GARY C. RILEY

Scope
The purchase of U. S. cotton for export is perhaps the most rewarding business venture within our entire economic spectrum; however, those wishing to cash in on the often huge profits face a maze of difficulties including but not limited to unwieldy
Federal regulations, problems with organized labor and political conflicts and upheavals in virtually every country to which cotton is shipped. Moreover, the cotton exporter must have a tremendously large line of credit coupled with a Las Vegas personality in that fortunes are made and lost each year not only because of good or bad business judgements but rather because of political and economic conditions wholly outside the exporters control. Indeed, the exporter who buys cotton even before it is planted and then guarantees its sale abroad must turn to the open market when that prospective cotton fails to materialize because of poor weather conditions. Likewise, the exporter must be on good terms with United States Senators and Congressmen as well as the
White House in that a few hours difference in the commencement of official negotiations with foreign states could be devasting to his financial position.
Due to the complexity of the cotton exporting business from the initial purchase of U. S. cotton through its ultimate delivery to foreign states, only an overview of the entire process can be presented here. Moreover, we can but scratch the surface of the myriad and diverse Federal regulations controlling the exporting of U. S. cotton. As a result, this effort can best be served by tracing the operation of the business from the purchase through the delivery abroad, touching briefly on a few applicable laws but concentrating on the specific aspects of the business itself.
Finally, a specific but brief examination will be made of the financing arrangements where most Federal law is applicable.
One last mechanical aspect deserves brief attention. Even though there are volumes of Federal legislation touching at least peripherally on the exporting of
U. S. cotton, there is, nonet4eless, remarkably little information and printed materials which places the business in its proper perspective so that the layman may glean the requisite knowledge for the overview which he probably seeks; consequently, this

effort is, of necessity, predominantly based on but a handful of publications by the
U. S. Department of Agriculture. Just as farming is a family business normally passed from generation to generation, so is cotton exporting the type of business which can be learned only by practical experience. Though the attorney representing the cotton exporter can adequately rely on the law of contracts and the Uniform
Commercial Code in dealing with most domestic transactions between the exporter and the farmer or ginner, his training is almost entirely inadequate to fully represent the exporter unless he has at least a superficial knowledge of the entire business.
This paper should supply the requisites for that background but must leave the attorney with his own resources in the area of basic contractual law.
ORGANIZATION OF THE RAW COTTON TRADE
BUYING U. S. COTTON
Most often, cotton is purchased at the gin by ginners, country buyers for merchants, mill buyers and merchants; however, the farmer himself may retain the cotton for sale, either putting it in government loan or later giving samples of the cotton to a
1 spot broker in a large market for selling on a commission basis. The cotton merchants, who are the main subject of this discussion, do the bulk of the selling to U. S.
2 mills and for export. It is these individuals who are the subject of this effort.
Who Exports Cotton
Certainly all U. S. cotton merchants do not participate in the export trade and so confine their business to selling cotton to U. S. mills. Indeed, very few cotton merchants engage in the export business though their numbers have increased since
W. W. II because of various government programs essential to the financing of export programs. Indeed, efforts such as the Agency for International Development and its predecessors as well as what we shall call Public Law 480 programs were virtually responsible for increased export because of their facilitation of financing. Public
3
Law 480 will be discussed in part in the financing section of this paper. This system of financing under this program, using letters of commitment issued by the
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Commodity Credit Corporation (C.C.C.) with banks, eliminated the risk to the exporter.
4
It made finances available quickly so that the exporter did not need to wait for payment as he would have where sales were made on a cash basis. Cotton in C.C.C. stocks is sold to merchants, exporters, and American mills under various U. S. Government sales programs such as the foregoing.
Exporters usually do not try to sell in all the available markets for U. S. cotton and instead concentrate only on certain areas or certain countries of the world because it is extremely difficult and expensive to serve all of the fifty or
5 more foreign states using U. S. cotton. The number of bales of U. S. cotton exported annually by cotton firms today varies from about 1,000 per firm to close to a million.
The number of firms exporting over 100,000 bales is exceptionally small while the greatest number of firms fall with the group exporting 15,000 to 100,000 bales.
6
Before turning to the complicated and expensive procedure of establishing connections abroad, some mention should be made of other kinds of exporters. One type is the exporter who works alone, buying cotton from merchants or exporters on
7 the same terms that he sells it to foreign clients. Such a person could be called either a buying or a selling agent, and makes only a commission on such sales. The turnover done on this basis is very small compared to the exporters direct business with foreign connections. There are also some general import-export firms which handle all kinds of commodities and which buy cotton for export on a "guaranteed through" basis from exporters because they are not equipped to buy it firsthand in
8 the country as regular cotton exporters do.
