The US’s leading exchange for soft commodities is poised to make an unusual intervention in cotton markets as record prices threaten to devastate mills and merchants.

In a market notice, the ICE Futures US exchange said traders seeking to maintain positions to buy or sell more than 30,000 bales would have to prove it was economically necessary to do so as the contract neared delivery. The decision, not yet final, could curb speculation in cotton, the best-performing component of the S&P GSCI commodity index last year. The exchange cotton committee is expected to discuss the issue on Thursday.

“They want to take some of the casino mentality out of the market,” said Peter Egli, risk manager at merchants Plexus Cotton.

Benchmark cotton futures have shot up 154 per cent in the past 12 months, hitting a fresh record of $1.7622 per pound on Wednesday. Since the start of 2011, prices have moved up or down by the maximum allowable daily amount in 16 sessions.

Red-hot cotton prices reflect resurgent demand in emerging markets, especially China, the largest importer. Grain prices have been high as well, blunting the incentive for farmers to plant more of the fibre.

Cotton futures have also lured hedge and index funds with no desire to own a physical bale. Bullish bets heavily outnumber bearish ones.

The massive buying position has stoked a growing panic among mills, which contract to purchase cotton, and nervousness among the merchants who supply them.

Mills often purchase cotton “on call”, fixing the amount but not the price of cotton they intend to acquire. As of late last month a massive 8.1m bales had been sold against last year’s cotton crop without the price having been fixed, more than double the amount unfixed in January 2010, according to Commodity Futures Trading Commission data. In the US less than 1m bales is currently for sale, said Mr Egli.

This is because mills that committed to buy cotton last year held out hope that markets would have declined by the time they fixed the price, Mr Egli said. Merchants, who often hedge sales by selling futures, risk heavy losses if mills renege on the purchases.

Once mills do fix sales, merchants typically unwind their hedges by buying back futures, potentially pushing prices even higher. Less than 1m bales of US cotton is for sale, traders say. “This market could go absolutely crazy. We know there is not enough cotton to deliver,” Mr Egli said.

Jordan Lea, head of cotton merchant Eastern Trading and president of the American Cotton Shippers’ Association, called the exchange proposal “extraordinary” but “quite prudent”.

The number of open contracts for March delivery equals about 8.6m bales, even as fewer than 200,000 bales have been certified for delivery, he said. This could give speculators the power to squeeze merchants, threatening a “massive spike where the market breaks down, where you’re literally unable to liquidate your position”.

ICE’s move comes as the CFTC, the US markets regulator, has proposed new rules imposing speculative position limits across 28 commodities, including cotton. The exchange declined to comment.