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Textile mills and hedge funds are engaged in a scramble for cotton as a resurgent global economy pulls bales from warehouses. Benchmark US cotton futures surged again on Monday after last week rising by the daily exchange limit to the highest level since mid-2014 as data showed supplies flying out of the US, the biggest exporter. Brokers warned the tumult may not be over as mills have yet to fix the price of millions of bales they ordered from merchants for delivery by July. As volatility surged, the Intercontinental Exchange raised the amount of collateral needed to hold futures contracts and widened the allowable price band for today’s session. The fevered action ended months of soporific trading in cotton. Prices had moved sideways as consumers bought more polyester fabrics and China, the largest cotton spinner, maintained a massive state-owned reserve that damped rallies. But Beijing has begun selling off cotton stocks and global consumption will increase about 2 per cent this year to 24.6m tonnes as the world economy strengthens, according to the International Cotton Advisory Committee, an intergovernmental group in Washington. Mills in countries such as India, Pakistan and Vietnam have increased imports of US cotton by nearly 60 per cent this year, according to the US Department of Agriculture.
Hedge funds have clung to an overwhelmingly bullish position in cotton, with 10 purchases for every sale in US futures. To cotton market veterans, the intense rally recalled a 2008 price spike that knocked some of the industry’s oldest names out of business. The international cotton trade is today led by trading houses such as Louis Dreyfus, Cargill, Glencore and Cofco Agri.
With futures prices locked by the exchange fluctuation limit, brokers said nervous traders had bought call options giving them the right to secure July cotton for 85 cents after the ICE July cotton settled at 82.18 cents a pound on Friday, up three cents. The contract traded 3.7 per cent higher at 85.22 cents a pound on Monday.
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We’re pretty parabolic right now,” said Peter Egli of Plexus Cotton, a Liverpool-based trading house. The rally was sparked by USDA estimates showing US cotton stocks would dwindle to 3.2m bales before the autumn harvest. A bale weighs 480lb. “We are all but sold out of US cotton for this year,” said Ron Lawson of Logic Advisors, a commodity research group in California. The US commodity futures regulator later reported that mills had not yet agreed prices for forward contracts to buy 4.62m bales of cotton by July — an “alarmingly high” number, Mr Egli said. Brokers said the magnitude of unfixed contracts raised the risk that some mills would renege on purchase agreements with merchants. The scramble reflects the fact that the benchmark cotton futures contract only allows delivery of bales grown in the US. Even though new crops are arriving from southern hemisphere exporters such as Australia and Brazil, they cannot be used to back the industry’s main hedging tool. A world cotton futures contract launched by ICE has not yet gained traction.

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