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Cotton Sees ‘Exodus of Traders’ as Volatility, Margins Rise

Cotton-futures trading plunged to a 15-week low last week as prices extended their decline from a record and headed for the biggest monthly drop since January, exchange data show.

Open interest, or the number of futures contracts yet to be closed, liquidated or delivered, tumbled 5.2 percent to 194,995 in the week ended Nov. 23, the lowest since Aug. 10, the U.S. Commodity Futures Trading Commission said yesterday. A week earlier, the drop was 14 percent, the most since June 2008.

“An exodus of traders from the market is feeding this volatility,” said Keith Brown, the president of Keith Brown & Co., a brokerage in Moultrie, Georgia. Brown estimates that 20 percent of his customers aren’t interested in trading cotton.

Prices on ICE Futures U.S. in New York have plunged 24 percent since touching $1.5195 a pound on Nov. 10, the highest since the commodity began trading 140 years ago. Cotton for March delivery closed yesterday at $1.1576. The exchange increased margins, or the minimum deposit, required for cotton trading on Nov. 9 after prices and volatility surged.

“Margin levels are determined by volatility and by price,” with volatility playing the more significant role, said Lee Underwood, a spokesman for ICE.

Cotton futures have fallen by the exchange limit eight times in November, and risen by the limit seven times. The fiber still is up 53 percent this year on concerns that mounting demand in China, the largest user, will outpace shrinking inventories. Prices have dropped after China stepped up efforts to cool inflation and curb commodity speculation.

‘Fickle Market’

“You can’t have any confidence whatsoever when the market is as fickle as it is right now,” Mike Stevens, an independent trader in Mandeville, Louisiana, said in an interview on Nov. 23. “We see our customers frustrated,” said Stevens, who clears trades through Chicago-based Rosenthal Collins Group LLC. Long positions held by hedge funds and other large speculators have fallen 31 percent since the end of September to 54,629 contracts, and short positions fell 51 percent to 17,517 last week, CFTC data show.

“Part of that is just people getting out and saying ‘I’m staying out,’” Brown said. By January, the contract for March delivery may rise to $1.5195, the record set earlier this month, as bullish fundamentals “kick back in,” he said.

Production in the U.S., the world’s largest exporter, is forecast to jump by more than 50 percent to 18.42 million bales in the year that ends in July, the U.S. Department of Agriculture said. Plantings are predicted to grow to 11.04 million acres next year, while wheat and feed grain areas may decline, the USDA said in a report on Nov. 9.

Fewer Inventories

Stockpiles held in warehouses monitored by ICE have tumbled 92 percent since June, dropping as low as 8,910 bales on Oct. 8, down 99 percent from this year’s high of 1.08 million bales on June 2, exchange data show.

There’s been “less participation, less confidence in the market,” said Ron Lawson, a managing director at Logic Advisors, a commodity consultant in Sonoma, California. “There’s reluctance on the part of some of the participants, some guys have opted just to step back a while.”

“We would be shying away from it with the market conditions as they are now,” said Robert Humphreys, the chief executive officer of shirtmaker Delta Apparel Inc. in Greenville, South Carolina. Hedging is more expensive and traditional methods for protecting against price changes have been “thrown out the window,” he said.

Raising Shirt Prices

Earlier this month, Delta, the owner of Fun-Tees Inc. and sportswear-maker MJ Soffe Co., said it plans to charge more for clothing because of soaring cotton costs. Delta uses about 150,000 bales a year, primarily from U.S. growers, Humphreys said on Nov. 24.

In March 2008, cotton rallied to 92.86 cents, before tumbling 26 percent to as low as 69.02 cents later that month. As the cotton industry shrank, after the worst recession since the 1930s, some merchants sought bankruptcy protection and filed for insolvency.

The recent run-up in prices is different than in 2008, when “you could point your finger and blame speculators,” independent analyst Stevens said. This time, “the cash market has kept up with the futures market,” he said.

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