Establishing Connections Abroad
The greatest expense in the cotton export business is the usually prohibitive costs of setting up business connections abroad. The long distances involved mean higher telegraph and telephone costs, greater transportation expenses for making personal contacts, and larger costs for forwarding samples and types than the domestic dealer would encounter. Usually, in order to make a sale abroad, the exporter must
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establish a connection with an agent or merchant (importer) or with a mill. At least one trip abroad is requisite to set up the necessary conditions in each country.
9
In the export trade, most business is accomplished through the use of foreignbased agents of the exporters and only a small percentage is carried on through direct connections with the mills; however, a direct mill business is done in countries where the number of mills is limited or a new textile industry is to be developed or where old friendships are involved. At any rate, to conduct a successful foreign business, regular trips are not only beneficial but necessary.
10
Prior to World War II, markets like Mainland China, India, Indonesia, Japan, the
Philippines, Australia, South Africa, the Balkan states and the South American countries were worked by only a few U. S. exporters. Today, a great many more cotton exporters sell in these areas except to Mainland China where a very large market has been lost for U. S. cotton since the Communists took over. Since World War II, a new or bigger markets have opened up for U. S. cotton in countries like Cambodia, Hong Kong, the
Philippines, Thailand, Vietnam, Malaysia and Ethiopia.
11
Before leaving the discussion as to how and where connections are established abroad, it is well to give brief attention to the system of arbitration used when conflicts arise. In case of a dispute between buyer and seller with regard to quality of the cotton shipped, the dispute is settled by arbitration. Various methods are used in each of the ten arbitration boards. Unfortunately, the relatively narrow scope of this paper will not allow a separate explanation of the procedures used in each area; however, a discussion of one of the more typical arbitration boards should be enlightening. Probably the largest volume of arbitation is carried on in Liverpool so it will serve as our example. There, the arbitrators are experienced members of
12 the Liverpool Cotton Association (LCA) and serve as unsalaried volunteers. There are two arbitrators in each arbitration, one representing the importer and one representing the exporter, with each being appointed by the party he is to represent.
13
Each arbitrator is supplied with the terms of the contract: the quality (grade, staple, color, or private type), growth (Texas, Orleans/Texas etc.), Micronaire and
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Pressley requirements and the last landing date of a steamer on which the cotton was shipped. The price of the cotton is never told.
14
When a decision is made, the arbitrators are paid by the parties to the arbitration and the decision is final unless an appeal is perfected to the appeal committee. That committee is made of 12
LCA members and a representative of the American Cotton Shippers Association.
15
Outlook for U. S. Cotton
Prior to an in depth discussion of the methods of offering cotton and the various sales terms inherent in export transactions, it is well to round out the preceding general discussion with a brief consideration of the potential and condition of the
U. S. cotton exporting market. Along these lines there is both good news and bad news in that even though domestic cotton use has rapidly recovered from the recent recession, export sales activity has remained extremely depressed.
16
Moderate demand for U. S. cotton abroad in 1970/71 and 1971/72 exploded in 1972/73 with prices rising rapidly though the industry suffered a dramatic reversal in 1974/75. Much of the problem is due to our current price disadvantage which has caused our share of the world cotton trade to decline in 1975/76.
Though the exporting situation for U. S. cotton is, at this time, less than ideal, some experts are predicting a shift from this bleak picture. With most of this year's cotton crop in, Joseph Stevenson, Director of Foreign Agricultural Services,
USDA, sees world cotton consumption in 1976 rising by some two to three million bales above last seasons unusual low. The U. S. is spearheading the recovery; however, the slow-but-sure upturn in world cotton demand will not translate immediately into a surge of U. S. export sales due to strong competition from other cotton-exporting
17 countries who now hold inordinately large stocks. This approach seems to be the universal forecast as most experts feel that the de-stocking in importing countries will prevent a return to the record 1973 year.
18
Methods of Offering Cotton and Sales Terms
To this point, out attention has been directed towards the business and promotional aspects of cotton exporting. The second segment of this paper deals with the mechanical
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aspects of offering cotton and necessarily includes a brief introduction into the various terms used in the trade. Though some of the aspects of the cotton exporting transaction are governed by the Uniform Commercial Code and basic contractual law, the U. S. exporter is more often concerned with the maze of Federal regulations which govern commerce and trade with foreign states.
Again, the scope of this paper precludes separate and in depth discussions of the various terms of delivery contained in the U.C.C. as well as the myriad shipping terms and regulations on which exporters rely.
