Gregory Meyer in New York
The cotton market may be global, but international commodity merchants are showing a preference for cotton futures contracts that are local.
Volume in Intercontinental Exchange’s world cotton futures, backed by bales from nine countries, has evaporated since their debut five months ago. Four in five trading sessions saw no transactions in February and March.
The flagging activity reflects the difficulty in establishing new derivatives markets. ICE envisages changes to the contract in the coming year “to make sure itΆs meeting the needs of participants,” Trabue Bland, president of the ICE Futures US exchange, said in an interview.
ICE launched the world cotton futures in November at the request of merchants who complained of flaws in its existing contract, which allows only deliveries of cotton grown in the US. The limitation has squeezed some traders when supplies were tight.
The new world contract reflects the global nature of production, permitting cotton grown in locales from west Africa to Brazil to be delivered to warehouses in Australia, Malaysia, Taiwan and the US.
The contract would “provide a new price discovery and risk management vehicle for the large volume of commercial cotton that moves from key origins to the multiple Asian consuming countries that dominate global exports/imports of cotton,” ICE said in a filing last year.
ICE took years to develop world cotton futures, and was even forced to get US law changed to list them. The Atlanta-based exchange operator created incentive programmes for merchants and proprietary traders and last year an executive invited willing cotton merchants to dinner on the floor of the ICE-owned New York Stock Exchange — a comment a spokesman said was made tongue in cheek.
But while trading of US cotton futures often tops 20,000 contracts per day, volumes in the world contract totalled just 38 contracts over the entire month of March, exchange data show. World cotton was $0.67 per lb last week.
Cotton merchants and brokers offered a variety of explanations for the lack of interest thus far. Herman Kohlmeyer, a cotton broker at Michael J Nugent in New Orleans, said the world contract was a “sellersΆ” contract, as it gave them a wide choice of delivery points.
“It never made sense to a number of people in the industry, and the odds of any new contract becoming successful are not terribly high,” he said.
Cotton executives said they have been cautious ahead of the first delivery month in May. Among their concerns: that lower-quality bales would be sold from countries where cotton bolls are still picked by hand.
Mr Bland said: “The reason weΆre seeing low volumes is because these guys are taking a risk on our delivery process. TheyΆre not going to take big positions in this because theyΆre testing how everythingΆs going to work.”
