Factors Affecting Cotton Price – How Are Cotton Prices Calculated?
Cotton is one of the world's most important agricultural products. In addition to the textile industry, cotton is also used in the oil, feed, paper, cosmetics and pharmaceutical industries. Cotton price is of great importance for both producers and consumers. So, how is the price of cotton determined and what factors affect it?
Factors affecting the cotton price include supply and demand, weather conditions, production costs, exchange rates, government policies, speculative movements and international markets.
Supply and demand: Cotton price varies according to the balance of supply and demand. When supply exceeds demand, prices fall, while when demand exceeds supply, prices rise. Factors affecting supply and demand are production areas, productivity, consumption habits, fashion trends and alternative products.
Weather conditions: Suitable climatic conditions are required for cotton production. Cotton plant is sensitive to factors such as temperature, humidity, precipitation and sunlight. Adverse changes in weather conditions can reduce cotton yield and quality. This could lead to a decrease in supply and an increase in prices.
Production costs: Various inputs such as seed, fertilizer, pesticide, labor, machinery, irrigation, storage and transportation are used for cotton production. The increase or decrease in the prices of these inputs affects the cost of cotton production. As the production cost increases, the price of cotton increases, or as it decreases, the price of cotton decreases.
Exchange rates: The cotton market is an international market. Cotton prices are generally determined in US dollars. Therefore, changes in exchange rates affect the price of cotton. As the exchange rate rises, the price of cotton also rises, or as it falls, the price of cotton also falls.
State policies: States can intervene in the cotton market in various ways. States can implement policies such as support purchases, subsidies, tax reductions and quotas to encourage or protect cotton production. These policies affect the price of cotton by increasing or decreasing the supply or demand of cotton.
Speculative movements: There are actors who buy and sell for speculative purposes in the cotton market. These actors take or change positions according to their expectations regarding the future course of cotton prices. Speculative movements may cause fluctuations in cotton prices.
International markets: The cotton market is a global market. The situation in the cotton market of countries such as the USA, India and Brazil, especially China, which is the world's largest cotton producer and consumer, affects the cotton price. Supply and demand changes, weather conditions, government policies, exchange rates and speculative movements in these countries pressure the cotton price upwards or downwards.
How are cotton prices calculated?
Cotton prices are determined according to the balance of supply and demand in the cotton market. There are two types of prices in the cotton market: spot price and forward price.
Spot price is the price of cotton determined instantly and delivered immediately. The spot price varies depending on the quality, quantity, place and time of delivery of the cotton.
The forward price is the price of cotton determined today to be delivered at a future date. The forward price is determined based on standard specifications such as the quality, quantity and delivery date of the cotton. The forward price may be higher or lower than the spot price.
There is a relationship between spot and futures prices in the cotton market. As spot and futures prices differ from each other, arbitrage opportunities arise. Arbitrage is the process of making a profit without risk by buying and selling the same commodity at different prices in different markets. Thanks to arbitrage transactions, the difference between spot and forward prices decreases and market balance is achieved.