New disputes over cotton contracts fell 53 percent in the first quarter, signaling a slowdown from the record number of defaults last year after prices plunged from an all-time high in 2011.
Applications for technical arbitrations slid to 35 during the period, down from 75 in the same quarter of 2012, the Liverpool-based International Cotton Association said today in a response to e-mailed questions from Bloomberg.
After cotton more than doubled in a year to a record $2.197 a pound in March 2011, prices on ICE Futures U.S. in New York plummeted as much as 71 percent by early June 2012. They have since rebounded, gaining 17 percent this year, the most after natural gas among the 24 commodities tracked by the Standard & Poor’s GSCI Spot Index. Futures for May delivery fell 1.3 percent to 88.07 cents at 12:08 p.m.
Fewer contract disputes “reflect a more or less stable market compared to what happened the last couple of years,” said Terry Townsend, the executive director of the Washington- basedInternational Cotton Advisory Committee. “Some of those arbitrations still being conducted are related to contracts entered when prices were still highly volatile. As we move further away from that period, I expect the number to decline to more historical numbers of about 50 per year.”
A record 247 applications for technical arbitrations were received last year, up from the previous high of 242 in 2011, with most of the disputes occurring in Bangladesh, China, India, Indonesia, Pakistan and Vietnam, according to ICA data. The requests had increased to five times their annual average. Last year, 226 cases were settled compared with 99 in 2011, Kai Hughes, ICA’s managing director, said in January.
“The effects of the defaults will last for many years,” Townsend said. “Many banks are less willing to make finance available to merchants. On the other side, many merchants are less willing to both buy or sell as far forward as they used to. Where they used to buy cotton a year ahead, now they do so no more than three to six months in advance.”
Merchants are also doing more due diligence on new customers or trying to secure partial payments on deals, according to Jordan Lea, chairman and co-owner of Eastern Trading, a merchant and exporter in Greenville, South Carolina.
“There may be some that are requesting a 5 to 10 percent performance bond at this level, but again, as cotton sold 45 days ago was cheaper than current replant costs, people are not asking for much,” Lea said today in an e-mail. “We have short memories, to a fault, in this business.”