East Arkansas cotton middleman plans lawsuit against merchant
Posted on Thursday, October 2, 2008
An Arkansas cotton firm is readying a lawsuit to recover for cotton farmers potential contractual losses of up to $ 50 million.
Paul Reinhart Inc. of Richardson, Texas, one of the nation’s largest cotton merchants, holds futures contracts on up to 425, 000 bales of cotton to be harvested this year in Arkansas, Mississippi and the Missouri Bootheel, according to a statement released Wednesday by attorneys representing East Cotton Co. of Marion.
“An economic and legal dispute of large proportions is developing,” the e-mailed statement said. “Paul Reinhart Inc., after receiving demands from attorneys, has failed to give what is called adequate assurance of performance that the contracts will in fact be performed.”
According to the statement, East Cotton has led an effort to inform cotton farmers of the problem and has hired two Memphis-based attorneys — Randy Fishman of Ballin, Ballin & Fishman, and Barry Ward of Glankler Brown PLLC — to represent East Cotton and area cotton farmers.
“A large percentage of the cotton farmers involved have committed to provide the funding for the lawsuit which is being prepared against Reinhart and its parent companies and a consortium of banks,” the statement said.
Attorneys for the Reinhart companies and the potential defendant banks have asked to meet with Fishman and Ward, according to the statement.
Reinhart is affiliated with Paul Reinhart AG, a Winterthur, Switzerland-based company. According to Reinhart’s Web site, www. reinhart. com, the Swiss company began trading cotton in 1788.
Although no official rankings are available, sources said Reinhart probably is one of the top five cotton merchandisers in the United States.
Reinhart’s Web site notes Reinhart established a joint venture in July 2002 with East Cotton to operate Riverbend Warehouse. East Cotton also acted as a broker for Reinhart, sources said.
The problem contracts were booked earlier this year at prices ranging from about 74 cents a pound to more than 90 cents a pound, Alexander said.
In comparison, cotton for December delivery closed Wednesday at 58. 34 cents a pound on the IntercontinentalExchange or ICE Futures U. S. market, formerly known as the New York Board of Trade.
The difference between the contract price and the current price, ranging from 15 cents to more than 30 cents, could represent losses to Arkansas cotton farmers of “as much as $ 50 million,” said Don Alexander, executive vice president of the Agricultural Council of Arkansas.
Arkansas farmers are expected to harvest about 650, 000 acres of cotton this year, down significantly from an average of 969, 000 acres during the previous 10 years.
Reinhart’s problems stem from massive “margin calls” that the company had to meet in March, according to Rogers Varner Jr., president of Varner Brothers Inc., a Cleveland, Miss.-based cotton merchant.
Margin calls are one of the risks associated with forward contracting during a period of rising prices.
Typically, farmers market crops year-round, locking in high prices by forward contracting in stages, gradually fixing profitable prices for more and more crops as the harvest nears.
A cotton buyer agrees to buy a farmer’s cotton at a set price for future delivery. To protect himself against the risk of falling prices, the buyer immediately “hedges” his position by selling a futures contract for the same amount of cotton.
Such a futures contract is a legal commitment to deliver a specific quantity of cotton on a particular date at an established point and an agreed-upon price. Futures contracts for cotton, written in 50, 000-pound increments, are traded on the ICE Futures U. S. market.
When a cotton buyer sells such a contract, he must post an initial cash “margin” that serves as a partial guarantee that he will honor the contract.
However, if cotton prices rise, decreasing the contract’s value, the cotton buyer is subject to what are known as daily “margin calls.” For example, a 3-cent increase in the price of a pound of cotton would trigger a $ 1, 500 margin call on a 50, 000-pound contract.
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