How U.S. Cotton is Marketed
The best method of buying cotton starts with your quality goals and product lines. Because the U.S. Cotton Belt stretches some 2,800 miles from the Atlantic to the Pacific, U.S. exporters can provide you with cotton that suits your needs.
Modern U.S. cotton trade is a complicated business, which is well over 220 years old. In recent years, there have been significant changes in the way cotton is exported, brought on by advances in communication technologies, shipping techniques and instrument classing techniques. These advances have enhanced the U.S. cotton industry’s ability to ensure that unsurpassed service is provided to the world’s textile mills.
The following overview highlights some of the primary methods for selling U.S. cotton and the basic contractual elements that are used to sell U.S. cotton overseas.
Most often, there are two types of suppliers for overseas mills: U.S. cotton merchants (members of the American Cotton Shippers Association, ACSA) and U.S. marketing cooperatives (members of the American Cotton Marketing Cooperatives, AMCOT). U.S. cotton merchants are private firms that buy cotton in the U.S. and sell it to overseas mills. U.S. cotton marketing cooperatives are producer owned organizations that sell cotton produced by the member producers to overseas mills.
There are three ways the U.S. cotton exporter can do business in overseas markets:
1) Through agents in international markets.
2) Through overseas merchants/importers.
3) Directly from the exporter to the mill.
Of these three methods, sales through local commission agents are the most common. Cotton agents serve as a point of contact between the exporter and the mill by negotiating on behalf of the exporter, monitoring Letter of Credit (L/C) progress and advising the mill on shipments. Direct business between overseas clients and U.S. exporters is not extremely common, for various reasons. However, some importers prefer to deal directly with shippers.
Methods of Offering Cotton
Modern communications have revolutionized the cotton business. Mill buyers and cotton exporters have virtually equal access to important supply, demand and price information. This has made the process for offering cotton on the world market, as well as for submission/acceptance of bids, considerably more efficient.
Cotton may be offered "on call" or at "fixed price." When cotton is offered "on call" the price is based on premiums or discounts ("on" or "off") in a certain month of the ICE Futures. The base price of the cotton will remain unfixed until the buyer instructs the seller to buy ("fix") futures in order to establish the final contract price by adding the ICE Futures fixation level to the contract "on call," "on" or "off" basis. The sales price of a fixed price contract is final at conclusion of the sale and does not change, regardless of fluctuations in the ICE Futures market prices. Business results mostly from firm offers, mill inquiries or bids received from abroad.
The natural evolution of improved communication is that business is concluded via a phone call between the buyer and the seller (or agent). It is the foundation of the cotton trade that this verbal commitment is contractually binding. The verbal commitment is reconfirmed in writing by either email or facsimile through the local sales agent. The seller then prepares the contract form and sends it to the buyer (or agent for submission to the buyer), who signs it and returns it to the seller. This formal contract is the written record for both parties of the previously agreed upon terms of the business. A good contract will spell out all important provisions of the sales agreement. Most exported U.S. cotton is sold on a standard contract form, usually incorporating International Cotton Association Ltd (ICA) or ACSA Rules.
Quantity can be specified in bales, pounds or metric tons. It is generally understood that the quantity stated in the contract is subject to a tolerance of 3 percent to account for differences in bale weight, etc. If bales are stated in the contract, it is usually understood that the average net weight should be 500 pounds.
Growth specifies the origin of the cotton to be exported. Common growths are:
(i.e., no specific origin)
- San Joaquin Valley (SJV)
(Texas, Oklahoma, New Mexico, Missouri, Louisiana, Mississippi, Tennessee and Arkansas)
- Memphis/Eastern Territory
(Arkansas, Tennessee, Louisiana, Mississippi, Missouri, Georgia, Alabama, North Carolina, South Carolina and Florida)
Cotton quality description should include grade (i.e., trash content), color, staple (length), micronaire and strength (if applicable). There are several ways to describe quality:
|1) ON DESCRIPTION:
||Described in terms of Universal Standards such as Strict Middling, Light Spotted.
|2) ON TYPE:
||Cotton is sold on basis of exporter’s private type or sample for grade and color.
