With cotton futures prices soaring to an all-time high of more than $2 per pound Friday, this may seem like a good way to kick off the 2011 growing season.
With cotton futures prices soaring to an all-time high of more than $2 per pound Friday, thismay seem like a good way to kick off the 2011 growing season. However, it can lead to serious issues and monetary shortfalls for the industry, said a West Texas cotton industry spokesman.
Cotton futures for May 2011 opened at a high of about $2.08 per pound Friday, according to the IntercontinentalExchange.
Theproblem comes whenfarmersdeliver fewer bales of cotton than what was agreed to in their contracts, said Michael Patranella, president of the Texas Cotton Association.
That could mean farmers are selling their cotton at a higher price outside of their contracts with other merchants or they truly are short on bales, but there is no clear explanation for the discrepancies merchants are seeing, said Alan Underwood of Alan Underwood Co.
If farmers did break their contracts, he said it could cost the industry millions of dollars, harm the integrity of the industry and hurt the honest farmers, merchants and the mills buying the cotton. To meet their orders from overseas mills, merchants would have to buy cotton elsewhere at a much higher price.
However, that has not been the case with Plains Cotton Cooperative Association’s marketing pool, said Wally Darneille, PCCA president and CEO.
“We’re very pleased to say our farmers have behaved with absolute integrity,” Darneille said. “The PCCA members have fulfilled their contracts in an absolute way in a challenging time.”
There arefew exceptions to this, he said, because the PCCA producer and landlord members understand that failure to honor their contracts hurts their fellow members. Also, PCCA has a system that registers all of its cooperative gins, making it easy to audit deliveries and ensure the farmers are delivering the cotton they promised.
When a contract sanctity problem arises, merchants typically approach the individual farmers in question and go through arbitration if necessary to prove a commitment had not been kept. But that process is costly and time-consuming, Underwood said.
Because of these recent broken contract claims, the TCA on Monday opened an anonymous hotline, Cotton Integrity Reporting Line, operated by an outside party to take calls and find out why farmers are not meeting their commitments.
There has been some response, Patranella said, but the merchant subscribers of the hotline just have to wait and see the results and then determine what their next steps will be.
Steve Verett, executive vice president of Plains Cotton Growers, said the claims of fewer bales from the 2010 crop being delivered to merchants can be explained by the U.S. Department of Agriculture’s statistical bale production estimates. The Texas High Plains was predicted to produce 6.08 million bales in September, whereas the most recent report from January said the region would produce 5.56 million bales. However, the exact number of bales produced will not be available until USDA’s final production reports are released in May.
Verett said he has not seen any evidence of producers deliberately coming up short on their cotton contracts.
“As far as PCG’s position on sanctity of contracts, we will never support a producer or merchant not honoring a contract,” he said.
Like Patranella, he agreed these current prices were unheard of in recent years and the market volatility created a new set of issues the industry had not dealt with before.
Merchants and marketing pools have also altered their marketing strategies for the 2011 crop to deal with the rising costs — some have signed up farmers earlier than usual and others are waiting to see what the market will do. These historic prices, Patranella said, could even change the way forward contracts are done.
“It’s going to take an open discussion with everyone to see what we need to do to go forward,” he said.
These contract sanctity concerns may be addressed by representatives in an industrywide meeting later this spring.