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Cotton has been in the political spotlight recently as the World Trade Organization has reprimanded the United States for giving farmers enormous subsidies that were deemed illegal by WTO laws. What's more, the United States agreed that its own practices must be abandoned, potentially shaking up the entire cotton market. Currently, America is the second largest producer of cotton in the world, behind China, and its cost of production is well over the current market price. The shortfall between the selling price and the farmer's production costs are made up by billions of dollars of US subsidies. Any change in the political situation may drastically effect this market. Without any doubt, if the US were to abandon its subsidies altogether, the price of cotton would skyrocket. Most farmers in the United States, especially those in the South, would stop production because of heavy losses. While the US may only be second in cotton produced, it is responsible for close to 50% of the world's exports, making it virtually the price setter in the global marketplace. While the United States has agreed with the WTO to disband a large part of its cotton subsidy program, the actual implementation of this is unlikely to occur. Any changes in trade laws must be passed by the US Congress, where the political lobby of cotton farmers is quite strong. Nevertheless, international pressure may eventually cause some decrease in the level of subsidies allocated to this program. The Commodity Investor predicts that while subsidies may not be eliminated, they will likely be decreased in the years to come. Any indication of this will cause a rally in cotton prices.
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