19
Certainly, competent exporters must have an understanding of ocean shipping, marine insurance, port activities, export and import banking and trade promotion to mention but a few of the pertinent areas.
20
Additionally, they must have a working knowledge of warehouse receipts, bills of
21 22 23 lading, bank drafts and the sales terms, such as f.o.b., f.a.s. and c.Lf. to mention but a few. It must be reiterated that no attempt is made herein to play down the importance of the Uniform Commercial Code to the cotton exporter; however, the
U.C.C. is of little use to the attorney who is without a working knowledge of the complex and often unique sales terms employed by exporters and importers. Once the attorney has this background, the U.C.C.can be applied with relative ease.
Methods of Offering Cotton
Once the exporter has made his contracts in the foreign country, he is ready to offer his cotton to a merchant or mill for sale. There are numerous types of offers, including but not limited to "firm," "regular," "good until cancelled," "special,"
24
"good for a specified length of time," and "subject to confirmation." Today, as a result of keen competition from foreign cotton growing countries, from manmade fibers and because of dollar shortages, actual business is done predominantly as a result of special offers. Quite simply, foreign importers tend to buy the cheapest cotton available thereby forcing competitive bidding.
Regular offers, less common than special offers and also called offer lists, are communicated by airmail, telex, or cable as based on the urgency of need. Exporters check these regular offers daily so that necessary changes may be made such as raising
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or reducing the basis for the various qualities, changing the shipment or delivery periods, altering the number of bales offered, eliminating offers for unobtainable quantities and so on.
25
Special offers are more specific in that they usually are made to a specific client who has a specific request. Often, a special offer is used when the exporter is particularly anxious to sell cotton on hand. Because the price in a special offer is figured very carefully and closely, it may often be lower than regular offers or even for a fixed price; thus the duration of a special offer is usually limited, especially if the market price shifts suddenly. Though the special offer is made for
"inunediate" or "prompt" reply, sufficient time must be allowed to send the cable, contact the buyer and receive a reply. Usually, the process can be completed within
24 hours and seldom takes much longer.
26
Quantity terms are usually expressed in numbers of bales including specified weight limitations to assure a minimum and a maximum weight. Expressions of quantity are usually found in pounds, kilograms and metric tons. Under the P. L. 480 program, the allocation of funds is made by the foreign government to the buyer in terms of monetary figures rather than baleage or weight; however, in foreign countries that do not buy under programs financed by the U. S. Government, expressions of weight are crucial.
27
Quality terms are very important in cotton shipping and tend to be quite sophisticated.
Grade and color standards are usually added. Moreover, the cotton is also accompanied by one of several certificates which show grade, staple and Mirconaire under U.S.D.A. standards. For instance, · "Form A" is the classification of samples freshly drawn and submitted before shipment to a U.S.D.A. classing office direct from a public warehouse.
A large amount of U. S. cotton is sampled at the warehouse and so eligible under
"Form A". "Form B" is issued when the official class is based on a sample cut by a bonded sampler at a gin. "Form M" is utilized when the sample is obtained by means of a mechanical sampling device installed in some gins. Finally, "Form D" is the certificate used when the sample is merely brought or sent to an official classing
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office for an informative classing without regard to how and where the sample was taken.
28
The last quality terms are the Micronaire and Pressley terms. During the last few years, quality descriptions of U. S. cotton have included more and more }licronaire and Pressley specifications in regard to fitness and strength, respectively. These terms are specified after the grade, color and staple descriptions.
Destination and delivery periods are also very important aspects of the shipping contract. Of course, the destination is usually a seaport in a foreign country though in the Netherlands, sales are made at both the largest seaport and at a waterway
29 in the core of the country. Generally, sales are made for a specific shipment period from a port in the U. S. or for a specific delivery or arrival period in the country of destination. The period may be immediate (shipment within seven calendar days), prompt (shipment within fourteen days), by a specified steamer or during certain months. Delivery must be made to a steamship company within the stated period though the steamer needn't depart during that period; however, a specific sailing date may be specified in the contract. Exporters obtain either an onboard bill of lading or a port of custody bill of lading. In sales for a delivery period in a foreign country, the cotton must be delivered on a certain date or during a certain period. Further, if the delivery sale requires correct calculation as to when the destination is reached, the exporter is held to the many unforseen perils attendant thereto. Fortunately, delivery sales are much less common than shipment sales.
30
In large cotton markets, steamship companies have offices who supply the exporter with up-to-date information on freight rates. It is incumbent on the exporter to stay well versed on freight rates to the countries to which he sells. After booking a freight firm, the exporter must deliver the cotton to the steamship company during the period for which the freight is booked or suffer a penalty. Generally, however, the exporter is not penalized except during a tight freight situation.
