Cotton futures surged 6% to the exchange-imposed upper limit Tuesday as investors with bets that prices would fall found themselves victims of a “short squeeze”—thanks largely to recent purchases by China.
A short squeeze occurs when investors who shorted the market, or bet on declining prices, are forced to pay higher prices to exit their wagers in a market where prices are rising rapidly.
Speculators are scrambling to get out of the July contract before Monday, when the exchange-imposed daily trading limit is lifted as the July contract goes to delivery. Analysts expect prices to swing wildly after that.
Front-month ICE cotton for July delivery rose five cents to settle at 87.98 cents a pound Tuesday. The upper trading ceiling was hit even though ICE had raised the trading limit from three cents to five cents for Tuesday’s session.