By Gregory Meyer in New York
When July 2012 US cotton futures become history on Monday, many traders will say good riddance.
The contract, to deliver bales this month to one of five southern US cities, is the latest example of why the cotton market seems full of frustrated people.
In the week to June 20, the July cotton futures contract rose more than 19 per cent to 89.48 cents a pound on the ICE Futures US exchange. July cottonΆs premium to December more than doubled, suggesting someone needed exchange-quality US cotton, and quickly.
The trigger: on June 14, the US Department of Agriculture reported sales of 744,200 bales of US cotton to China to be exported by July 31. This was a large portion of domestic stocks.
Next, just as markets were surging, one or more exporters turned round and cancelled more than 600,000 bales of sales to China in the week ending June 21. July cotton fell like a stone, closing at 70.78 cents on Friday.
In other words, the premise of the price spike – one that cost textile mills who needed to fix the price of forward cotton purchases – was a mirage. Or in the view of merchants Plexus Cotton, “a classical ΅pump and dumpΆ play, inflicting considerable pain on many unsuspecting market participants while enriching themselves in the process”.
“We canΆt wait for the July contract to finally leave the board,” Liverpool-based Plexus said in a note.
Last monthΆs spike followed an alleged cotton squeeze a year ago that hit big traders such as Glencore . GlencoreΆs former head of cotton has sued the biggest merchant, Louis Dreyfus Commodities, over his personal losses. Dreyfus last week told Bloomberg News it would “vigorously contest” the lawsuit.
And it follows another spike in March 2008 that eliminated some of the biggest cotton traders and cemented Louis DreyfusΆs importance . To date, DreyfusΆs in-house futures broker, Term Commodities, has issued notices that it will take all but 2,200 of the 91,200 bales noticed for delivery to ICE warehouses this month.
Traders say the wild trading in the final weeks of the July contract may reflect structural problems with cotton futures. One potential problem is that the ICE exchange only accepts bales grown inside the US.
This may have been fine at a time when US mills were humming and US farmers grew a fifth of the world cotton crop. But times have changed. ICE-deliverable cotton is now less than 10 per cent of world supply, analysts say. This means traders delivering to exchange warehouses have a limited supply of bales.
ICE has discussed a foreign-grown cotton contract with traders but so far failed to reach consensus. After the latest drama over cancelled exports to China, maybe talks will gain traction again.
The Commodities Note is a daily online commentary on the industry from the Financial Times