Cost of Merchanilisinq Cotton in Texas Seasun NATURAL FIRERS ECONOMIC RESEARCH. The University of Texas at Austin

Transcription

1 Cost of Merchanilisinq Cotton in Texas Seasun NATURAL FIRERS ECONOMIC RESEARCH The University of Texas at Austin

2 Research Report No. 98 COST OF MERCHANDISING COTTON IN TEXAS, SEASON Natural Fibers Economic Research The University of Texas at Austin A Part Of Natural Fibers & Food Protein Committee of Texas

3 PREFACE This report is based on a study conducted by Natural Fibers Economic Research, formerly Cotton Economic Research, The University of Texas at Austin, a part of the Natural Fibers and Food Protein Committee. Appreciation is expressed to Mr. Kermit E. Voelkel a member of this office who collected these data through personal interviews of some of the cotton firms located in the Dallas, El Paso, Houston, and Lubbock, Texas trade areas. The fine cooperation of these cotton firms in furnishing accurate and complete data is gratefully acknowledged. Without their assistance this study would not have been possible. Appreciation is also extended to Mr. Carl Cox, Executive Director of the Natural Fibers and Food Protein Committee for reviewing the manuscript. Natural Fibers Economic Research Research Report No. 9 April 1972

4 TABLE OF CONTENTS Page Preface iii Introduction i The Texas Cotton Shipper... 2 Purpose of This Study Background The Texas Cotton Shippers' Costs, Domestic Merchandising Costs... 5 Foreign Merchandising Costs Texas Designated Spot Market Prices, Premiums and Discounts and Prices Received by Producers... 9 Cotton Purchased by Firms in the Texas Trade Areas Method of Merchandising Cotton I 14 Sources of Purchases Cost of Merchandising Cotton in Texas Increased Domestic Cost Factors Foreign Cost Factors Some Possible Methods of Reducing the Cost of Merchandising Cotton in Texas Appendix Reference List V.

5 Number LIST OF TABLES Page 1. Shippers' Average Cost of Assembling and Distributing Cotton by Trading Areas and Outlets, Season (In Dollars Per Bale) Reported purchases by Merchants and Spot Cotton Prices for Middling 1" in Designated Markets for the , , and Seasons Commodity Credit Corporation Micronaire Loan Differences, , , and Seasons Micronaire Differences for the Texas and United States Designated Spot Markets, Seasons , , and , in Points Per Pound Average Prices Received by Farmers in Texas and the United States, Through Percentage of Cotton Purchased by Firms of the Four Texas Trade Areas From Four National Regions, , , and Seasons Percentage of Cotton Purchased in Four Trade Areas by Firms Headquartering in Texas, , , and Seasons Percentage of Texas Sales as Shippers, etc., by Trade Areas, Seasons , , and Volume of Texas Cotton Sold as Shippers, etc., by Trade Areas, Seasons , , and (Data in Percent) Shippers' Purchases of Cotton by Sources and Trade Areas, , , and Seasons, in Percent Shippers' Comparative Data According to Outlets for Shipments During the , , and Seasons Distribution of Texas Cotton by Trade Area Shippers to Domestic and Foreign Outlets, Shippers' Average Cost of Assembling and Distributing Cotton by Trading Areas for the , and Seasons (in Dollars Per Bale) Average Cost Per Bale of Receiving Cotton at Public Storage Facilities, by States, Crops 195 Through 1969, Cents Average Monthly Cost Per Bale for Insured Storage, by States, Crops l95o Through l969,cents Average Cost Per Bale for Standard Density Compression of Cotton, by States, Crop 195 Through 1969, Cents Average Cost Per Bale for High Density Compression of Cotton, by States, Crops 195 Through 1969, Cents vii

