Dennis Gartman on Corn, Cotton and Speculation Curbs

Corn, cotton and commodity position limits are top of mind for many traders Monday, as softs continue their year-long surge.

Corn [CCV1 673.5 -1.25 (-0.19%)] prices hit 30-month highs early Monday after the U.S. Department of Agriculture forecast China's imports would exceed previous records this year. The corn price spike raised concerns that exchanges may consider position limits to curb speculation in the commodity.

There’s recent precedent for such limits. On Thursday, the IntercontinentalExchange announced a crackdown on cotton speculation. ICE intends to require large cotton contract buyers to prove they have an “economically appropriate” reason for their orders. That "economically appropriate" reason, by the way, means a business has exposure to cotton prices and requires a hedge. A clothing manufacturer, for example, hedges its input costs with futures.

Cotton [CTCV1 Unavailable () ] prices are up 160 percent in the past year due to crop destruction in many large cotton-producing nations, like Australia, which has suffered from considerable flooding. Cotton mills and clothing manufacturers have argued that the steep price increase will force consumer price hikes and could damage their businesses, prompting the ICE to act.

A currency and commodities trader with more than 30 years of experience, Dennis Gartman on Monday said ICE’s move is “terribly bearish for cotton.”

“It reminds me very much of the change that was done in the early 1980s when silver [SICV1 29.355 0.012 (+0.04%) ] was skyrocketing higher and the governors of the COMEX said all trading would be for liquidation only," Gartman explained. "Silver went from $50 to $10 within two months.”

Gartman cautioned, however, that it was unlikely the ICE or other exchanges would extend such limits to other commodities.

“I don’t think this will spread to other commodities, nor should it,” Gartman said, adding that cotton’s surge has been particularly aggressive.

Still, there is talk that more actions to curb speculation could come. Earlier this year, the Commodities Futures Trading commission proposed position limits in more than two-dozen commodities including corn, soybeans and coffee. The CFTC plans to vote on the proposal in the next two months.