Insight: Cotton market trust crumbles on defaults, lawyers pounce

Thu Jan 24, 2013 7:32pm EST
 
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By Josephine Mason

NEW YORK (Reuters) - The global cotton trade, which still operates on handshakes and trust to the astonishment of hard-bitten operators in other commodities markets, might lose much of that clubbiness because of a wave of defaults by textile mills.

Merchants are reviewing centuries-old practices that relied on promises of payment rather than cash deposits - with any disputes sorted out calmly through arbitration. They are now either taking or considering legal action to stem the tide of contract defaults caused by the wild price volatility that has engulfed the industry since 2011.

The National Cotton Council (NCC) estimates that contracts worth a whopping $1 billion, or 7 percent, of the $14 billion a year global cotton market could be in default.

Many of the deals being ripped up were signed when prices were soaring to record highs of $2.20 per lb in March 2011. In many cases, the scramble to secure supplies meant mills agreed to pay record prices, while delivery of the fiber was not for another year.

When prices collapsed to below $1, spinning mills struggling with squeezed margins and weak demand walked away from those higher-priced deals at an unprecedented rate.

Joe Nicosia, the global head of cotton at trading house Louis Dreyfus, the world's biggest cotton merchant, is threatening legal action against customers who renege on contracts and is now forcing some buyers to post deposits.

"Arbitration's not the last resort. It's a middle phase. There are legal enforcements," he said in an interview earlier this month on the sidelines of the Cotton Beltwide conference, the biggest meeting of farmers in the country. "We'll be taking people to court."

Nicosia would not name who he had in his crosshairs, but his message was clear.   Continued...

 
A Gin operator checks on the ginning process in Minturn, South Carolina in this November 27, 2012, file photo. The global cotton trade, which still operates on handshakes and trust to the astonishment of hard-bitten operators in other commodities markets, might lose much of that clubbiness because of a wave of defaults by textile mills. REUTERS/Randall Hill/Files