While four of the five soft commodities posted gains in 2023, and over the first nine months of 2024, cotton futures bucked the bullish trends and declined. In 2023, nearby ICE cotton futures posted a 2.84% loss, and over the first three quarters of 2024, they were down 9.12%, settling Q3 at 73.61 cents per pound. In late Q4 2024, cotton futures were lower at under 70 cents per pound.
In my Q3 Barchart article on soft commodities, I noted that, “Cotton prices tend to peak during spring.” At the end of 2024, spring 2025 is right around the corner, and cotton could offer value at the current price level.
The trend is bearish- long cotton is a contrarian trade
The continuous ICE cotton futures contract reached a record peak in March 2011 at $2.1970 per pound.
The monthly continuous contract chart highlights that cotton futures reached a lower $1.5595 high in May 2022. Since then, the soft commodity has made lower highs and lower lows, falling to the latest bottom of 66.26 cents per pound in August 2024. In late 2024, cotton futures were below the 69 cents per pound level.
The December WASDE report was not bullish
The USDA’s monthly World Agricultural Supply and Demand Estimates report is the gold standard for fundamental supply and demand data for agricultural products. The December 2024 WASDE report told the cotton market:
The USDA increased its forecast for 2024 U.S. cotton output. Global beginning cotton stocks fell, but the USDA raised ending stocks, which validated the current price level in late December 2024.
The quarterly action shows risk-reward favors the long side
There is a technical reason to be constructive about cotton futures from a long-term perspective as the market enters 2025.
The quarterly chart shows a pattern of higher lows since 2001 when cotton prices fell to 28.20 cents per pound. Cotton made higher lows of 39.23 cents in 2008, and 48.35 cents when the global pandemic gripped markets across all asset classes in 2020. While critical technical support at below 50 cents is substantially below the current price, the cotton market’s risk-reward dynamics favor the upside in late 2024 as seasonality favors the upside during the first half of 2025.
A long history of spring ralliesThe monthly cotton futures chart illustrates that annual highs tend to occur during the spring, when the crop’s uncertainty tends to peak. Cotton prices reached annual peaks in March through July in 2008, 2011, 2014, 2018, 2019, and 2022.
Inflation over the past years has increased the cost of producing all agricultural commodities, and cotton is no exception. Meanwhile, cotton has lagged behind the other soft commodities. In 2024, cocoa, coffee, and frozen concentrated orange juice futures reached new record highs. Sugar prices have remained mostly over the 20 cents per pound level, more than double the 2020 low. While cotton has distinctive fundamental characteristics, its current price, long-term bullish trend of higher lows, price action in the soft commodities sector, and timing as spring 2025 is just around the corner could mean that cotton offers significant value at below 70 cents per pound. We should expect at least one substantial rally in the cotton futures market over the coming months.
The ICE cotton futures curve displays a contango or premium for futures out to July 2025, with May and July prices around the 70 cents per pound level. While the curve reflects abundant supplies, it could also point to sentiment that higher prices are on the horizon during the first half of next year.
No ETF or ETN products- Futures are the only path for risk positions
Unfortunately, the iPath Series B Subindex Cotton ETN product (BAL) stopped trading in June 2023, leaving the only arena for participating in cotton’s price action the futures and futures options on the Intercontinental Exchange.
Each cotton futures contract represents 50,000 pounds of the fiber, with a value of $35,000 per contract at 70 cents per pound. The original and maintenance margin levels are currently $2,062/$1,875 per contract. A market participant can contract a cotton contract for a 5.89% good faith deposit but will need to pay market differences if equity drops below the $1,875 maintenance margin level.
Cotton is a liquid futures contract with a daily volume averaging around 20,000-25,000 contracts. The total number of open long and short positions in the cotton futures market was nearly 237,000 contracts in late December 2024. Meanwhile, daily price volatility in the cotton futures arena has dropped below 13%, which is historically low. The monthly price variance metric stands at around 22% and has risen as high as 60% in 2022 and 2011.
Cotton’s downside could be limited at under the 70 cents per pound level. Any production problems or weather-related issues could ignite the soft commodity as it approaches the time when the price tends to peak in spring and early summer.
