US Cotton Seeks Action on Contract Defaults

WASHINGTON, D.C. – U.S. cotton industry leaders met this week with senior U.S. government officials to discuss the serious financial losses accruing in all industry segments as a result of massive defaults on cotton export contracts. Industry leaders emphasized the threat these contract defaults posed to the growth of U.S. exports and underscored the crucial importance of contract sanctity and the enforcement of arbitration awards as cornerstones of international trade.

The delegation from the National Cotton Council (NCC), the American Cotton Shippers Association (ACSA), AMCOT and the National Council of Textile Organizations (NCTO) met on September 25-26 with USDA Secretary Thomas Vilsack, U.S. Trade Representative (USTR) Ron Kirk, and Assistant Secretary of State William E. Craft, Jr. The sessions followed up previous meetings with Administration officials and leading Members of Congress in August and March.

The cotton industry leaders reported that contracts worth nearly $1 billion, covering sales of more than 4 million bales, are either in default or are at risk of default with little sign of resolution. The delegation explained that while the industry has worked diligently to utilize the internationally recognized arbitration system, far too many foreign mills have refused to honor eventual awards. Worse, in many cases, the host governments appear to be protecting the foreign mills from enforcement of awards, a concern exacerbated in cases in which the mills themselves are state owned.

The delegation urged the U.S. officials to pressure foreign government counterparts, emphasizing the crucial importance of contract sanctity as a cornerstone of international trade and warning that a failure to enforce contracts will disrupt international trading relations and undermine the support for future trade agreements. The delegation also noted that other U.S. commodities, such as grains and oilseeds that are currently enjoying record prices, could be at similar risk in the future if the United States doesn't take a strong stand in defense of contract sanctity.

The delegation suggested that U.S. officials use the leverage of trade preference discussions to impress on foreign government officials the importance of honoring contracts. They further suggested that if U.S. government agencies are sourcing products from suppliers in default that future purchases from those sources should be terminated.

ACSA Chairman Ricky Clarke, a merchant with Cargill Cotton, a division of Cargill Inc., in Cordova, Tenn., said textile mills in several countries, including Bangladesh, Indonesia, Thailand and Vietnam, have defaulted on millions of dollars of raw cotton contracts that resulted in severe economic losses for U.S. cotton merchants and marketing cooperatives.

"Contract sanctity is a fundamental building block of trade relations and widespread disregard of the principle should sound a loud warning to the extension of trade preferences," Clarke said. "The U.S. government should carefully consider a foreign government's record of enforcing commercial commitments when granting eligibility to a U.S. trade preference program."

NCC Vice Chairman Jimmy Dodson, a Robstown, Tex., cotton producer, said, "The defaults are threatening the ability and the willingness of cooperatives and merchants to enter into forward contracts with producers, thereby reducing competition for cotton fiber and resulting in lower prices for farmers."

AMCOT's Mike Quinn, president of Carolinas Cotton Growers Cooperative in Garner, N.C., agreed saying, "Contract defaults ultimately mean lower prices and reduced returns for producers. In addition, merchant and cooperative losses jeopardize U.S. jobs and threaten the fragile commodity banking system."

NCTO's Dan Nation, division president of Parkdale Mills in Gastonia, N.C., noted, "U.S. textile mills honor their commitments or face quick legal action in U.S. courts. International mills operate under fewer judicial constraints and gain a competitive advantage by their ability to default without penalty, reducing their relative raw material prices and allowing them to undercut prices for yarn, fabrics, and garments offered by non-defaulting mills."