The floods in Pakistan, the extreme heat in Texas, rising Chinese stocks: numerous factors are put forward to explain the sudden increase in cotton prices which rose from $1.05 to $1.11 per pound last week, making traders nervous.
Indeed, they know how volatile cotton prices can be. Earlier this year, cotton prices on the New York Stock Exchange escalated in just a few weeks reaching $2.27 per pound in March, the highest since the Civil War. Then they rapidly dropped to a dollar a pound. According to the U.S. Department of Agriculture this price spike was caused by low world stocks, the lowest in 15 years, an increase in demand by the Chinese and poor weather. But apart from causes related to market fundamentals or weather, the behavior of market participants also played a part in the increase in price volatility.
Because the economic crisis is making many investments increasingly more uncertain, speculators are returning to agricultural commodities such as cotton or cereals, especially because in recent months, their prices are volatile with an upward trend. So that according to experts, the number of “pure” speculators on cotton futures market was up by over 20% in one year.
This increase in the number of speculators led the New York Stock Exchange, on 3rd February, to restricting contract purchases on its cotton futures market. The Intercontinental Exchange has also demanded that participants prove the economic value of their purchases when they exceed 6400 tons of cotton. These measures demonstrate that though they might not cause price volatility, speculators strongly contribute to accentuating it and to straining markets, consequently weakening all market players.