Exchange to traders: You need to buy and sell a lot of cotton? Prove it.

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As cotton prices soared to historic highs this week, weaving woe for mills and clothing retailers, the IntercontinentalExchange announced that has taken a rare step to try to cool off the heated cotton market.

The U.S.’ main cotton exchange said Thursday that it will roll out a new rule that will require investors looking to buy or sell more than 30,000 bales of cotton to prove that their actions were “economically appropriate” as the contract got near delivery.

The exchange has a limit already in place but previously has allowed exemptions, without demanding that traders explain why they should qualify. (What proof the traders will have to show to justify their transactions is still unclear, according to news reports.)

The rule is designed to try to curtail speculative trading, according to exchange officials in news reports. Some market experts have blamed cotton’s rapid run-up in price –- hitting historic heights –- on speculators who have no interest in ever taking possession of the commodities they are buying and selling.


It’s also a bid, say market analysts, to try to avoid what happened in 2008, when the industry was rocked by a massive market rally that ended with a deep plunge. Now, tight supplies and booming demand have fueled another rally, with prices having more than doubled in the last six months.

Cotton futures hit a high of $1.76 a pound Wednesday, then spiked to $1.81 in midday trading Thursday before closing at $1.72.


Cotton’s sudden boom raises specter of a bust

-- P.J. Huffstutter