Cotton futures present contrarian opportunity ahead of Spring 2025

Cotton futures lagged other soft commodities in 2023 and 2024, posting a 2.84 per cent loss in 2023 and a 9.12 per cent drop over the first three quarters of 2024, settling at 73.61 cents per pound. By late 2024, prices dipped below 70 cents, with bearish trends dominating since the May 2022 high of $1.5595. The December WASDE report highlighted higher US cotton output forecasts and rising global ending stocks, reinforcing the current price range.

However, historical patterns show cotton prices often peak in Spring. Since 2001, the commodity has formed higher lows, reflecting long-term resilience. Spring rallies in 2008, 2011, and 2019, among others, suggest potential upside in early 2025, supported by inflationary production costs and cotton's current undervaluation compared to other soft commodities.

The ICE futures curve shows contango, with May and July contracts around 70 cents, indicating sentiment for higher prices. While ETFs are unavailable, futures and options remain accessible, with contracts representing 50,000 pounds of cotton. With historically low volatility and a liquid market, cotton at under 70 cents offers an attractive risk-reward balance. Production or weather challenges could spark a rally as seasonal strength emerges in spring 2025.