November 13, 2012 6:19 pm

Cotton merchant rejects price manipulation

The world’s biggest cotton merchant has brushed off market manipulation accusations by Glencore’s former head of cotton as the complaints of a speculator who lost money on “ill-timed and poorly executed” trades.

Mark Allen personally sued Louis Dreyfus Commodities in June, alleging the agricultural trading house manipulated and monopolised cotton markets during a period of extreme price gyrations last year. Mr Allen was dismissed from commodities trading company Glencore as it was on its way to losing more than $330m on cotton in 2011.

The case has riveted the close-knit cotton world and focused attention on Dreyfus, its top merchant by volume. US commodity regulators are investigating claims of a squeeze.

Dreyfus made no mention of Mr Allen’s former employer in its first court filing rebutting the allegations. He and another who joined his class action suit “appear to have been engaged in purely speculative trading” and their losses stemmed from their “own ill-timed and poorly executed speculation”, company attorneys said in a letter to the judge.

Paris-based Dreyfus raised hackles in mid-2011 by taking delivery of more than half a million bales of cotton through the ICE Futures US exchange. The deliveries accompanied a surge in prices of bales for imminent delivery, a premium that the lawsuit called a “classic indicator of a manipulation”.

Traders who held “short”, or selling, positions in cotton futures scrambled to make deliveries. Mr Allen’s lawsuit charged that Dreyfus demanded scarce cotton registered on the exchange and turned down cheaper bales for sale elsewhere in a scheme to “artificially inflate” futures prices. Dreyfus’ attorneys, without acknowledging the massive cotton deliveries, defended the right to pay more than the market price for cotton.

“‘Overpaying’ for a good is not anti-competitive,” said the letter filed by the attorneys from the New York firm of Sullivan & Cromwell.

They added that Mr Allen did not accuse Dreyfus of cornering available cotton stocks to prevent would-be sellers from obtaining supplies, so was unable to claim “a manipulative short squeeze”.

A Dreyfus spokeswoman said: “We do not comment on pending litigations”. Mr Allen, now with Netherlands-based Compass Cotton, said it was “too early to make any comments”.

The case highlights peculiarities of US cotton futures market. While they serve as a pricing benchmark, only cotton grown in the US may be delivered to fulfil ICE futures contracts. US farmers produce about 15 per cent of the annual global cotton crop.

Glencore was caught up in the market volatility of 2011 but did not join Mr Allen’s complaint. The company declined to comment.

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