Financial Regulatory Forum

PREVIEW-U.S. cotton trade frets over volatile trading

By Reuters Staff
January 4, 2010

By Rene Pastor

NEW ORLEANS, Jan 4 (Reuters) – The U.S. cotton industry remains worried about volatile trading in the futures market and is hopeful that demand is gradually recovering from the world’s worst economic downturn in 70 years, a senior official said Monday.

Mark Lange, president of the National Cotton Council, an industry group, said that a top concern of the trade in 2010 would be “continuing concerns about market volatility and confidence in the futures market.”

He spoke with Reuters at the start of the Council’s annual Beltwide Cotton Conference which runs Monday through Thursday in New Orleans.

A spike in cotton prices in March 2008 to around 92 cents a lb from 50 cents caused millions of dollars in losses for many companies in the cotton industry which could not keep up with rising margin payments as cotton futures ran higher.

Several merchants were driven out of business.

Paul Reinhart of Richardson, Texas, filed for bankruptcy protection in October 2008, followed by Weil Brothers of Montgomery, Alabama, a month later.

Reinhart was squeezed by margin calls while Weil Brothers said the risks in trading cotton had become too high.

Analysts said the volatility likely played a role in the decision by Allenberg and Dunavant Enterprises, two of the biggest U.S. cotton merchants, to merge operations in August.

“We continue to push for changes in reporting and transparency that will restore confidence in the market,” Lange said.

The Commodity Futures Trading Commission, the U.S. futures market regulator, said it was considering a clampdown on excessive speculation in energy and commodity trading by restricting holdings or positions of big players.

CFTC commissioner Michael Dunn, chairman and designated federal official on the CFTC’s Agricultural Advisory Committee, is scheduled to speak at the conference.

Last month, the U.S. House of Representatives approved a sweeping bill to create an interagency council to crack down on hedge funds and credit rating agencies, set up a financial consumer watchdog agency, and expose Federal Reserve monetary policy to unprecedented Congressional scrutiny, among other measures.

U.S. COTTON EXPORTS A KEY AREA

Lange said the pace of U.S. cotton exports has also become a major area of concern for the industry as world economies recover from a crippling recession.

“The downturn in the global economy certainly had a significant effect on consumer spending, and subsequently on global textile demand,” he said.

But world cotton consumption is starting to recover. The U.S. Agriculture Department has forecast a rise in consumption in the 2009/10 marketing year (August/July) to 114.51 million (480-lb) bales, up from its November forecast of 113.52 million.

“We are beginning to see signs of recovery in cotton demand. That will translate into a tighter balance sheet and an environment that is more supportive of prices,” Lange said.

Industry officials believe that demand could well be fueled by China, the world’s No. 1 consumer of cotton.

In December, USDA increased its estimate for Chinese cotton imports to 9.0 million bales from its previous forecast of 8.5 million bales.

Analysts said news from China’s Agriculture Ministry that cotton production would be down 11 percent would likely force the USDA to cut its own estimate of Chinese output to around 29 million to 30 million bales, from 31.5 million in a December report.

(Editing by Jim Marshall) ((rene.pastor@thomsonreuters.com; +1 646 223 6047; Reuters Messaging: rene.pastor.reuters.com@reuters.net))

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