Cotton Surges To Daily Limit
Cotton futures soared at the open Monday, with the July contract surging to its trading limit by 9:30 a.m. ET, squeezing short players in the market before pulling back.
Cotton for July delivery was up 2.5% at 84.26 cents a pound on the ICE Futures U.S. exchange, on track for its highest close since May 9, 2012.
A speculative surge in the cotton market is catching cotton spinners and textile mills wrong-footed. Most merchants and mills were bearish on cotton prices at the beginning of this crop season, as U.S. output is expected to grow more than 30%, to 17.2 million bales.
Those merchants and textile mills held a large number of short positions in the July contract as a hedge against their physical cotton, but cotton's bullish run has caught them off guard.
"The mills did not price sales from producers at cheaper levels and now are forced to pay higher prices," said Jack Scoville, vice president of Price Futures Group in Chicago.
Cotton futures have soared 10% over the last three sessions and also hit their trading limit on Friday, leading the exchange to increase the margin requirements for buyers and sellers in the cotton market. Increasing margin requirements--the amount of money traders must put down as collateral to guarantee trades--is a tool frequently used by exchanges during times of run ups caused by speculative volatility.
If the contract closes at its trading limit Monday, margin calls are expected to reach $393 million, with the idea that if speculators and commercial buyers in these trades don't have the money to guarantee the positions, they will be washed out of the market.
The situation in cotton has created a standoff between the deep pockets of major cotton merchants, including Cargill, Louis Dreyfus and Olam, and large macro funds who have recently piled into agricultural trades, including cotton.
Analysts say the price surge makes it unlikely that Asian cotton spinners and textile mills will be willing to fix contracts at these prices, as they are staring down prices for cotton that are 15 cents per pound higher than when many of those sales were contracted.
"Nobody is going to touch U.S. cotton anymore," said Peter Egli, a risk manager at Plexus Cotton Ltd.
With about 700,000 bales of cotton left unsold in the 2016/2017 U.S. cotton crop and 13 million bales of open interest in the July contract, there isn't enough cotton to satisfy every short in the market. Mr. Egli said some merchants are renegotiating contracts with mills, buying back the contracts and selling back to the board.
The trigger for the cotton rally came last Wednesday, when the U.S. Department of Agriculture dropped its estimate for U.S. ending stocks from 3.7 million to 3.2 million bales, a level that isn't far above the minimum amount of cotton needed to supply domestic and foreign commitments.
USDA attributed the lower stocks to robust export sales, which were raised to 14.5 million from 14 million bales in its latest report. That trend was confirmed in Thursday's export sales report, which showed that the U.S. sold a total of 328,000 running bales of cotton during the week ended May 4.
For the current year, total commitments for exports are at 14.55 million bales, of which 11 million bales have already been exported.
Mills have been buying large quantities of cotton on an "on-call" basis, which allows them to fix prices later at a potentially lower level.
However, cotton prices had a strong start in 2017, forcing mills to repeatedly delay fixing their purchases. According to the Commodity Futures Trading Commission, there were still 4.62 million bales of cotton unfixed on the July contract. Most of the on-call sales have to be fixed before the July contract expires.
Merchants with short positions buy back futures when prices are fixed.
In other markets, raw sugar for July was up 1.3% at 15.71 cents a pound, cocoa for July rose 0.8% to $2,031 a ton, arabica coffee for July shed 0.5% to $1.343 a pound, and frozen concentrated orange juice for July lost 2.6% to $1.4375 a pound.
Write to Julie Wernau at julie.wernau@wsj.com
(END) Dow Jones Newswires
May 15, 2017 11:33 ET (15:33 GMT)