On Description/Type sales, the staple, micronaire and strength (if applicable) are separately guaranteed.
|3) ON GOVERNMENT CLASS:
||Cotton is described in terms of USDA class for grade, color, staple and micronaire.
|Common forms are:
|(a) GREEN CARDS:
||The original classification given to the cotton producer by the USDA Classing Board. The shipper presents to the buyer a notarized computer printout of the USDA classing.
|(b) FORM A:
||Classification is made on the basis of samples submitted directly from a public warehouse to the USDA Classing Board.
|(c) FORM R:
||The form used by the USDA to rewrite the original green card class on certificate. This must be done within 12 months of the original classing date.
Practically every contract contains specifications for micronaire. Both minimum and maximum levels can be stated. If cotton is sold on description or type, the micronaire is guaranteed by the exporter. If cotton is sold on USDA class, it is usually included on the computer printout.
As previously discussed, the sales contract price can be “fixed” or “on call” and is usually in U.S. cents per pound.
The most common ways to buy cotton are FOB (free on board), FAS (free alongside ship), CNF (cost and freight) or CIF (cost, insurance and freight). In the case of FOB or FAS, the buyer books and pays the ocean freight, and the seller delivers the cotton to the docks of the steamship line specified by the buyer. FOB/FAS contracts should specify the loading range (i.e., West Coast, Gulf or East Coast). The buyer is responsible for costs after the cotton is delivered to the steamship line. In CNF, the seller is responsible for all shipping costs excluding marine insurance. Under CIF, the seller has additional responsibility for providing marine insurance. Once the cargo arrives and is discharged from the ship, the buyer becomes responsible for all costs.
Shipment terms can be for one month or several months. A custody bill of lading should be allowed, as well as partial shipments, however, neither buyers nor sellers like partial shipments. Due to the complexity of the shipping business, partial shipments cannot always be avoided. Sometimes cotton is loaded at more than one port. The introduction of containerized shipments has resulted in less shipper control over the loading. Once the cotton has been loaded in containers, the steamship line only controls the vessel on which the container is actually transported, meaning that shippers are at the mercy of the steamship lines.
A carrying charge is assessed against the buyer in case of unforeseen delays in opening the L/C or in providing available freight space (in case of FOB or FAS). In that case, the shipper would have to carry the cotton longer than foreseen in the contract. It is only fair that the shipper be reimbursed by the buyer for the additional cost of interest, insurance and storage. In no case does this clause entitle the buyer to delay the shipment by payment of carrying charges.
There are two primary ways to buy cotton. One is “certified shipping weights final” and the other is “net landed weights final.” Certified shipping weights specify that the cotton will be reweighed by a licensed public weigher before shipment with the seller, providing weight certificates showing gross weight, tare and net weights. With net landed weights, the cotton will be invoiced on provisional weights and final settlement will be effected on the basis of weights determined upon arrival. The landed weights are determined by internationally recognized controllers appointed by the sellers at the time of shipment.
Typically, Letters of Credit are required. The timing of the opening duration and other details should be specified in the contract. There are numerous other items that might be specified in any L/C for U.S. cotton sold in the export market, including shipment dates, carrying charges and marine insurance, which must be agreed upon by the parties involved. The L/C does not replace the contract. It is the facility for payment under the contract.
In the event of disputes over quality or technical matters, the rules of arbitration should be specified in the contract. Dispute settlements should be pursuant to the rules mutually agreed upon in the contract.
The recognized cotton arbitration boards are:
||Association Cotonnière de Belgique
||Cotton Exporters Association in ARE
||Associazone Cotoniera Liniera e delle Fibre Affini
||Gdynia Cotton Association
||International Cotton Association, Ltd.
||Bolsa de Mercadorias & Futuros, São Paulo
||Association Française Cotonière
||The East India Cotton Association Ltd.
||Japan Cotton Arbitration Institute
||Centro Algodonero Nacional