6 LIST OF TABLES Continued Number Page 1. Shippers' Average Cost of Assembling and Distributing Cotton by Trading Areas and Outlets, Season (in Dollars Per Bale) Shippers' Average Cost of Assembling and Distributing Cotton by Trading Areas and Outlets, Season (in Dollars Per Bale) Production and Percentage Distribution of Cotton by Regions, United States, Through Seasons Mill Consumption of All Growths of Cotton in the United States, Crops 1934 Through 1969 (Thousands of Running Bales Bales)......, Quantity and Proportion of Cotton Consumed in the United States, by Areas, for Specified Seasons, Through United States Cotton Exports to Various Countries, (Running Bales) Volume of Cotton Exported From the United States to Various Countries for Specified Seasons (5-Pound Gross Weight Bales) Volume of All Cotton Consumed by Countries for Specified Seasons viii

7 INTRODUCTION The production, processing, and marketing of cotton are major sources of cash income and employment in Texas. Cotton lint and cottonseed are two of the world's most important raw materials. The cotton industry in Texas has played a major part in the economic development of agriculture, transportation, banking, and related service businesses over the past 15 years. The Texas cash farm income from cotton and cottonseed for 1969 was $642,67,8 (including $334, 538, from government cotton payments Food and Agriculture Act of 1965). Income derived from cotton lint and cottonseed was 22.8 percent of the total state cash farm income and 54.7 percent of the state cash income from all crops. In 1969, Texas produced 2,86,926 running bales of cotton, bringing the total for the state during the history of cotton production in Texas from the year 1822 through 1969 to more than 316,, bales, with a value in excess of $28.3 billion. In 1969, cotton was produced in 239 of the 254 Texas counties. The harvested cotton acreage amounted lint and cottonseed averaged $137 per harvested acre. acres. The value for both The largest amount of cotton ever produced in Texas was during the season, when over 6,, bales were ginned. Figures indicated that 98 percent of the 1969 cotton crop was machine harvested. The average grade index of the 1969 Texas cotton crop was 86.7 (Middling White is 1), which was the lowest in the history of quality reporting. Adverse weather conditions, insect infestations, and methods of harvesting affected the grades. The average staple length was 31.5 thirty seconds of an inch. This was the third longest average staple length in 42 years. The average fineness of the cotton was 4.1 micronaire units, with 81 percent in the desirable range of readings. The average fiber strength was 85,7 pounds per square inch, up 1,9 psi from the previous year.

8 In , the average price received by the producer for his cotton production was 1.43 cents per pound. Ginned cotton moved from the 1,126 active gins in 15 Texas counties to any of 175 public storage establishments (9 cotton compresses and 8 5 warehouses). The title to the cotton, after being ginned, passed from the farmer to either the ginner, local buyer, mill buyer, broker, Commodity Credit Corporation (a Federal government agency), or to one of the more than 1 cotton merchandising firms operating in Texas. THE TEXAS COTTON SHIPPER A very vital step between the producer and the textile mill is merchandising, and the cotton shipper is the major one who performs this function. The cotton shipper must offer and perform the many services necessary to deliver the cotton required by a mill customer. This requires a variety of skills and services which the shipper must perform through his own staff or which he may arrange for from outside his own firm. The overall service performed by the shipper is the delivery of the required cotton where and when needed. This general service necessitates that a shipper perform the following specific services: Obtaining the cotton, quality selection, compression to proper density, storage until needed, insurance coverage of cotton until delivered, transportation to destination, and financing of all the preceding services until delivery is accomplished and payment is made. The number of the above services has increased over the past 5 to 1 years because additional quality factors were being considered in marketing. These increased services include insturment testing for length, fineness, maturity, uniformity, elongation, etc.; textile processing assistance; and cotton selection by variety, area of growth, etc. Some shippers rely on research to find new or additional possible end uses for pecific cottons and to improve their services to the mills. These additional services may be performed by the shipper's own personnel or may be arranged and paid for by the shipper through outside commercial fiber testing organizations

