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From Memphis to Malaysia, cotton goes global with new ICE contract

[MEMPHIS] A century ago, Front Street, known as "The Street," in Memphis, Tennessee, was home to the world's largest physical cash market for cotton, the king of US commodities.

Now, the revolving door to the trading floor - set up in the aftermath of the US Civil War that bustled with some 70 merchants and once littered with discarded cotton lint - is chained shut.

The former trading hub a stone's throw from the Mississippi river is now a museum, populated with artifacts like cotton grading charts and a chalkboard for writing in the latest prices from a time that has slipped away with advent of electronic futures trading in New York and as India and China surpassed the United States as the world's largest cotton producer.

Now, the US market faces one of the biggest tests of its centuries-old grip on global trade.

Intercontinental Exchange Inc launches on Monday its first world cotton contract 0#WCT: on ICE Futures US that will allow for delivery of cotton grown abroad in locations from Brazil to Malaysia.

If successful, some industry sources expect the upstart contract could supplant the US benchmark 0#CT: that has set the price of T-shirts and socks made in Bangladesh to Vietnam and affects the incomes of millions of farmers from China to Egypt for almost 150 years.

Supporters of the launch say a global price is better suited for textile industry customers that left the United States for Asia in the 1990s. "Everything has changed, except the futures market," said Raymond Faus, head of Omnicotton Inc, which has offices in Texas, Brazil and Australia. Faus said they plan to trade the contract. "This is trying to catch up with the change and give everybody a better tool," he said.

For the handful of hold-outs that still work in offices in the exchange building, the launch is the latest sign of Memphis'diminishing influence on trade. "The Exchange was a place, a set of rules, and a de facto social institution," said Calvin Turley, 65, who has traded cash fiber for over four decades.

Cotton heavyweights like Louis Dreyfus Commodities' unit Allenberg Cotton Co and Cargill Inc left the city for a nearby suburb.

Other major merchants like Ecom Trading, Noble Group , and Olam International Ltd have set up shop in Texas, the top-producing US state, as acres in the Mississippi Delta switched to better-paying crops like corn and soybeans.

The contract has been in the works for years after lobbying by merchants who said the US contract is out of date and vulnerable to price-distorting squeezes.

The "flexibility for delivery of several growths in multiple locations would make the world contract more representative of world cash prices," said Mahesh Menon, cotton president at Singapore-based Olam.

There are few alternatives to ICE's US contract. Other exchanges are in China and are off limits to uses outside the country.

That has meant few hedging tools for the $41 billion worth of cotton produced in the crop year that ended July 30, based on average prices quoted by the International Cotton Advisory Committee.

ICE Futures US President and Chief Operating Officer Ben Jackson said there has been broad-based support for the contract, noting both the exchange and physical players have made "significant investments" to get the contract off the ground.

The main drawback of the existing contract is that only US cotton is deliverable to the exchange. Pressure for a new contract gathered momentum in recent years after the turmoil caused by whipsawing prices, bankruptcies and contract defaults since 2009.

In 2001, part of the reason for soaring prices to records not seen since 1871 was a drought wiped out much of the crop in Texas.

Some worry the new product will rival the US one, eroding liquidity in one of ICE's smallest contract by liquidity.

Abroad, it has already garnered support. "If everything goes well, in the next couple of years, we believe the focus will shift to the world contract," said a Chinese trader with a global firm.

Jackson said the exchange will offer a "fee holiday" for three months to entice traders to the new contract, though it may still be a challenge to lure money away from a deeply entrenched benchmark that still enjoys the support of the US industry's biggest players.

John Mitchell, head of Choice Cotton which handles the marketing for Alabama's Autauga Quality Cotton Association co-operative, said he will continue to use the existing contract for hedging needs. The group expects to market about 150,000 to 200,000 bales this year.

For many, the change is long overdue. "Change is good. It's hard, but it's good and the industry needs it," Faus of Omnicotton said.