When plastics are found in cotton, who foots the bill? Is it the grower? The ginner? The merchant? Or the consumer?
"If we're talking about classed bales, the grower clearly bears the cost," said John Robinson, professor and Texas A&M AgriLife Extension specialist with cotton marketing, during the Plastics in Cotton webinar May 6.
Displaying a slide depicting the cotton value chain, Robinson invited viewers to take a 30,000-foot view. "If you look at the whole picture, the point is pretty obvious, as you move down the supply chain, the added value works against you if you're having to throw away product or spend more to produce a product that's more valuable due to contamination.
"The point is nip it in the bud and deal with this problem early," Robinson said. "You didn't need me to tell you that but that is the case."
Robinson referred to three merchant contracts and two pool contracts he's surveyed. "They pretty much all say the same thing," he said as he read the contract. "USDA remarks 71 and 72 (that's plastic contamination) are not deliverable on this contract. A buyer may at his sole discretion agree to accept such cotton, but if they accept it, the price will be the market price at the time of delivery. (The price of plastic cotton at the time of delivery.)
"Merchants have told me in the last couple of years, they've been paying 15, 20, 25 cents a pound for that kind of cotton and then begging textile mills to take it. But they're paying a very discounted price."
Merchants tell USDA-AMS (Agricultural Marketing Service) the daily price information in the spot quotes, AMS collects and publishes, is even higher. "40 cents off is what's being reported as the discount for cotton purchased with plastic contamination, which would be 10 or 15 cents less and they may not take it at all."
The loan value in 2019/2020, shows a discount due to plastic from just over 5 cents to 7.75 cents, depending on the level of contamination, Robinson said.
He compares the market price and the loan value discounts. "I'm not a rocket scientist, but I might look at that and say, 'I could try to sell it and take a 40-cent plus hickey, or maybe I could put it in the loan and forfeit it and take a smaller discount.' You might predict that a lot of these bales with this kind of problem have been flowing into the loan. And I've heard anecdotally that that's what happened to a lot of them in 2018. Looking at these numbers, I predict that it might happen again in 2019, but I don't think it's going to happen in the future."
Why? Because the loan schedule discount is getting bigger, Robinson said. For 2021, the discount is 18 to 20 cents off. "The reason it's getting bigger is because that discount is figured as a three-year average of the spot quote prices, so they're averaging 40 cents off. For 2021 and 2022, they'll average another 40 cents off, I assume. So, the penalty is taking away any benefit from putting it in the loan."
Robinson said he's also heard that some segments of the industry are proposing to USDA to exclude contaminated cotton from the loan. "All of that sounds tough. It is. If there's anything positive to say about it, it's that at least it only applies to individually classed bales in a given year, which raises a whole other twist on this issue.
"In that situation, the mills and the merchants bear the cost or at least the initial cost."
When a mill has to stop and clean contaminated cotton, their labor expenses increase and it slows their production, making it less efficient. "To some extent, they'll push that back on the merchants. I've heard of rejected loads, but they don't make the merchant at least replace bales. And if that bale was bought by the mill with duty-free, favorable pricing terms, the merchant might have to make up the difference on that value. So, there's a bunch of costs those folks are bearing."
While Robinson doesn't have data on how many bales mills are opening and finding to be contaminated, he said to the extent that the mills perceive it as a big or a growing problem, it represents an open-ended risk to them.
The U.S. makes its reputation on good, quality cotton, but Robinson said if the mills perceive risk, whether nationally or in a specific region, it's not good for cotton. "If you're a mill buyer, how are you going to deal with the situation? If you perceive that there's more of this problem in a certain region of the world, a certain region of the country, it could be in any bale, any gin anytime. How are you going to respond to this kind of problem? I think a mill buyer would try to avoid bales from that region or he would bid a lower price figuring in his expected extra processing, extra cleanup, mitigation costs."
Robinson compared plastic contamination to the whitefly or sticky cotton problems from the 80s and 90s, that would flare up in the Southwest regions, South Texas, West Texas, and Arizona. The sticky cotton wasn't detected in classing, but would reveal itself at the mill, he said.
"Again, the mill was bearing the cost of slow processing and extra labor. There were some bad sticky-cotton years in the 90s and some economists conducted research that showed cotton from those particular regions suffered a market discount for the next couple of years. Every bale from that region, on average, was 2 or 3 cents cheaper than similar quality coming from elsewhere in the country. And the lag in the market went on for a couple of years.
"That's just not something we want to be associated with in our region," Robinson said.
Cotton contamination is everybody's problem, he said. "The grower bears a lot of the cost if it's classed. But I think growers are potentially going to bear the cost if it becomes a big problem that reveals itself down the line. We need to do what we can to solve it."
To learn more about how to prevent plastic contamination, visit the NCC website, or click here to view the NCC video, "Prevention of Plastic Contamination. Recommended Best Practices for Producers and Ginners."