9 The various services performed by the shipper necessarily meant that his personnel had to have a greater knowledge and be better qualified than in earlier years. Also, the information obtained from testing services must be maintained on cotton in the shipper's stock. Some shippers installed data processing equipment because of this increased record keeping, and by doing so, made it possible to furnish faster and more accurate quality data and price quotations to the prospective mills or other marketing outlets. Data processing equipment has also been integrated with instrument fiber testing equipment in order to render faster and more complete service. With the modern innovations, the shippers' services were made more efficient and useful to their customers. Obviously, these additional and new services performed by the shipper also meant an increase in the cost of merchandising. While the shipper was increasing his services, mills were also requiring additional quality data such as fineness, strength, uniformity, etc., besides the usual quality factors of grade and staple length of the cotton they needed. Mills, in order to reduce their processing costs, were making studies on excessive ends down, waste, yarn, and fabric imperfections, etc., in an effort to determine their needs more accurately. As pointed out on the preceding page, the services performed by the cotton shipper are a vital step between the producer and the textile mill in merchandising cotton. The number of shippers in Texas has decreased alarmingly in recent years. There are a number of reasons for this situation, chief of which are the increased requests from mills for new, better and greater services and the cost of furnishing them; the loss of both domestic export markets due to imported textiles, including apparel; and the increased use of synthetics. In addition, some mills have by-passed the shipper in the purchasing of their cotton. Field contracting of the cropt a method of purchasing which has been on the increase during the past several years, has and will contribute to the condition. Also, since mills purchase large lots of cotton, the shipper is the logical one to handle these purchases. Smaller buyers or merchants would have problems handling large lots. On the other hand, the shippers that are still in operation have improved their services and efficiency through cost reduction practices and have therefore strengthened their positions. 3

10 In an effort to remain in operation, and to provide efficient services to the mills, some shippers have cut their cost of operation by consolidating several of their offices and personnel functions by closing branch offices and reducing office and field staffs. Since the cotton shipper performs so many important services in the merchandising step, he will always remain a needed cog in the marketing system. PURPOSE OF THIS STUDY This study was made to provide estimates of the major costs involved in marketing of Texas cotton. It was also made to up-date the Research Report No. 9, Cotton Merchandising Costs in Texas, Season, and earlier reports. With the number of active cotton shippers decreasing annually, and with the advancement of prices because of economic conditions, requests increased for this study. These requests were made by the United States Department of Agriculture, National Cotton Council, Cotton Inc., shippers, researchers and other interested parties. JJD] Data presented in this report are based on analysis of information obtained from about 37 percent of the cotton shippers maintaining offices in Texas during the season. The firms were located in the Dallas, El Paso, Houston and Lubbock, Texas trade areas. They handled a total of 2.2 million bales of which more than _percent was Texas growths. These Texas growths (1,73, bales) represented _61_percent of the Texas crop. Cost data were acquired on a points and cents per pound basis for the - various cost items covered in this study. Qne hundred points equal 1 cent per pound and amounts to $5 on a 5-pound bale of cotton. Personal interviews were held with an official or representative of each firm concerning cost and volume data on the domestic and foreign shipments in Supplementary data were also obtained from each firm as to where and from whom they obtained their cotton, along with their methods of selling. Based on these data obtained, weighted averages for the various costs of merchandising were developed for the trading areas according to outlets. These results were then utilized to develop the weighted state average cost for the specific items of merchandising to the outlets. 4-

11 THE TEXAS COTTON SHIPPERS' COSTS, The total cost (weighted average) for merchandising cotton from the four Texas market areas amounted to $22.66 per bale. For cost of merchandising shipments to all outlets during the season, see table 1. The total cost figure of $22.66 is $1.56 less than the season cost. This indicated decrease in combined cost of merchandising was not the result of an actual decrease in the cost but was due to the increased amount of cotton sold to domestic outlets and a reduction in amount sold to foreign outlets in as compared to the volume to same outlets for the earlier period. The cost for shipments to domestic and foreign outlets amounted to $15.18 and $31.74 per bale, respectively, see table 1. These two costs were above the costs for the two earlier seasons, and Data for the cost of merchandising Texas cotton by trade areas and according to outlets for the season are in table 18 of the Appendix and for the season are in table 19 of the Appendix. During the season, the Dallas market area had the highest average cost of merchandising cotton to all outlets, with *23.64 per bale. The Houston trade area had the lowest cost of $21.39 per bale $2.25 less than the Dallas trade area cost. The average costs to all outlets for the El Paso and Lubbock trade areas were $22.56 and *22.92 per bale, respectively. DOMESTIC MERCHANDISING COSTS The season domestic costs were from 93 cents to $2.22 per bale more than the costs during the season for selling cotton to United States mills. The Houston trade area had the lowest domestic merchandising cost of $14.48 per bale compared with El Paso, which had the highest with $17.39 per bale. The Lubbock and Dallas trade areas' domestic merchandising costs were *15. and $15.43 per bale, respectively. FOREIGN MERCHANDISING COSTS Merchandising costs to foreign outlets ranged from $3.6 per bale for the Houston trade area to $47.96 per bale for the El Paso trade area. The Dallas and Lubbock trade areas showed a merchandising cost to foreign 5

