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Defaults send chilling signal to cotton shippers

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Earlier this month, the American Cotton Shippers Association conducted a survey of Amcot and ASCA members and found that cotton companies and cooperatives have over $850 million of open contracts abroad that are either at-risk, an arbitration is ongoing or there is an unfulfilled award.

Four countries, Bangladesh, Indonesia, Thailand and Vietnam, have over 450,000 bales hung up in arbitration or awaiting an award to U.S. exporters.

As world cotton supplies dwindled in 2011, nervous end users in foreign countries bought hundreds of thousands of bales of high-priced U.S. cotton to insure ample supplies. Then later, after cotton prices receded, those same buyers walked away from signed contracts in record numbers.

It sent a chilling message to the U.S. businessmen who sell and buy cotton – that in some countries, and even some judicial systems in those countries, a signature is hardly worth the paper it’s written on.

Addressing the National Cotton Council’s mid-year board of directors meeting, Richard Clarke, chairman of the American Cotton Shippers Association, said the defaults have cost U.S. exporters nearly $1 billion. He said that over 400 arbitrations were conducted by the International Cotton Association in 2011-12, and he wouldn’t be surprised if the number reaches 500 by the end of the year.

Earlier this month, the American Cotton Shippers Association conducted a survey of Amcot and ASCA members, two trade associations which represent nearly all cotton exported from the United States.

The numbers of defaults are huge. According to the survey, cotton companies and cooperatives have over $850 million of open contracts that are either at-risk, an arbitration is ongoing or there is an unfulfilled award. “We believe this number probably would have exceeded $1 billion had we included all of the countries with defaults or everyone had reported their issues,” Clarke said.

Four countries, Bangladesh, Indonesia, Thailand and Vietnam, have over 450,000 bales hung up in arbitration or awaiting an award to U.S. exporters.

What is particularly worrisome to the cotton industry is that judicial systems in foreign countries don’t seem to be in a hurry to enforce decisions made in favor of U.S. exporters. To restore an appropriate sense of urgency in defaulted countries, Clarke suggests sending in a high profile government official similar to Henry Kissinger, who in the 1970s was responsible for opening doors with the Soviet Union and China.

“We do feel like additional assistance from the U.S. government is necessary,” said Clarke, who called the default issue unprecedented. “We are not asking for legislation. We’re not asking for additional regulation. We’re not asking for appropriation. The U.S. government currently has the tools in place.”

Clarke said some of the countries involved in the Trans-Pacific Partnership, for which new negotiations begin in Leesburg, Va., in September, are among the most egregious of the defaulters. “These governments all want greater access to our markets, particularly for textiles. We feel that with this access to the U.S. market, there are certain responsibilities and obligations and most important, contract sanctity of the rule of law,” Clarke said.

Darci Vetter, USDA’s deputy undersecretary for Farm and Foreign Agricultural Services, said the defaults “have been a significant burden and have created real uncertainty in the market when certainty would be more welcome.”

Reneging on a contract is serious business. It’s time for these defaulted trading partners to make things right, or it may be time to send in a heavy hitter.

Discuss this Blog Entry 3

Roger Haldenby (not verified)
on Sep 1, 2012

I'm not commenting on what is right or wrong, but many of the situations are not simply black and white with merchants being the 'hurt' party in every case.
Many farmers contracted their cotton at a relatively low price and delivered to merchants at that price when the market was high. The merchants made a killing on this cotton when they sold to mills at top of the market.
Merchants using sophisticated hedging strategies made huge profits selling to mills at prices based on the sky high futures selling to unsophisticated mills without offering protection to those mills against the market plunge that would come before mills could take delivery.
And nobody is touching the story of agents who pushed hard making sales, at 1% or more commission bringing them checks double or triple normal size, to mills with ample inventory that didn't need more cotton at such high prices at that time.
Farmers delivered without complaint, at high cost to themselves.
Mills, without complaint, opened letters of credit and took delivery, at crippling costs to them.
But the loudest voices we hear are from those who made huge profits, albeit with some appreciable losses.

Trader (not verified)
on Sep 10, 2012

I have been in a country and was a sub-agent for these big traders such as Dreyfus and Allenberg. If a mill bought lower priced cotton, these companies simply delayed the shipments by more than 6 months in almost all cases. They only shipped the lower negotiated price cotton when the market came back down instead of what was originally stated in the contracts (ie when cotton peaked). This is how these trading companies made a killing both ways.
I agree this situation is not black and white, but those who made the most money in this situation (not shipping when prices were high) are the ones shouting the most.

Anonymous (not verified)
on Sep 17, 2012

I suggest someone on the seller side start a list of buyers that have not honored their contracts. Then all sellers could take steps to protect themselves when nogotiating delivery contracts.

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