Understanding Cotton Prices

When it comes to manmade materials like plastic and polyester, prices are largely influenced by oil, demand, and inflation.  Polyester and Rayon do compete with Cotton in certain applications so when the cotton market goes up so does Rayon and Polyester. 

The pricing for natural materials, like virgin cotton, are influenced by a wider range of factors, including acreage, weather, seed pricing, and planting decisions. Cotton competes with corn, soybeans, and peanuts for acreage.  If less acreage is available for planting cotton, the higher the cotton price.  Cotton pricing can therefore change quickly and often. 

 

The Basics

USDA Cotton quality classifications measure grade, staple, micronaire, length uniformity, strength, and leaf grade.  There are multiple grades of cotton:  color (white, middling, etc.), as well as 1 leaf and 2 leaf, which are determined by a recap from a cotton merchant or ginner.  

Cotton futures are stock exchange-traded contracts that enable buyers to purchase a specified quantity of cotton at a predetermined price on a future date. Instead of buying at the current market price, also known as the commodity price, manufacturers of cotton-based products guarantee a specific price to pay in a future transaction. While this is beneficial when futures are purchased at the right time in the market, it can also result in financial losses for businesses that trade at the wrong time. For instance, someone might purchase futures guaranteeing a price of $0.80 per pound, but when the date rolls around to make a bulk purchase, the price has fallen to $0.65 per pound. Since they’ve already locked in the $0.80 per pound price, this will result in a financial loss. 

So, why do some manufacturers choose to purchase futures instead of just buying cotton at the current commodity price? Due to the volatile nature of cotton pricing, which is impacted by uncontrollable circumstances like drought and extreme cold, futures help businesses control their raw material expenses and minimize risk. If you believe that the price of cotton will increase in the future, you may decide to purchase futures to lock in the current pricing. In the inverse, futures are also used by producers of cotton to manage their risk. If they predict that the price of cotton will soon decrease, they might choose to sell futures to obligate buyers to pay the current price. 

 

The Importance of Favorable Weather 

The price of cotton is affected by a few factors unique to the farming industry. Weather conditions can have a significant effect on cotton production, which in turn affects price. While the price of synthetic materials isn’t usually impacted by weather, natural products are vulnerable to the effects of mother nature. According to David Stanford, the Vice President of Marketing for the Plains Cotton Cooperative Association (PCCA), “Weather is a topic of conversation for everyone in the cotton industry since it is a pivotal factor in the direction of prices in the cotton market.” Farmers of all types rely on favorable weather conditions to deliver sizable crop yields.  A decrease in rainfall or a cold front, resulting in frost, can significantly impact a farmer’s ability to grow and harvest healthy cotton. A decrease in supply results in a price increase, which can be detrimental to manufacturers of cotton-based products. Typically, Texas grows over half of the US crop, with Georgia coming in second.

 

Bottom Line

Barnhardt Manufacturing Co., Richmond Dental and Medical’s parent company and purified cotton supplier, uses most of the US grown organic cotton.  With over 120 years of experience, Barnhardt monitors the state of cotton so that Richmond Dental and Medical can continue to maintain a sustainable supply chain that meets the quality standards and pricing demands our customers face in today’s market.