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15 outlets of $31. and $31.7 per bale, respectively. The Houston trade area reflected the smallest increase since the season with 83 cents per bale. TEXAS DESIGNATED SPOT MARKET PRICES, PREMIUMS AND DISCOUNTS AND PRICES RECEIVED BY PRODUCERS The three designated spot markets in Texas during the season were Dallas, Houston, and Lubbock. Galveston was a designated spot market until the season. Prices reported to the USDA were based on Middling, 1 inch, with premiums and discounts for other qualities. The number of bales sold in each market were also reported. While El Paso is not a designated spot market, Middling, 1 inch prices were reported to the USDA by the El Paso market. During the season, the merchants of the three designated spot markets reported purchases of 2.3 million bales of cotton (see table 2). The prices paid for these purchases were recorded for Middling, 1 inch in cents per pound. These data are also found in table 2, along with those for the seasons of and Purchases during the season amounted to 25.5 percent of the total reported purchased in all the designated spot markets (12) in the United States. In contrast, the merchants, during the season, purchased 3.1 million bales which reflected 24.5 percent of the United States total purchased. The season's price for Middling, 1 inch in the Texas designated spot markets was higher than it was during the season, with the exception of the El Paso market which showed a lower price. In the past the quality factors of grade and staple length determined the price paid for cotton. However, now a third factor of fineness, the micronaire reading of the cotton, has been added. Fineness is also a measure of maturity or immaturity depending on the cottons involved. The trade has determined that the cottons which fall in the fineness range of 3.5 to 4.9 are to be considered as average. Those cottons that are below or above this range are cottons which are less mature on the fine end or very mature on the coarse end. Thus, cottons outside the average range of 3.5 to 4.9 micronaire units are discounted. The USDA has established premiums and discounts for the various micronaire readings entering the CCC loan. However, these differences were not applicable in the

16 Table 2. REPORTED PURCHASES BY MERCHANTS AND SPOT COTTON PRICES FOR MIDDLING 1" IN DESIGNATED MARKETS FOR THE , , AND SEASONS Market Reported Purchases Price Middling 1" - Trading in Bales Cents Per Pound Area Dallas 1127,881 1,834,49 Lubbock 19195,986 95,61 El Paso* - - Houston ,247 Galveston** All 1,11, , ,28 656, Markets 91164,736 12,665,148 11,776, * No volume figures given. -* Galveston was removed as one of the spot markets during the season. Reference (5) season, but were initiated with the 1965 crop. For the CCC loan micronaire premiums and discounts covering the , , and seasons refer to table 3. Cotton that was marketed by the farmers through trade channels was also subject to micronaire discounts. The trade did not, however, have a premium for the cotton within the range of 3.5 to 4.9. The CCC loan provided 45 points premium for this grouping during the season. The fineness groupings during this season were the same as the CCC loan, but the premiums and discounts varied. For the average micronaire differences for the designated spot markets see table 4. Texas producers generally received a lower average price for their cotton than producers in other parts of the United States. This lower average price can be attributed to the lower grades and shorter staple lengths produced in the state as compared with production outside the state. The average prices received by producers in Texas and the United States for the seasons through are shown in table

17 Table 3. COMMODITY CREDIT CORPORATION MICRONAIRE LOAN DIFFERENCES, , , AND SEASONS 5.5 & above & above & above ,3-3,4-45 3, , , & below -39 2,6 & below & below -3 Reference (5). Table 4. MICRONAIRE DIFFERENCES FOR THE TEXAS AND UNITED STATES DESIGNATED SPOT MARKETS, SEASONS , AND , IN POINTS PER PJND Market Below Above Dallas Houston Lubbock Market & Market Below Above Dallas Galveston Houston Lubbock Market O& Market Below Above Dallas Galveston Houston Lubbock Market Reference (s).

