The complexity of international cotton logistics

This article is part of a series exploring CTRM and Commodity Management in cotton trading.

 

At Gen10 we know it’s important to really understand the details our clients face in managing their commodity trading and shipping. We know that processes and workflows are different for every commodity and every company. And today we are exploring how, even if your organisation standardises as much as possible, regional differences in commodity processes, specifically cotton, can affect your workflows.

Location has a significant impact on cotton business processes, so cotton traders need to ensure that their commodity management or CTRM systems have the flexibility to manage these very different workflows concurrently.

Payment terms

Geographic differences in processes begin as soon as the bale is created. In Australia, the buyer may pay the ginning invoice on behalf of the farmer, and the farmer deducts the ginning amount from their invoice.

This impacts on the information in documents that traders and merchants need to create, as in Australia, an RCTI invoice is needed. This document is created by the recipient and is a tax invoice based on the number of bales, qualities of each bale, and premiums & discounts applied. The gin prepayments need to be applied to the RCTI when purchasing from a grower, and not inadvertently applied when purchasing from other merchants. Cotton traders therefore need to have good commodity management systems in place so that they can create accurate RCTIs and other invoices quickly and efficiently.

Other regions may not include this ginning payment and simply include it in the purchase price. But these countries may not have a standard process for other payments, meaning that traders need to be flexible in managing contracts across multiple processes. For example, in Brazil contracts often include pre-payment of 90% after take-up approval, but equally can have on call or fixed pricing based on documents received or receipt at warehouse.

Regional variations in cotton logistics

Different markets have different practices when it comes to take-up and pre-takeup information sharing, where brokers distribute lots’ quality information. In some geographies, such as Brazil, take-up files are standard, but they are not necessarily standardised – creating even more complexity in the cotton data management process as different fields may be needed depending on the broker.

To take Australia as an example again, these processes do not always include a take-up file, but instead can rely on the gin files. But logistics in Australia includes managing bale-by-bale packing lists that are not necessarily required elsewhere.

And some regions, such as the USA, manage sales based on recap reports, a document listing each bale summarised by quality data. Other regions make use of these recap reports in shipping documents rather than as part of the sale, and some do not use them at all.

Even for HVI files, although there are standard fields across most regions, the files can vary by geography, with some regions including many more fields for each bale, which again need to be managed in the CTRM or commodity management system.

Of course, logistics can vary in any region depending on where cotton is shipped next; exports require more document creation than domestic sales. Where a domestic sale needs a release note, overseas sales may also need an export packing order document with container numbers and seals, container packing list, inspections, and other shipping documents.

All of these documents require sharing data in both directions between your operations team and warehouse, and can involve a great deal of copying and verifying information if you do not have effective commodity management systems built for cotton in place.

Cotton certificates and trade finance

Trade finance arrangements can vary depending on where your counterparties are based, before even getting into topics such as geopolitical risk. For example, although Letters of Credit are standardised in terms of the field numbers and generally use the same fields, banks in some countries, such as Bangladesh, require more information than others in the LC.

These different LC requirements therefore have an impact on the information cotton traders need to manage depending on the regions they are shipping to, and can also influence the documents that traders need to create and manage. For example, your team may need to create and attach different Beneficiary’s Certificates depending on these terms, and attach different numbers of copies. Again, this process introduces the risk of errors if it is not supported with effective technology and controls.

And the certificates needed can also vary geographically. Whilst any cotton shipment needs a phytosanitary certificate, this may be enhanced by additional requirements. Countries that are signatories to the International Plant Protection Convention require certification that wood packaging materials have been treated to lessen the risk of pests and diseases being transmitted. These certificates can take different forms, such as the Australian Wood Packaging Certification Scheme in Australia.

Conclusion

The complexity of cotton trading can be overlooked by those who have been working with the commodity for a while, but it is certainly one of the more complex commodities to trade. And the regional variations of both the crops and where counterparties are based only adds to this complexity, meaning that many cotton traders need to manage multiple trading processes.

This complexity means that cotton merchants need to have flexible systems in place to support their various trading processes whilst maintaining control and minimising risk.

Find out how Gen10’s flexible CommOS Commodity Management System has been developed specifically to solve the challenges facing cotton traders.