Cotton: Trading
New York, Zhengzhou and Mumbai: three cotton markets
What this tab covers How and where it is bought and sold: who buys and sells, exchanges and benchmarks, contract types, the big trading houses and how prices are discovered.The benchmark futures contract is ICE Futures US Cotton No. 2, priced in cents per pound for US-grown lint. The Zhengzhou Commodity Exchange trades cotton in China, and MCX lists cotton futures in India. Physical cotton is priced as a basis to ICE and referenced to the Cotlook A Index of delivered Far Eastern prices. Merchants such as Louis Dreyfus, Olam and ECOM carry large risks. Pirrong describes widespread contract defaults in 2010-11 and a squeeze that reportedly cost Glencore about $300 million in 2011.
Where it is bought (buyers)
- Spinning mills in China, India, Pakistan, Vietnam, Bangladesh, Turkey and Indonesia buy lint from merchants on forward contracts
- Indian mills buy kapas-derived lint from ginners in Gujarat, Maharashtra and Telangana, and buy imports when Indian prices exceed import parity
Where it is sold (sellers)
- US, Brazilian and Australian growers and cooperatives sell to merchants, often priced on ICE futures
- West African cotton companies sell through merchants
- Cotton Corporation of India sells bales it bought at MSP through online auctions
Exchanges and benchmarks
| Venue | Contract | Notes |
|---|---|---|
| ICE Futures US | Cotton No. 2, 50,000 lb, US cents per lb | world benchmark for US-grown lint; physical cotton is priced as a basis to it |
| Zhengzhou Commodity Exchange | Cotton No. 1, yuan per tonne | Chinese domestic benchmark, large speculative volumes |
| MCX (India) | Cotton Candy futures, Rs per candy (1 candy = 356 kg of lint) | main Indian lint futures contract |
| MCX (India) | Kapas (seed cotton) futures | Indian seed cotton contract |
Contract types
- On-call contracts priced at a fixed basis to ICE futures, with the buyer fixing the futures price later
- Fixed-price forward sales for shipment months ahead
- International Cotton Association (Liverpool) rules and arbitration for cross-border trades
- Government procurement at MSP in India
Top trading houses
- Louis Dreyfus Company
- Olam Agri
- ECOM
How prices are discovered
- ICE Cotton No. 2 futures
- Cotlook A Index of delivered Far Eastern prices
- India's Shankar-6 spot price quoted by trade bodies and MCX
- Zhengzhou futures and China Cotton Index