Well, its been a while since we’ve put anything on the blog. It’s not that we’ve been lazy its just that it seems like this is the season that just doesn’t want to get started. Very little has been ginned in the region and as I write this, we are trying to dry out from a good bit of rain that moved through the region and we are awaiting Hurricane Zeta to make landfall.
It seems we have a fair number of new folks running gins this year and we’ve gotten a few calls on some similar issues in the past few weeks. One of the issues I’ve gotten questions on is forward contracts and on-call contracts. I really didn’t expect much in the way of questions on contracting and it certainly isn’t my forte. Of all years, we seem to have the least amount of contracted cotton out there this year which is why I didn’t expect many.
First of all, I’m not an attorney and nothing in this article should be construed as legal advice. I’m just putting this out there for educational purposes and hopefully to make sure no one gets caught by something in a contract. Everyone should go into these agreements with eyes open. We cannot review a contract to help you understand it. That is legal advice. Attorneys get paid a lot more than we do for a reason.
Language is a funny thing. The same word can mean different things to different people in different situations. Contract language is often not as clear to one party as it is to another. The first thing is to know what all the terms and jargon in the contract means. For example I was looking at a couple of anonymous contracts the other day and one contract had the term “non-culled” another had “gin run”. It is my understanding that these basically mean the same thing. The 100 bales in these contracts were the first cotton that the producer made regardless of grade as long as they met the minimum grade that was defined as acceptable.
It seems to me that the merchant is betting on a mix of grades (some really good and some not so good) and has hedged him/herself accordingly. If that mix of bales isn’t what is expected or if only the very minimum grades are delivered, then the merchant won’t make as much of a profit. Since farmers are the only true “price takers”, the merchant won’t lose money for long and this could/would end up in lower basis over time….or at least that’s what my unsophisticated economics has taught me. In this case, if you have such a term and are not sending a consecutive list of bales to a merchant, make sure you’re communicating with him as to why. It could be that you have bales that are below the minimum or have remarks that would prohibit delivery. Communication will help him/her plan and keep you out of potential hot water with the terms of the contract.
Another issue that has come up is the subject of trade rules. There are often terms in contracts that reference trade rules. Do you know what those rules say. For example I had a ginner call me several years ago mad as a hornet regarding weight penalties. I asked for a copy of the contract and it referenced the Memphis Cotton Exchange Trade Rules for weight penalties. He had no idea what those were. It is EXTREMELY important that you know what all the rules you’re working with are. Charges can be made that you may not be aware of that ultimately costs the gin and the producer money if you aren’t aware of the rules you’re playing under. Get a copy of the trade rules for your own reference. ACSA has a copy of the 2018 rules on their site at https://acsa-cotton.org//wp-content/uploads/2018/11/Memphis-Cotton-Exchange-Rules-2018.pdf.
This article has gone on way too long. I will probably address other topics like this later. For now… never ever, ever be afraid to ask questions. The take-away from all of this is to know what you’re getting into. Get an attorney involved if there is ANYTHING you don’t understand and make sure you’re communicating with the merchant that you’re dealing with. They are out to get the cotton at the lowest price they can, no doubt about that, BUT they won’t be in business long by screwing anyone. Honesty on both sides is the best policy. Communication will help to drive that. Finally, since most of these contracts are written by one side (merchants typically) don’t be afraid to request changes. If there’s something you don’t like, get your attorney to draft a change. It’s a contract… they are there to improve certainty not to confuse. Make sure you KNOW what you’re getting yourself into. Every letter in a contract means something. Expect that every letter will be enforced by the other party. Know what your rights are to make sure you’re not getting taken advantage of and that you’re following through on your obligations.