The May 19 issue of Cotton Outlook (subscription required), published by Liverpool-based Cotlook Ltd., succinctly outlines the extreme difficulties facing participants throughout the cotton supply chain currently, and, as it finds it necessary periodically, points to the temptation by some in the market to forgo their contractual obligations at a time at which they find themselves on thin financial ground.
“It would not be an understatement to say that the recent course of the market – stagnant demand, sustained pessimism as to business prospects - has been a source of bewilderment among many industry participants. On the face of it, the supply and demand statistics still argue for a more urgent business rhythm, but that, patently, remains lacking. Much reference is made to burgeoning yarn stocks in a number of textile producing countries, which are doubtless a primary contributor to the cotton market’s current malaise.
In the circumstances, the focus has rested on contract performance, particularly in regard to the higher-priced deals (especially those ‘on call’ purchases fixed against the ICE March delivery), some of which now look in grave risk of not being fulfilled. Furthermore, the reappearance of a widening gulf between the nearby July contract and new crop December on the ICE futures market has reignited concern about the transition from this season’s high price levels to the new season’s lower values.
The latter development, together with the extreme volatility of prices earlier this year, are undoubtedly perceptible threats to good trading order in the raw cotton market, the ramifications of which could reverberate for some time to come. Not only does the arbitration system of the International Cotton Association, under whose Bye-laws and Rules most international contracts are written, stand to be tested heavily, but the manner of trade, moving forward, seems to be distinctly susceptible to change. For instance, some producing countries that have encountered contractual issues in recent times may find buyers less willing to engage in forward trade, leaving them potentially as ‘price takers’ at the time crops are ready for sale. Efforts to inform mills about the use of ‘options’ strategies in hedging may have to be redoubled, while some traders have already reviewed their own approaches to risk management. Parties that fail to honour contracts, moreover, whether producers, traders or mills, risk putting their reputations at stake, leading to future contracting difficulties.”
Questions: How should the threat level of contract defaults be rated currently?
Is the situation so severe that sellers may indeed be less willing to book sales forward in the future? Or would forward sales be a matter of degree, say no more than six months to a year out, as opposed to a longer period of time?
Is there a long-term threat to marketing practices that have ruled for decades? If so, what would be an example(s), and how could the threat be avoided?