Improving Cotton Flow Efficiency a Top Priority
February 22, 2012 The industry continues to suffer from the volatility that began in August 2010, with December 2010 ICE futures prices at the 84 cent level. In December 2010, March 2011 futures were at $1.12 and reached a high of $2.27 in March 2011. Today, ICE futures are about 85 cents/lb.
Toward the end of 2010, we saw producers not delivering previously contracted cotton. One year later, it was textile mills refusing to honor contracts.
Contract defaults continue to be a problem due to market volatility, lack of credit for international mills, currency volatility and waning consumer demand. We have seen similar situations in the past, but they weren’t as volatile as today’s markets. The effects, however, are. In both of these periods, merchants experienced huge contract defaults and major collateral damage. As an industry, we have in place an arbitration system that has efficiently handled contract disputes, both in the U.S. and international markets. Now, all of those systems are overwhelmed.
International Cotton Association (ICA) arbitrations are at an all-time high, with about 200 logged in 2011. Default lists are growing daily, and ACSA monitors them closely. The ACSA arbitration system is currently saddled with the largest number of merchant/grower contract disputes we’ve seen in recent times, mostly occurring from the 2010/11 crop year. Additionally, The American Cotton Exporters Association and World Cotton Exporters Association (both administered by the ACSA office) have, since August 1, received more than 120 defaults between them.
Our arbitration systems are being tested like never before, but it is imperative that they continue to operate at a high level to protect contract sanctity.
In the United States, the recent passage of the Dodd Frank Financial Reform Legislation will certainly change how we conduct risk management and its costs.
It is not yet clear how the new rules and regulations ultimately will affect trade. The Commodity Futures Trading Corp. staff has been overwhelmed by the rule-making process since the legislation passed.
Farm bill legislation is still an unknown. Major changes will occur for all of agriculture, with U.S. cotton having an additional challenge in complying with the Brazilian WTO case. At this time, direct payments and credit programs for exports could be part of the changes we will most likely see. In addition, we don’t know if the program proposed by the National Cotton Council (NCC) and endorsed by the cotton industry will stand alone or be combined with other farm segments.
Another issue is the flow of cotton from the producer to end user. Two industry studies on that topic have drawn similar conclusions, indicating that some of the key issues that have plagued the industry remain unresolved.
To focus on this issue, the industry came together in 2011 to begin serious discussions on the importance of timely movement of cotton. ACSA stressed that cotton flow has made U.S. cotton uncompetitive in export markets. This lowers the price growers receive and delays in shipments, adding contract default exposure to merchants – especially in market downturns like we are experiencing today.
In meetings organized by the NCC over the last 10 months, all aspects of the movement of cotton were reviewed to create more transparency and efficiency in cotton flow. Much work needs to be done, but I feel we are making progress one small step at a time.
We have seen significant changes to ACSA in the past 24 months, and we will continue to work with the industry on all policy issues – domestic, international and political – to be the most effective trade association for the cotton merchandising community.
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