Better cotton supply chain to promote safer trading - ICA
In 2011, the International Cotton Association (ICA) received 242 requests for technical arbitration - over five times its normal yearly average and more than double the Association's prior record high of 2008.
With a record range in prices in the past year of approximately $1,25/lb - from a low of around 70 cts/lb and a high of around $2,25/lb - the industry is still seeing parties failing to honor their contractual obligations. This is continuing to have a direct impact on the number of disputes brought for arbitration at the ICA and the pace does not seem to be slowing down.
In the first two weeks of 2012, the ICA has received eight requests for arbitration. This situation not only demonstrates the stress placed on the cotton supply chain and the performance of contracts, but it also highlights the role of the ICA and the importance of taking consistent and positive action towards promoting contract sanctity and a safer trading environment.
Antonio Esteve, ICA President explains: “The ICA's major guiding principle is the fulfillment of contracts. One way we aim to promote this principle is by expanding our membership. Being an ICA member means that you believe in upholding contract sanctity. By trading with other ICA members you know that your counterparties also support this principle. Last year we introduced a more inclusive membership structure to attract members from all links in the supply chain, from all over the world. This has been a success with membership up by 34 per cent. In 2012, we want to further expand our membership to include brokers and agents.”
The majority of the world's cotton is traded under ICA Bylaws & Rules. These regulations act as guidelines for the cotton industry on how cotton should be traded and the consequences for not adhering to them. To enforce the Bylaws & Rules, the ICA has an arbitration process.
If a company fails to honor an arbitration award brought against them, they will be placed on the “ICA Default List”. Defaulters' names are posted and circulated across the cotton community so that they are marginalized from the normal course of business. ICA members are not allowed to trade with counterparties on the default list and, if members do not fulfill their contractual obligations, they face being expelled from the Association. The ICA firmly believes that this process, if adhered to, will create the safer trading environment the industry is seeking.
Antonio continues: “Another way we are trying to improve the economic sustainability of the cotton supply chain is by working with organizations that can reinforce our efforts, such as other global cotton associations, the Better Cotton Initiative, the International Textile Manufacturers Association, major retailers, banks, insurance companies and rating agencies. We have also developed a training course for spinners and agents to promote “responsible contracting”, which focuses on the behavior of the cotton market, the use of risk management tools and the ICA Bylaws & Rules. The cotton supply chain is very long, but by reaching out in this way we know we can help promote a safer trading environment.
“The cotton industry is at a crossroads. Our attitudes towards contract performance will shape the industry for years to come. The cotton industry needs to stand united. If not, it will suffer the consequences. It is easy to succumb to the attraction of short term gains, but history shows that this will create irreparable damage that will affect the long term economic sustainability of the cotton supply chain.”
International Cotton Association (ICA)