentrated in Asia, Cotton No. 2 offers exposure to China and other textile manufacturing centers that import U.S. cotton. Cotton may also offer exposure to/correlations with the U.S. Dollar and competing or complementary agricultural commodities, such as soybeans. As China and other emerging economies continue to accelerate and as global cotton consumption continues to outpace production, Cotton No. 2 will remain an important indicator of the global economic activity. Contract specifications for Cotton No. 2 and more information are available on ICE's Cotton homepage.