What are 'cotton futures contracts'?

Cotton futures contracts are financial agreements between parties to buy or sell a specified quantity of cotton at a predetermined price on a future date. This type of contract allows producers and traders to hedge against price fluctuations in the cotton market. By locking in a price ahead of time, they can stabilize their revenue and plan their operations more effectively. This is particularly important in commodity markets, where prices can be volatile due to various factors such as weather conditions, changing demand, and global market trends.

The contracts are standardized and traded on futures exchanges, which adds transparency and liquidity to the trading process. This means that participants can enter or exit positions readily, which is essential for effective risk management.

In contrast, the other options do not accurately represent what cotton futures contracts are. The focus on specific aspects of cotton, such as seeds or short-term agreements for field rental, misses the essential element of futures contracts being related to price agreements and future delivery dates. Therefore, the concept of buying or selling cotton at a specified price on a specified future date succinctly captures the essence of cotton futures contracts.