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Defaults send chilling signal to cotton shippers

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.

TAGS: Cotton
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