RPT-INSIGHT-Is cotton the new aluminum?

Warehouse queues rise, along with tempers – RTRS

28-May-2014 07:00   By Chris Prentice

NEW YORK, May 28 (Reuters) Cotton merchants are waiting months to take delivery of fiber from U.S. warehouses, tightening supplies and fueling fears the niche market is in the grip of a storage game that plunged aluminum trading into crisis.

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 OLAM.SI, 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 Jordan.

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 500,000 bales.

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 year.

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 in queues.

Louis Dreyfus Commodities LOUDR.UL, 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. CARG.UL and Olam with three. Noble Group NOBG.SI, 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.


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.

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 stocks.

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 load out 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 rules.

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 Intercontinental Exchange Group Inc. ICE.N, 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.


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 enough.

“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. KO.N and Miller Coors 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)
((christine.prentice@thomsonreuters.com)(+1 646 223 6136)(Reuters Messaging:

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