Speculators Not Blamed In Cotton Futures Spike

“There is no smoking gun. If there was, obviously somebody would have been prosecuted.”


Market manipulation did not cause cotton futures prices to artificially spike in 2008, the U. S. Commodity Futures Trading Commission said Jan. 5, after a lengthy investigation spanning nearly 20 months.

Evidence found a host of factors may have contributed to the wild movement in cotton contracts traded on the Intercontinental Exchange’s (ICE) Futures U. S., formerly the New York Board of Trade, during the week of March 3, 2008, the CFTC said.

The CFTC conducted the probe at the behest of farmers, investors and other market participants who expressed concern about the price spike, which pushed two leading U. S. cotton merchants out of business.

Rather than manipulation, the price spike may be due to factors such as a broad rise in commodity prices, tight credit conditions, switch from pit to electronic trading, impact of certain large market participants, and the presence of cotton market price limits, the agency said in a 27-page report.

“There was a variety of factors that contributed to the rally. It was not just (speculative) buying in cotton alone that resulted in those radical price moves,” said Sharon Johnson, cotton expert at First Capitol Group in Atlanta.

“There is no smoking gun. If there was, obviously somebody would have been prosecuted,” she said.

The surge in cotton prices came dur ing a year when other commodity prices such as oil, wheat and copper rose to record peaks, and led to calls for the government and the futures regulator to crack down on speculation.

Congress has since held hearings on the role of speculators in markets, and the CFTC is poised to strengthen position limits in oil and other commodities such as metals.

CFTC commissioner Bart Chilton said the agency must be “especially vigilant”

in addressing so-called new speculators in markets such as cotton with historically low volatility and few market participants.

“Some have argued that we need to limit appropriately the participation in the market by these traders as a class so that they do not become excessively concentrated. That is certainly a legitimate question,” said Chilton, who backs mandatory hard cap position limits on traders.

In Ma rch 2 0 0 8 , cot ton futures on ICE soared to US$1.09 per pound, despite high cotton stocks. It forced many players to ante up extremely high margin calls to cover positions, leading to millions of dollars in losses. After the run-up, cotton prices fell almost 30 per cent during the next few weeks.

Farmers, investors and other participants expressed concern about cotton at an April 2008 CFTC meeting. The CFTC announced two months later it was investigating the price swing.

Two U. S. cotton merchants went out of business, and many analysts suspect the spike also helped push Dunavant Enterprises into the arms of Allenberg Cotton, part of Paris-based commodity-trading giant Louis Dreyfus.

In its investigation the CFTC found:

Trading activity of the largest longs was not consistent with activity that would cause an increase in the price of cotton futures or options.

Many market participants active in the futures and option markets before futures prices reached limit up were cotton merchants, who held significant short positions. They would not benefit financially from manipulating the price of cotton.

During critical time periods before futures prices reached limit up, no participant in the option market had a significant long position or sold a significant existing option position.

Merchants with large short positions were hedged, holding sufficient physical cotton to deliver against their contracts.



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