Traders that own the stockpiled cotton have raced to remove their
bales this year in order to cash in on higher prices as inventories
shrink to their lowest seasonal level in over seven years. But some
warehouse operators are shipping it out at the slowest possible rate
in order to keep charging storage fees, 12 traders, buyers, and
warehouse operators said.
The issue, which has dogged the market on and off for years,
returned with a vengeance this year at sheds from Lubbock, Texas, to
Memphis, Tennessee. The logjams, which have not been widely
reported, are among the worst seen since the existing minimum
load-out rate was introduced in 2004, traders said.
"U.S. merchants and growers U.S. merchants are missing out on sales
because it can take months to get shipments to buyers," said Kevin
McDermott, vice president at Jess Smith & Sons Cotton, a mid-sized
merchant in Bakersfield, California.
Frustrated merchants such as Singapore's Olam International Ltd, the
world's No. 2 trader, are calling for measures that would force
warehouse operators to release the cotton more quickly.
Those who own the sheds - a mix of independent warehouse operators,
farmer cooperatives, and merchants - say they are simply operating
within government-mandated load-out rates.
But the Cotton Growers Warehouse Association, which represents
warehouse operations affiliated with farmer cooperatives,
acknowledged the practice of stalling shipments to generate revenue
was still a possibility.
That's because the load-out rate stipulates only the minimum number
of bales that needs to be shipped. As long as warehouses stick to
that minimum they are not breaking any rules.
"We are trying to find a way either through regulations or through
market channels to reward warehouses that provide good service and
provide disincentives for warehouses that might sit on the cotton
simply for revenue," said association executive director Andrew
The U.S. Department of Agriculture, which oversees more than 350
warehouses across the country, is preparing to step up monitoring
next month in response to industry pressure, but critics say more
action is needed to speed the cotton to market.
It is not clear just how much fiber is stuck in queues, and market
sources would not identify sheds with the biggest wait times.
Capacity at warehouse sites can range from 1,000 bales to more than
Several buyers said Louisiana, which is near some of the country’s
major mills and shipping hubs, has been a hot spot for logjams this
With mills buying on a just-in-time basis, stocks running low and
prices volatile, dealers fear they will get caught short and end up
paying more for alternative cotton supplies if their bales are stuck
Louis Dreyfus Commodities, the world's No. 1 cotton merchant, is the
biggest U.S. merchant-operator, with at least 18 warehouses in eight
states. Other merchants include Ecom Agroindustrial which has at
least six, and Cargill Inc. and Olam with three. Noble Group, which
declined to comment, has at least three. The other companies did not
respond to requests for comment.
The dispute has echoes of the queues in aluminum warehousing, where
buyers sometimes have to wait up to two years for their metal. That
logjam is under investigation by the Department of Justice and
Commodity Futures Trading Commission.
ALUMINUM MARKET UNRAVELS
The cotton congestion is not as pressing as it is for aluminum, but
the complaints are similar.
Warehouse operators offered incentives such as rent rebates to get
cotton and aluminum into their sheds. During the economic downturn,
these deals were profitable for merchants with surplus material.
But when export demand picked up at the end of 2013 and traders
rushed to take advantage of higher prices they found that getting
the bales out was not as easy as getting them in.
Customers should be prepared to pay more to get their cotton from
warehouses faster, said Shane Stephens, vice president of
warehousing for Staplcotn, one of the largest U.S. cooperatives and
exporters and a member of an industry taskforce.
[to top of second column]
Warehouses also want to protect their revenue stream, especially
when supplies are falling. U.S. farmers produced a smaller crop this
season and the scramble by cotton merchants has further depleted
Warehouse inventories dropped below 4 million bales in the first
week of May, their lowest levels for that period since at least
2007, according to USDA data.
One reason for the backlog is the USDA minimum loadout rule, a
system similar to one used by the London Metal Exchange to ensure
the flow of metals.
In recent years, the LME has increased the minimum rate to alleviate
the queues and is now trying to push through even more stringent
In the case of cotton, operators have to ship or prepare to ship at
least 4.5 percent of their capacity or inventories in any given
week. Some warehouses are certified and monitored by
IntercontinentalExchange Group Inc, which runs the benchmark cotton
futures contract and requires cotton to be loaded within nine weeks
of a request.
In times of high demand and low supplies, those rates can be too
long to meet the just-in-time demands of mill who carry minimal
stocks after years of price volatility.
A spokeswoman for ICE declined to comment.
NEW MEASURES COMING
The problem has re-emerged at a critical time for the cotton
industry after wild fluctuations in prices in 2011 put one of the
country's most storied merchants out of business and triggered
allegations of market manipulation.
At the recommendation of the industry taskforce of merchants,
farmers and operators, the USDA will implement a new system for
measuring shipment rates next month, according to a May 7 bulletin
from the National Cotton Council.
The new data will show how many bales merchants have requested for
shipment, but will be done on a voluntary basis.
The USDA declined to comment on the new system or the complaints
that warehouses are too slow with cotton deliveries.
While many market participants say the USDA measure is a good first
step, Ashok Hegde, global head of cotton at Olam, says it is not
"Unless the stipulated industry norms are changed so as to increase
the load-out rates or the commercial competitive pressures push
warehouse service providers to do better, it is difficult to see how
this situation can change," he said.
The queues are vexing the cotton industry but seem unlikely to
achieve the public prominence of the aluminum market, where can
makers like Coca-Cola Co. and MillerCoors LLC have stirred up
congressional hearings and lawsuits over queues they say are
inflating physical prices.
That's not quite the case for cotton. Prompt prices, while higher
than future contract, are not anywhere near all-time highs. Major
cotton users are hunkering down until next season, when fresh
supplies will arrive on the market, and hoping industry pressure on
the USDA will improve transparency.
(Reporting by Chris Prentice; Editing by Josephine Mason, Jonathan
Leff and Ross Colvin)
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