31
Currently, many steamship companies have begun to use containers which operate to definitely
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decrease damage and pilferage to the cotton. Already insurance rates have dropped due to containerization; consequently, the practice will probably be successful.
Before leaving a discussion of sample terms in the ordinary cotton-exporting contract, it is necessary to focus briefly on methods of reimbursement. (As mentioned previously, recourse to the U.C.C. may be had for in depth coverage of payment terms.)
Suffice it to say that the most common mode of payment is a letter of credit, usually an irrevocable one, opened by the buyers; against this, the seller draws a draft with original documents such as the invoice, bill of lading, insurance certificate, weight sheets, original Form A certificate for quality (or whichever form is used) and Micronaire and Pressley certificates attached thereto. Further, should the cotton be financed under P. L. 480 programs, additional documents are required.
32
Still other forms of payment are possible, including cash upon arrival of the steamer at port of destination; letter of credit with drafts to be drawn at 30 days, 60 days, etc., sight on a prime U. S. bank; cash on delivery ex-warehouse and cash upon presentation of documents at destination. Of course, "cash" usually means cable transfer.
33
Though there are other pertinent terms such as insurance, commission, claims, and foreign exchange, each cannot be discussed separately.
Financing the Export Sale
The third and final segment of this paper concerns government financing of cotton exporting programs. The U. S. cotton exporter's success in world markets often depends on effective credit. Four major export credit assistance programs for cotton are provided by two U. S. Government agencies, the U.S.D.A. and the Export-
Import Bank of the U. S. These programs, designed to complement and supplement rather than duplicate each other, offer a variety of plan intended to meet the needs
34 of cotton exporters and their overseas customers. Two of the plans are discussed here.
Commodity Credit Corporation
The Export Credit Sales Program is a commercial export program operated by the
35
U. S. Department of Agriculture's Commodity Credit Corporation (C.C.C.). The

C.C.C. program is separate and distinct from the Agricultural Trade Development and
Assistance Act (P.L. 480, referred to supra); however, cotton exports under the
C.C.C. are eligible to satisfy the usual marketing requirements for P.L. 480 agreements between the U. S. and other countries.
36
Under the C.C.C., prices are negotaited between exporter and importer on the regular commercial basis. The entire 100% of the contract price is financed by the
C.C.C. so no downpayment is required. C.C.C. purchases the account receivable from the exporter and pays the exporter cash when he submits his account receivable along with an acceptable letter of credit, the bill of lading, the sales invoice, an assignment of the account receivable arising from the export sale and a certification of delivery
37 of the commodity.
Under the C.C.C., the exporter is not obligated to make export sales of cotton if granted financing approval; however, if he is going to use the program, he must export the commodities within ninety days from the date of the financing approval.
Interest rates for the program are announced monthly should the exporter use the
38 program. The rate runs from the date of delivery until payment to C.C.C. of the amount financed.
The avowed purpose of the C.C.C. is the stabilization and protection of farm income and prices as well as assistance in maintaining balanced and adequate supplies
39 of agricultural commodities. Management is in a board of directors, subject to the general supervision and direction of the Secretary of Agriculture, who is an exofficio director and chairman of the board. The C.C.C. is capitalized at $100 million and has the authority to borrow not to exceed $14,500,000,000 for use in its programs.
Eximbank
Another source of financing for the cotton exporter is the Export-Import Bank of
40 the United States (Eximbank). Assistance under the program is limited to repayment in dollars and is used only for purchases of U. S. goods and services. Generally, its assistance must also have a "reasonable assurance of payment". The cotton exporter seeks Eximbank credit by requesting his local bank to make an application to Eximbank.
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The local banks within a particular country receiving such requests consolidate the applications with a single bank, which then negotiate with Eximbank for a global line for their country. That global line is the total amount available through Eximbank to that country for financing U. S. cotton purchases for a cotton crop for a year.
Public Law 480 and Cotton Exporting
As mentioned repeatedly throughout this paper, the volume of Federal laws governing commerce and relations with foreign countries do not lend themselves to a general discussion within the scope of this effort; however, if there is one important piece of legislation without which cotton exporting could not be what it is today, it is
Public Law 480.
41
Public Law 480 (hereafter P.L. 480), as it is referred to throughout the trade, has as its main objective the constructive use of the agricultural abundance of the U. S. Though the dozens of sections do not bear separate treatment, a summary of the spirit of this important legislation is sufficiently enlightening to allow the attorney to expand to research into the particular sections. Moreover, it is of primary importance to tie programs under P.L. 480 into the workings of the C.C.C. in that these two pieces of legislation are the backbone of the cotton exporting trade.
