Speculators drive cotton price volatility, hurting farmers and consumers
Texas cotton grower Brad Heffington speaks Wall Street’s language of hedges, correlation charts and the like as easily as he discusses weevils and pesticides. Yet today his financial knowledge is of limited use.
Heffington’s been sidelined from the cotton futures market, thanks to a surge of financial speculators into the market, which originally was designed to protect farmers like him against price shifts.
“It’s something I watch but can’t use anymore,” Heffington said of the cotton futures market, where contracts for future delivery of 50,000 pounds of cotton are bought and sold.
Today, pension funds and Wall Street banks are pouring money into futures markets for cotton, oil, natural gas, wheat, coffee and other commodities. Such financial speculation helped drive an overheated cotton market to record levels of $2.17 a pound on March 7. Before peaking, cotton prices had risen by more than 140 percent in less than 18 months.
Some analysts contend that this speculative money from investors who’ll never actually take delivery of cotton is distorting the futures market, driving up cotton prices, and thus raising prices for apparel retailers and consumers alike. The United States is the world’s top exporter of raw cotton, sending much of it to Asia for garment manufacturing.
In a series of investigations this year, McClatchy has reported how excessive financial speculation in commodities markets by companies with no intent of taking delivery of a product have punished consumers of gasoline and aviation fuel while doubling the price of coffee, all while there were no actual shortages in supplies.
The latest McClatchy probe finds that increased volatility in cotton prices has corresponded with the changing composition of the futures market, where speculators hold more contracts than do growers, producers, buyers and users of commodities.