The global cotton trade, which still operates on handshakes and trust to the astonishment of hard-bitten operators in other commodities markets, might lose much of that clubbiness because of a wave of defaults by textile mills.
Merchants are reviewing centuries-old practices that relied on promises of payment rather than cash deposits - with any disputes sorted out calmly through arbitration. They are now either taking or considering legal action to stem the tide of contract defaults caused by the wild price volatility that has engulfed the industry since 2011.
The National Cotton Council (NCC) estimates that contracts worth a whopping $1 billion, or 7 percent, of the $14 billion a year global cotton market could be in default.
Many of the deals being ripped up were signed when prices were soaring to record highs of $2.20 per lb in March 2011. In many cases, the scramble to secure supplies meant mills agreed to pay record prices, while delivery of the fiber was not for another year.
When prices collapsed to below $1, spinning mills struggling with squeezed margins and weak demand walked away from those higher-priced deals at an unprecedented rate.
Joe Nicosia, the global head of cotton at trading house Louis Dreyfus, the world's biggest cotton merchant, is threatening legal action against customers who renege on contracts and is now forcing some buyers to post deposits.
"Arbitration's not the last resort. It's a middle phase. There are legal enforcements," he said in an interview earlier this month on the sidelines of the Cotton Beltwide conference, the biggest meeting of farmers in the country. "We'll be taking people to court."
Nicosia would not name who he had in his crosshairs, but his message was clear.
"We're not going to forget, we're not going to stop pursuing. We will pursue it politically and legally," said Nicosia, who is regarded as the unofficial spokesman of the cotton merchant community.
Resorting to costly and time-consuming lawsuits with the hope of seizing goods as compensation is a dramatic step for the industry. The strategy has not been used widely for decades and navigating foreign courts is rare, market participants say. As agents between growers and mills, merchants have been hit the hardest by the reneging.
Taking deposits or asking for guarantees from banks or the parent companies of some customers would help to revive trust. That is considered more secure than getting letters of credit, which have been the traditional method of guarantee.
Some merchants have managed to demand and get 5 percent to 10 percent deposits from mills in Asia, said Jordan Lea, chairman and co-owner of cotton merchant Eastern Trading in South Carolina.
Merchants are also doing much more due diligence on new customers, trade sources said.
Still, a seismic shift in practices would be hard to introduce in the United States, where prompt-paying mills would baulk at requests for deposits.
It is also likely to increase the financial burden on many mills that are already cash-strapped because the wild swings in prices have hurt demand for natural fibers.
Mills in Bangladesh, which have had the highest number of defaults since 2011, were left high and dry when credit lines were pulled as prices more than halved from the March 2011 peaks, said Muhammad Ayub, president of the Bangladesh Cotton Association.
Clothes manufacturers have also canceled orders in the wake of the price swings, sources at the mills said.
"Defaulters are the victim of the circumstances," Ayub said.
FARMERS ALSO RENEGED
To be sure, it's not the first time the industry has struggled with excess capacity, low margins and contract wash-outs. And many mills also honored their contracts, incurring enormous losses, or negotiated new terms with their suppliers.
Mills are not the only ones to blame, either. Many farmers who contracted to sell their cotton crops at much lower prices in 2010 reneged on those deals as prices soared a year later, forcing merchants to pay much more to meet export commitments.
Those "wash-outs" were dealt with more quickly than the longer-term deals the mills were lured into.
About 185 companies from almost 50 countries, including the United States, tore up contracts and disregarded arbitration rulings against them over the past two years, according to records kept by the International Cotton Association (ICA), which polices the industry. Its 500-strong membership includes farmers, merchants and mills.
With the market undergoing one of the most tumultuous periods in its history, lawsuits have been starting to flow in a number of directions.
Nicosia, Dreyfus and its U.S. subsidiary, Allenberg Cotton, are themselves the target of a lawsuit. They are facing allegations from former Glencore International Plc trader Mark Allen of artificially inflating prices during the 2011 run-up in one of the highest profile commodity manipulation lawsuits in more than a decade.
Allen has accused the company and its boss of violating antitrust laws by cornering the futures market, driving the May and July 2011 prices higher, even while prices in the physical market were lower.
He left his job at Glencore in November 2011 after the trading firm lost more than $300 million in the market during the upheaval. Louis Dreyfus has denied the charges and filed a motion in November to dismiss the case.
The high stakes have also pushed some growers to the brink, often to the benefit of merchants such as Dreyfus. Last week, one of Australia's biggest grower groups, Namoi Cotton Co-operative Ltd, accepted a bail-out from the trading house after losing almost A$70 million, partly due to defaults in 2011 and 2012.
By playing hardball, Nicosia, who grew up in Chicago, far away from the clubby cotton market in Memphis, Tennessee, wants to recoup some of the company's money. Dreyfus has not disclosed the size of the outstanding bills.
In turn, merchants hope that one of the industry's most influential and high profile figures will help turn the tide.
"He is trying to find a remedy to the situation itself. It's good for the industry. We should all be doing it," said Eastern Trading's Lea, who is also an ICA-registered arbitrator.
"It's also trying to counter that mindset and belief that it's OK (to default)."
While the ICA was inundated by a record number of arbitration requests in 2011 and 2012, it has struggled to enforce awards.
Its blacklist of companies that have not complied with its arbitration proceedings has risen by more than a third since 2011 to over 500.
Bangladesh, the world's second-biggest cotton importer behind China, has by far the highest number, with 47 companies, equating to a quarter of additions since 2011. Vietnam, the world's No. 6 importer, has 24 listed in the past two years, while Pakistan has 15 companies, followed by Tanzania with 14.
Until 2011, the threat of being added to the blacklist, which dates back to around 1976, was often enough to deter defaults.
But with companies ignoring rulings, enforcing awards has become one of the ICA's biggest challenges. In a radical step, the association has set up a surveillance committee to monitor companies it suspects of using "dishonorable" methods, such as setting up shell firms to buy on behalf of defaulters.
Nicosia, who joined Dreyfus' grains trading desk over 30 years ago, also urged Washington to pressure foreign governments to enforce contracts and arbitration awards.
His request comes as a trade delegation, including representatives from major merchant Cargill Cotton and U.S. trade associations, prepares to march on the capitol next week to plead for help.
They hope to hear of diplomatic progress from Department of Agriculture Secretary Thomas Vilsack, who has contacted his counterparts abroad, NCC president and chief executive Mark Lange said.
The trip follows a similar effort in September, although this time the group will also meet a trade representative from the Vietnamese embassy.
But with counterparty trust in shreds, it might take more than negotiations.
"The industry has a long history of integrity," Nicosia said. "That's been challenged and if it's not fixed, it will result in changes in prices and contracts."
(Reporting By Josephine Mason; Additional reporting by Ruma Paul in Dhaka; Editing by Martin Howell and Andre Grenon)