The Act authorizes the President to carry out a program for the sale of U. S. surplus agricultural commodities for foreign currencies under agreements with friendly nations.
42
Financing under the Act provides for C.C.C. funds to be used to finance the sales and authorizes appropriations to reimburse C.C.C. for its costs. The
Department of Agriculture requests appropriations for estimated program costs for the year and reimburses C.C.C. on a monthly basis as costs are incurred.
43
Program development under P.L. 480 is complicated and places responsibility on a U. S. negotiating team to make certain that the foreign government fully understands the various requiremerits and conditions for financing under the P.L. 480 agreement.
After the government to government agreement is signed, a definite financing procedure is followed. This procedure, as outlined below, will provide an understanding of how the many aspects of the cotton exporting deal relate to each other and how all parties
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are ultimately paid for the transaction.
Once the aforementioned agreement is signed, final payment is made in the currency of the foreign country to the account of the U. S. Government in a depository of the foreign country designated by the U. S.
44
Next, the importing country applies to the
Foreign Agricultural Service (F.A.S.) for purchase authorizations which provide for dollar financing of the commodity sales and specify the conditions under which such
45 financing will be made available. Of course, certain government controls are maintained since U. S. funds are used to finance P.L. 480 sales.
46
Next, the government of the importing country designates certain banks in its country and in the U. S. and the C.C.C. issues letters of commitment to the stated
U. S. banks as requested by the government of the importing country. Such is a commitment by the C.C.C. to reimburse the U. S. bank for payments made under letters of credit for the account of the foreign bank in connection with export sales under the purchase authorization.
47
Following these interactions between the foreign governments, the foreign importer enters a contract with the U. S. exporter and applies to their own local bank for letters of credit in favor of the U. S. exporter, which letters of credit are paid through designated banks in the U. S. holding a C.C.C. letter of commitment which names the designated foreign bank.
48
Then the U. S. bank pays the exporter against a draft and shipping documents; however, instead of calling on the designated foreign bank for payment in dollars, the U. S. bank obtains reimbursement from the C.C.C.
After receiving shipping documents, the foreign bank pays for the sale by depositing local currency to the account of the U. S. Government rather than crediting the account of the U. S. bank. Generally, the U. S. is paid in foreign currency at the same rate at which the importer would purchase dollar exchange from his bank in his currency.
49
Conclusion
The exporting of U. S. cotton is clearly a complex business, governed not only
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by the law of commercial transactions but also by one of the massive arms of the
United States Government. This paper has touched briefly on each of the major facets of this complicated but rewarding enterprise. UnfortunatelY, an in depth study of any particular area would equal the scope of this paper; consequently, in the interest of providing the maximum amount of exposure and the largest possible base on which to work, this paper has hopefully provided the framework which will allow expansion in any direction.
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Citations
1
U.S.D.A., How U. S. Cotton is Sold For Export (1972).
2
Id. at 2.
3
7. U.S.C. ~ 1691 (1954).
4
7 U.S.C. ~ 1853 (1956).
5
How U.S. Cotton is Sold For Export, supra at 2.
6
Id.
7
Id. at 3.
8
Id.
9
Id. at 4.
10
Id.
11
Id.
12
How U. S. Cotton is Sold For Export, supra, at 16.
13
Id.
14
Id. at 17.
15
Id.
16
Id. at 18.
17
Address by Russell Barlowe, U.S.D.A., National Agricultural Conference, Nov. 20, 1975.
18
Address by Joseph H. Stevenson, Director of Foreign Agricultural Services, Dec. 15, 1975.

19
Wall Street Journal, Sept. 24, 1975, at 7, col. 1.
20
Murr, Alfred, Export/Import Traffic Management and Forwarding (2d ed. 1970).
21 rd.
22
U.C.C. 2-319.
23
U.C.C. 2-319.
24
U.C.C. 2-321.
25
How U. S. Cotton is Sold For Export, supra, at 4.
26 rd. at 5.
27 rd.
28 rd. at 6.
29 rd. at 7.
30 rd. at 12.
31 rd.
32 rd. at 13.
33 rd. at 14.
34 rd.
35
U.S.D.A., Export Credit For Cotton (1969).
36
15 U.S.C.

38 rd.
39 rd. at 3.
40
15 U.S.C. 714.
41
Export Credit For Cotton, supra, at 3.
42
7 U.S.C. 1701.
43
7 U.S.C. 1703.
44
7 U.S.C. 1704 b.
45
7 U.S.C. 1705.
46 rd.
47 rd.
48
Export Credit for Cotton, supra, at 21.
49 rd.