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The Economics Building

Terminology

Cotton is the world's preferred natural fiber and is produced in approximately 80 countries.

Crop/Marketing Year:
As with other agricultural commodities, cotton production, consumption, and prices are commonly discussed in terms of crop years. The term crop/marketing year reflects the planting and harvesting patterns for crops. For cotton, the crop year runs from August 1 to July 31 (the current 2009/10 crop year began August 1, 2009) and reflects the period for marketing a given cotton harvest before the next harvest comes in behind it. Most of the world's cotton is grown in the northern hemisphere, where the earliest harvests begin in August and this is why the crop year begins in August.

Cotton Varieties:
Being natural, different cotton growths have different attributes. Cotton is usually described and traded in terms of fiber length, strength, uniformity, and micronaire. Micronaire is an indication of fiber maturity and, along with the other cotton quality data, helps indicate for which end uses certain growths of cotton may be most appropriate. Prices reflect the relative availability of certain cotton qualities relative to demand for different uses.

Cotton Prices:
Cotton prices are typically quoted in cents per pound. In the US, volumes of cotton are described in terms of cotton bales (480-500lbs. blocks of compacted cotton). Internationally, cotton is typically described in metric tons.

NY Nearby:
The NY Nearby can be considered the US price. As a futures price, the NY Nearby is a contract for future delivery of cotton. Most commodities in the United States are traded in futures markets and different commodities have different contract months, or months when delivery of the commodity represented in these contracts is due. For cotton, there are five contract months (March, May, July, October, and December). December contracts are often given special importance since December is the first contract to expire after the U.S. harvesting period. The term nearby refers to the contract closest to expiration. For example, in April the nearby price refers to the May contract. In January, the nearby refers to the March contract.

'A' Index:
The A Index is considered to be representative of a world cotton price. An ideal world price would be weighted average of all cotton that is traded. Since the volume of cottons traded for all varieties is not available, however, the A index is derived as an average of the five cheapest prices (among commonly traded cotton varieties), with the rationale that cheaper cottons are more likely to be traded. The A index is usually a little higher than the NY Nearby because the quality represented by the A Index is slightly better than that of the NY Nearby and since the price represented by the A Index also includes shipment to Asia.

Fundamentals:
With commodities, fundamentals refer to supply and demand or production consumption. Cotton prices are typically influenced by supply and demand forces. In agriculture, production refers to the amount harvested. For cotton, consumption refers to the amount of raw cotton fiber used by spinning mills to produce yarn. Major sources of estimates of data concerning cotton fundamentals are the USDA, Cotton Outlook, and the International Cotton Advisory Committee (ICAC). The Monthly Economic Letter is published one business day after the release of revisions to USDA estimates, generally around the 10th of each month. This publication is available free of charge at www.cottoninc.com.