Small US cotton farmers probe insurrection against commodity giant
According to a report in Wall Street Journal, a tiny group of American cotton farmers are probing insurrection against commodity giant Cargill Inc., alleging “the company’s “Las Vergas”-style trading costing them USD 35 million and brought some growers close to bankruptcy
Autauga Quality Cotton Association, Alabama, the farmers’ cooperative, filed a request for arbitration, seeking to recover the money and alleging that Cargill is engaged in “a pattern of imprudent behaviour that amounts to gross negligeance”.
The case is on arbitration with the Memphis Cotton Exchange and gives some rare insights into the cotton market, dominated by a few large merchants such as Cargill, Louis Dreyfus Holding BV and Noble Group. Particularly small growers depend on such merchants acting as middlemen, finding buyers for their cotton. Of course such merchants are also trading in the future market on behalf of farmers by assisting them to hedge their exposure to swings in cotton prices. Wild price swings in the past years have been testing those relationships. 2011 cotton future prices soared 51 % over two months to a record of USD 2.1515 per pound in March only to tumble about 60 % towards the end of the year.
In its claim, Autauga (700 members) alleges that Cargill had to put on hedges in the futures market on behalf of the farmers to help them to get a good price for their cotton and initially Cargill executed such hedges, but then removed them, leaving the farmers fully exposed to tumbling prices. In the complaint Autauga alleges that in September 2011 Cargill has removed hedges without its permission and that is why farmers received just 77 US cents/pound for their cotton, instead of USD 1.10 to USD 1.20 leading to a loss of around USD 35 million for the 164’000 bales of cotton. The cotton production cost was 85 US cents per pound and U.S. farmers received on average 93.88 US cents per pound through February 2012, according to the U.S. Department of Agriculture. Autauga alleges Cargill’s actions as wilful misconduct, or, at a minimum, gross negligence and/or gross incompetence. Autauga states that Cargill failed to alert the cooperative and still hasn’t handed over accounting records documenting the trades and the last delivery date for such documents is October 31, 2012. Only after non compliance the arbitration process will start and TextileFuture will report on its outcome.
Cargill voices the opinion that it overpaid Autauga in 2010 and has been seeking compensation for that and is also demanding compensation for losing Autauga’s business in the arbitration case. But also Autauga has been losing, because of Cargill’s alleged behaviour around 200 farmers left the cooperative meanwhile.