Market Spotlight: Cotton


Cotton is a natural vegetable fiber that comes from small trees and shrubs of a genus belonging to the mallow family, one of which is the common American Upland cotton plant. Cotton has been used in India for at least the last 5,000 years and probably much longer, and was also used by the ancient Chinese, Egyptians, and North and South Americans. Cotton was one of the earliest crops grown by European settlers in the U.S.

Cotton requires a long growing season, plenty of sunshine and water during the growing season, and then dry weather for harvesting. In the United States, the Cotton Belt stretches from northern Florida to North Carolina and westward to California. In the U.S., planting time varies from the beginning of February in Southern Texas to the beginning of June in the northern sections of the Cotton Belt. The flower bud of the plant blossoms and develops into an oval boll that splits open at maturity. At maturity, cotton is most vulnerable to damage from wind and rain. Approximately 95% of the cotton in the U.S. is now harvested mechanically with spindle-type pickers or strippers and then sent off to cotton gins for processing. There it is dried, cleaned, separated, and packed into bales.

Cotton is used in a wide range of products from clothing to home furnishings to medical products. The value of cotton is determined according to the staple, grade, and character of each bale. Staple refers to short, medium, long, or extra-long fiber length, with medium staple accounting for about 70% of all U.S. cotton. Grade refers to the color, brightness, and amount of foreign matter and is established by the U.S. Department of Agriculture. Character refers to the fiber’s diameter, strength, body, maturity (ratio of mature to immature fibers), uniformity, and smoothness. Cotton is the fifth leading cash crop in the U.S. and is one of the nation’s principal agricultural exports. The weight of cotton is typically measured in terms of a “bale,” which is deemed to equal 480 pounds.

Cotton No. 2 trades on the Intercontinental Exchange (ICE). The futures contract trades electronically from 9:00 PM ET to 2:20 PM ET, Monday through Friday. The pre-open is 7:30 PM ET. On Sunday evenings, the market opens at 6:00 PM ET, with pre-open at 5:30 PM ET.

One Cotton futures contract size is 50,000 pounds net weight. One contract is roughly 104 bales of Cotton.

The price increment is quoted in cents and hundredths of a cent per pound. The last traded price (September 9th, 2014) for December 2014 Cotton futures was 65.79 or $.6579 per pound. The minimum price movement or “tick” is 1/100 of a cent per pound or $5.00 per contract. The next price after 65.79 upward is 65.80, followed by 65.81. Therefore a one point move, from 65.79 to 66.79, would be $500.

The performance bond or initial margin requirement to initiate one futures contract is 4.01% of the contract value or $1,320 (as of September 8, 2014) To control that futures contract going forward the maintenance margin becomes 3.65% of the contract value or $1,200 (as of September 8, 2014).

The futures contract is subject to a daily price limit that begins at 3.00 cents per pound and can reach 7.00 cents per pound.

The futures contract month listings are March (H), May (K), July (N), October (V), and December (Z).

Cotton contracts are physically delivered. The futures contract’s First Notice Day (FND) is five business days before the first delivery day of the spot contract month, which is the first business day of that month. The December 2014 Cotton futures contract FND is November 21, 2014 for example. The Last Notice Day is the twelve business days from end of spot month. The futures contract’s Last Trading Day (LTD) is seventeen business days from end of spot month. The December 2014 Cotton futures contract LTD is December 08, 2014 for example.