JULIE WERNAU
The Wall Street Journal
Cotton futures have jumped 12 per cent over three sessions, throwing the finances of textile mills and fibre merchants around the globe into disarray.
Speculators have been driving up the price, analysts say, following a government report last week showing a tightening in cotton supply. That triggered the largest three-day rally in the commodity since December 2010, with prices rising nearly 4 per cent yesterday to US85.32c a pound.
After cotton futures topped their trading limits on both Friday and Monday trading, the Intercontinental Exchange after each session increased margin requirements, or the amount of money that buyers and sellers must put down as collateral to guarantee trades.
Increasing margin requirements is a tool used during periods of rapid run-ups caused by speculators. Exchanges hope to force traders who donΆt have the money to guarantee their positions to unwind from those trades.
The rapid increase in prices may force some cotton users to cancel sales or pay up for the fibre, industry analysts say.
The price surge is disrupting the industry during a crucial time in the crop cycle for US cotton, when there will be no new cotton on hand for several months as farmers begin to plant for the next harvest, which begins in July and extends to November.
Many cotton buyers entered into contracts last year to purchase US cotton at a price to be determined at a later date, a common practice in the business. Most were bearish on cotton prices and figured they could pay a cheaper price in the future.
But cotton prices have jumped 30 per cent since September, and mills are running out of time for them to come back down.
Some users now face cotton prices that are US20c a pound, or about 30 per cent, higher than when the sales were contracted.
“A mill somewhere is going to lose some money because they waited and paid through the nose,” said Howard Simons, an economic consultant and president of Rosewood Trading in Glenview, Illinois.
“And someone with cotton to deliver will make money.”
There isnΆt much cotton left for mills or spinners to buy separately because most of the harvest is headed abroad.
The higher margin requirements is likely to also hurt major cotton merchants. Companies, including Olam International, Cargill and Louis Dreyfus, face tens of millions of dollars a day in margins calls while they wait for cotton mills to fix sales, according to analysts and traders with knowledge of those businesses. The companies didnΆt respond to requests for comment.
Margin calls for all market participants were expected to top $US262 million yesterday, analysts said. The margin calls intensify the standoff between merchants such as Cargill and Louis Dreyfus who have deep pockets and speculators. Hedge funds and other traders have been piling into speculative agricultural trades, including cotton.
Adam Sarhan, chief executive of investment firm 50 Park Investments, said cotton had attracted speculative money because it was one of the top-performing materials.
“Cotton has remained one of the strongest commodities out there and is left with very little competition,” he said.
With about 700,000 bales of cotton t unsold in the current US cotton crop, Peter Egli, a risk manager at Plexus Cotton said merchants were renegotiating contracts with mills.
The merchants are buying back the contracts from the mills and pushing that cotton back onto the exchange, with the hope of finding a buyer who is still betting on rising prices.
Most of the cotton spinners and textile mills are in Asia. Given the recent price rise, “nobody is going to touch US cotton any more,” Mr Egli said.
