Prices for Cotton Futures Go Up Over Looming Fears of Industry Squeeze

on Jun 21, 2012

Cotton bales that are expected to be delivered in July have gone up in price, spurring fears about a potential squeeze in the cotton futures market, the Financial Times reported. The publication reminded that about a year ago, the biggest global cotton merchandiser Allenberg Cotton, owned by the DutchLouis Dreyfus Commodities, took delivery of over half a million bales on the ICE Futures US Exchange, which caused hundreds of millions of dollars in losses for several high-profile rival trading houses. The incident immediately drew the attention of regulators, and the Commodity Futures Trading Commission’s enforcement division at the time launched a probing campaign, interviewing leading cotton traders.

According to the FT, ICE cotton for July has gone up 16 percent, reaching 87.98 cents a pound. Compared to December 2011 futures deliveries, prices have doubled, suggesting that the search for July delivery bales is nothing short of desperate.
Chris Kramedjian of futures broker FCStone told the FT:“We definitely could see a squeeze take place. There are very few willing sellers and all the people who have already sold are scrambling.”

During a squeeze on the market, decreased supplies cause futures sellers to either buy offsetting futures or buy the physical commodities to deliver on the exchange.
!m[](/uploads/story/79/thumbs/pic1_inline.png)The FT further explained that high prices for July cotton also reflect China’s ambitions to up its cotton imports from the US by 744,200 bales before July 31. The deadline falls just a month short of the next crop harvest in the US – the country with the highest cotton export rates in the world. At the same time, the FT noted, according to predictions by the US Department of Agriculture, only 3.2 million bales would be left over from the 2011 domestic crop.

Trading expertsanticipate that merchandisers making the sales might opt for delivery over the futures exchange, because that way bales would meet the quality standards of China’s national cotton reserve. Meeting Chinese standards is important for the world cotton markets at a time when global consumption is lower.
Earlier this year, the FT reportedthat all eyes have been on China for the past 12 months as the country’s government-run stockpile has been steadily accumulating millions of tonnes of the fibre. In fact, China’s demand for cotton is estimated to comprise 15 percent of this year’s estimated global demand.

The FT also said that a large number of July cotton futures positions this week were being closed out through privately heldoff-market “exchange for physical” (EFP)or “exchange for swap” (EFS) transactions. During an EFP transaction, the cotton buyer transfers to the supplier an equivalent amount of long futures contracts or receives a corresponding amount of short futures at an agreed price. AnEFS transaction is similar to EFP, except that an EFS allows market participants to exchange a position in a futures contract on cotton for a cash-settled position instead of the physical commodity.
In response to the close, ICE increased the deposit required to trade futures by 50 percent for July cotton, which is indicative of growing concerns overtrading disturbances.