NEW YORK, March 1 U.S. cotton merchants fear prolonged federal budget cuts could roil trade in the multi-billion dollar fiber market by disrupting procedures vital to delivering product against the ICE futures contract.
While traders say there would not likely be a disruption in the near term, they are concerned that the $85 billion in automatic cuts due to take effect at midnight on Friday could lead to mass layoffs of USDA inspectors and eventually crimp or delay certification of cotton for export or delivery against the ICE contract.
So far, the U.S. Department of Agriculture has not commented on the impact on cotton inspections, leaving some traders nervous about what could happen in autumn when harvesting starts and the 2013/14 crop needs to be certified. Most of the current crop has already been processed by inspectors.
"All of the cotton has been pretty well classed for last season. The next situation won't occur until we get into July and August, with the new crop, to see if there will be delays," said Peter Barnard, owner of TransGlobal Inspections LLC, a private cotton inspection service.
Officials in ten nationwide classing offices check bales to ensure material complies with the specification for delivery against futures contracts set out by ICE and a separate agency issues export certificates vouching for the standard and grade of cotton before it is shipped abroad.
In addition to full-time staff, the classing offices bulk up their workforce with seasonal staff during harvesting in autumn, the busiest time of the year.
The impact on the current marketing year which ends on July 31 may be minimal. Much of this year's crop has been classed, traders said, with about 17,000 480-lb bales awaiting USDA review.
But the 2013/14 crop could be vulnerable if the budget crisis escalates. That may draw traders' focus to the December futures which represents prices for next crop year.
"Let's say if my cotton doesn't get graded because of the sequestration, is that my liability? Is it force majeure? It may not be a big problem for the market, but if it's my cotton, it's an issue," said Jordan Lea, chairman and co-owner of merchant Eastern Trading in South Carolina.
An ICE Futures U.S. spokeswoman declined comment.
While only a small portion of the U.S. crop is actually delivered to the board, a disruption to classification could distort prices and reduce availability of supply against futures contracts, Knight Capital cotton specialist Sharon Johnson said.
It would take a significant cut of personnel to affect the futures market in that way though, she said.
Even so, ICE's cotton No. 2, one of the exchange's smallest products measured by open interest and trading volumes, is the pricing benchmark for most of the world's global cotton trade.
Furthermore only U.S.-grown cotton, which accounts for only one-fifth of this world's estimated 116 million 480-lb bale output in 2012/13, is accepted for delivery on ICE.
Some merchants said independent auditors could fill a vacuum left by cuts at the USDA, particularly for export checks, but details of contingency plans have not been disclosed.
Beyond areas such as meat inspection, public feeding programs, the forest service and work on the Census of Agriculture, a major survey of the U.S. farm sector, the USDA has not discussed the possible impact of sequestration which will be spread over seven months.
Other markets are already bracing for upset. Chicago-based exchange CME Group has warned the cattle market that cutbacks could affect some of its livestock and daily contracts.
Cotton merchants, brokers and analysts have similar concerns about delays to the compilation and publication of USDA reports, such as weekly export sales and world price calculations.
Amidst the general confusion, questions about its effect have cast an early shadow over the 2013/14 marketing season.
"It's probably something people need to pay attention to. Who knows, it could be a factor down the road," said Chris McGowan, a trader with Newedge in New York.