ICE world cotton contract debuts with few trades as merchants sit out

IntercontinentalExchange Inc's new world cotton contract debuted on Monday with just 21 contracts changing hands, giving merchants, mills and growers their first alternative to pricing on the U.S.-only century-old benchmark.

The world cotton contract for delivery in May 2016 on ICE Futures U.S. settled at 71.23 cents a lb with the equivalent of around 2,400 480-lb bales trading hands. That represented a 7.47 cent premium over the May contract for U.S. cotton.

That is tiny compared with the 95,300 bales traded in the May U.S. cotton contract, while 11 million bales traded in the most-active December contract.

The light volume came as the temporary lack of daily price limits coupled with the absence of options trading left several merchants concerned about the risks of trading a contract with low liquidity in its early stages, traders said.

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"Everyone's waiting for the other guy to go first," said Ron Lawson, a partner at commodity investment firm Logic Advisors in Sonoma, California.

"When there's a limit to how much you can bleed out, guys will be a little less reluctant to take positions."

The first trade occurred at 11:03 a.m. EST (1603 GMT), around 14 hours after the contract began trading, with five contracts trading hands at a price of 72.27 cents a lb.

Trading opened at 9 p.m. EST on Sunday with a wide bid/ask spread, with traders looking to buy at 69.61 cents a lb and others looking to sell at 74.59 cents a lb.

That spread remained wide for the bulk of the trading session, but narrowed considerably in the final hours of trading, which Lawson said was a somewhat encouraging sign.

The contract had been in the works after years of lobbying from merchants, who said depending on the U.S. contract as a global benchmark meant the price was not representative of world cash prices and left the contract vulnerable to squeezes.

ICE has been actively seeking to garner support from global merchants, millers and bankers for the contract, which will allow delivery of cotton from nine origins and will have global delivery points better suited for customers in Asia's textile industry.

If the contract can continue with relatively little volatility, more commercial players and, ultimately, speculators will begin to participate, said Louis Rose, independent cotton trader and consultant with Risk Analytics in Memphis, Tennessee

"The volume will pick up, but it's not going to be overnight," Rose said.