For most of us, cotton is a regular part of our daily lives – from the clothes we wear to the decorative touches in our homes, like blankets and window shades. Despite the frequency with which we use cotton, The Wall Street Journal recently reported that it was actually “the most volatile of the world’s 64 exchange-traded commodities,” during the period from August 2010 through July 2011. Moreover, if the increase in the number of arbitration requests over contract disputes in the cotton market is any indication, the market has not yet stabilized.
Cotton prices have varied significantly over the past couple years, creating problems both for cotton farmers and the mills that purchase their cotton. Businesses on both sides have walked away from contracts, rather than fulfilling their terms, due to a sway in cotton prices in their favor.
For instance, cotton farmers who have agreed to sell a certain amount of cotton at a particular price have failed to meet the terms of their contracts when cotton prices have risen. Conversely, cotton mills who have signed contracts, agreeing to purchase a certain amount of cotton from a farmer have refused delivery of the product when cotton prices have fallen. The parties believed they could sell their cotton for higher prices or buy cotton at lower prices, respectively.
Consequently, the number of contract disputes among businesses in the cotton market has surged. In 2010, the International Cotton Association saw a total of just 73 arbitration filings – just one year later, in 2011, that figure had risen to 242.
These broken contracts have had far-reaching consequences, for farmers, the mills and all other parties involved in the cotton market. Next week, we will discuss the effect these broken contracts have had on collection efforts for those in the cotton business.
Source: The Wall Street Journal, “Plague of Broken Contracts Frays Cotton Market,” Michael Rothfeld and Carolyn Cui, August 30, 2012.