Cotton soars on worries about squeeze


Worries about a squeeze are building in the cotton futures market as bales to be delivered next month soar in price.

The concerns come a year after Louis Dreyfus, the world’s biggest cotton merchant, stood for delivery of half a million bales on the ICE Futures US exchange, exacerbating losses for rivals in the clubby cotton market and drawing the attention of regulators.

In the past week, ICE cotton for delivery next month has risen 16 per cent and on Tuesday rose by the exchange-imposed limit of 5 cents to 87.98 cents a pound.

The premium for July cotton above futures delivered in December has doubled, suggesting a desperate search for bales for delivery next month.

“We definitely could see a squeeze take place,” said Chris Kramedjian, at futures broker FCStone. “There are very few willing sellers and all the people who have already sold are scrambling.”

In a squeeze, low supplies force futures sellers to exit short positions by either buying offsetting futures or buying the physical commodities to deliver on the exchange. The “notice period”, in which sellers announce plans to deliver cotton, starts on Monday.

“The big question is: who’s short?” said Ron Lawson, managing director with broker LOGIC Advisors. “Because they’re getting hurt right now.”

July cotton has surged since it emerged last week that China plans to increase cotton imports from the US by 744,200 bales before July 31, months before the next crop is harvested in the world’s leading cotton exporting country.

This was a large jump at a time when the US Department of Agriculture projected only 3.2m bales would be left over from last year’s domestic crop.

Traders said that merchants making the sales might seek to take delivery over the futures exchange, as bales traded there meet the quality standards of China’s national cotton reserve, an important backstop for world cotton markets at a time of soft consumption.

Mr Lawson added, however, that “this may be the crescendo” for July cotton, as a large number of futures positions were on Tuesday being closed out through privately agreed “exchange for physical” or “exchange for swap” transactions.

Physical cotton trading is dominated by a handful of merchants including Louis Dreyfus Commodities, Cargill, Olam International, Noble Group and Glencore.

This year’s US crop is forecast to be a plentiful 17m bales, replenishing stocks in the coming crop year.

Source: ‘Financial Times