Cargill wins arbitration case filed by Alabama cotton co-op

Thu Feb 7, 2013 5:00pm EST

Related Topics

* Cargill did not breach of cotton contract - arbitrator

* Cotton co-op "disappointed" by ruling

* Arbitration one of 100s since 2011 when prices shot to records

By Chris Prentice

NEW YORK, Feb 7 (Reuters) - Cargill Inc has won an arbitration case filed by an Alabama cotton cooperative that accused the global commodities trader of breach of a contract in 2011, according to a ruling.

In October last year, the Autauga Quality Cotton Association alleged that Cargill cost its member farmers an estimated $35 million of hedging-related losses in 2011 and filed a complaint with the Memphis Cotton Exchange.

The exchange determined that Cargill was not responsible for the loss in value of the farmers' cotton and was not in breach of the terms of the contract, its board said in a Jan. 28 ruling posted on Autauga's website.

The co-op was "sadly disappointed and vehemently disagree with their decision," Jeff Thompson, Autauga's representative of the southeast/mid-south, said in a statement on the organization's website.

According to the original complaint, Cargill, one of a number of large commodities merchants, was responsible for finding cotton buyers for a small group of farmers represented by the group as well as helping them hedge exposure to price volatility in the futures market.

But Cargill prematurely removed hedges without the farmers' consent, leaving Autauga's cotton unprotected against price gyrations. The removal of those hedges cost the co-op's members about $35 million in losses for 164,000 bales of cotton, the group said.

"Notwithstanding the comments on the (Autauga's) website, the arbitrators found that Cargill did not act arbitrarily or engage in any conduct for which it could or should be held accountable. The unanimous award speaks for itself," Mark Klein, a Cargill spokesman, said on Thursday in an emailed statement.

In September 2011, Autauga farmers received 77 cents a pound for their cotton, instead of the $1.10 to $1.20 they had been expecting, thanks to the dropped hedges, the organization previously said. The average cost of production that year was about 85 cents a pound, according to Autauga.

Cargill replaced short futures with cash sales on behalf of the farmers, believing that China's plans to build up its state cotton reserves would turn Autauga's futures hedges against them, according to the arbitrators' determination.

In March 2011, China announced plans to build its reserves of the fiber. Those reserves now stand at roughly half of global inventories.

While the trading firm's decision was "not a good one," Cargill acted in Autauga's best interest based on information known at the time, the three arbiters on the exchange's committee said.

Autauga could not be reached for further comment.

The arbitration is one of hundreds that have taken place since 2011 when prices shot to $2.20 per lb, their highest level since the U.S. Civil War in the 1860s.

The International Cotton Association, a UK-based trade association that oversees international trade disputes, said last month it dealt with a record 247 applications for arbitration in 2012. That was up from a previous all-time high of 242 a year earlier.

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