Higher cotton prices driven by speculation not fundamentals
06/03/2024
The actions of speculative buyers have significantly increased the demand for futures contracts, pushing prices higher.
Speculators attract additional participation in the market, creating a feedback loop that escalates buying pressure and, consequently, prices.
It said: “The real story will start to unfold in the next few months when planting intentions are solidified, at least in the Northern Hemisphere. Planting intentions have been lower than in previous years, and it remains to be seen whether the recent higher prices will incentivise farmers to increase the area under cotton.
"If the planted area remains below previous seasons' levels, and consumer sentiment improves — thus driving demand up in the 2024/25 season — then we can certainly expect higher prices to materialise and be justified by fundamentals, especially given the lower stocks in many of the largest countries.”
Ben Eaves, director of Liverpool Cotton Brokers, explained to Sportstextiles that initially, tightness in the US balance sheet led by a pick-up in the pace of US export sales caused prices to move higher to ration demand for US cotton and preserve ending stocks, but this brought opportunistic speculator money to the table.
He said: “The trade (in particular the large international merchants) started off as very willing sellers to the speculators as they are not necessarily trading the futures market based on direction but typically to hedge price risks. But trading futures requires margin (a performance bond) which increases as the market moves against you. Under normal market conditions, traders are able sell their cotton inventories and lift their hedges ensuring that cashflow remains liquid. Noting ICE futures are the price benchmark for most upland cotton, not just US, when the futures prices soared above 90 c/lb, yarn prices and garment demand were unable to follow suit and the commerciality of mills refilling their inventories was unjustified, halting new sales.
“Traders were therefore forced to hold on to their existing hedges while the speculators continued to pile on long bets in record daily volumes. Due to the trade’s growing margin burden, sell side liquidity started to dry up as appetite for further margin risk ceased. This allowed the speculators to ‘squeeze’ the trade, some of whom were likely forced to liquidate (buy back) some of their shorts if they were unable to satisfy their margin requirement, adding further fuel to the fire. This is how and why the market detached from fundamentals.”
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