18 Table 5. AVERAGE PRICES RECEIVED BY FARMERS IN TEXAS AND THE UNITED STATES, THROUGH Price Per Pound Season Texas United States Reference (5,7,8). COTTON PURCHASED BY FIRMS IN THE TEXAS TRADE AREAS The cotton shipping firms located in the four Texas trade areas generally purchased the cotton produced in the territory where they were located. The United States is divided into four regions of production, namely, Southeastern, South Central, Southwestern, and Western. While the firms doing business in the Dallas, Houston, and Lubbock.trade areas purchased cotton, during the season, from some of the above regions, 66 percent to 99 percent was purchased in the Southwestern region. It will be noted in table 6, which shows from what regions cotton was purchased during the , , and seasons, that firms doing business in the El Paso market bought all their cotton in the El Paso area or the Western region. (El Paso located in District 6 of Texas is included in the Western region.) The production of cotton in the United States, by regions, is shown in table 2 of the Appendix. These data cover the seasons through and give the percentage of the nation's cotton produced in each of the four regions. The data also reflect the westward movement of cotton production. Of the cotton shippers located in the four trade areas of Texas, only the firms located in the El Paso trade area purchased their cotton requirements during the season solely within their own area which is a

19 Table 6. PERCENTAGE OF COTTON PURCHASED BY FIRMS OF THE FOUR TEXAS TRADE AREAS FROM FOUR NATIONAL REGIONS, , , AND SEASONS on ern Texas Dallas El Paso * * * Houston Lubbock All Markets * District 6 of Texas is included in the Western region. Original data and reference (2). part of the Western Region. These data for El Paso and including the three other market areas covering the , , and seasons are shown in table 7. The firms in the Dallas, Houston, and Lubbock trade areas purchased from 4 percent (Houston) to 87 percent (Lubbock) from the Lubbock section. Sixty (6) percent of the cotton purchased by the Dallas area firms originated from the Lubbock section. With 7 percent of the state's cotton production on the High and Rolling Plains, it is understandable why such a large percentage of the Lubbock area cotton is purchased by the firms of the major trade areas of Texas. More than 62 percent of the cotton purchased by all cotton shippers located in Texas was grown in this heavy producing area of the state. Table 7 shows the percentage of cotton purchased from the various trade areas of the state

20 Table 7. PERCENTAGE OF COTTON PURCHASED IN FOUR TRADE AREAS BY FIRMS HEkDQUARTERING IN TEXAS, , , AND SEASONS Location Dallas - Houston Lubbock El Paso Total Dallas El Paso * * Houston Lubbock All Markets Original data and reference (2). METHOD OF MERCHANDISING COTTON The firms that were interviewed in connection with this study also supplied data on their methods of selling the cotton. They reported that the majority of the cotton was merchandised as a "shipper." Some of the firms in the Houston and Lubbock trade areas sold 19 and 13 percent, respectively of their purchases as F.O.B. merchants. Table 8 shows the percentage of cotton sold as shippers in the four trade areas for the , , and seasons. Table 9 shows the volume of Texas cotton sold as shippers, etc., by the four trade areas for the seasons , , and It will be noted that during the season Lubbock firms sold the largest percentage of the Texas cotton handled with about 42 percent. The Dallas firms -14-

21 Table 8. PERCENTAGE OF TEXAS SALES AS SHIPPERS, ETC. BY TRADE AREAS, SEASONS , AND Market F.O.B. Commission Area Shipper Mill Buyer Merchant Broker Buyer Total Dallas El Paso Houston Lubbock * Total Original data and reference (2). Table 9. VOLUME OF TEXAS COTTON SOLD AS SHIPPERS, ETC., BY TRADE AREAS, SEASONS , , AND (DATA IN PERCENT) Market Shipper Others* Total Dallas El Paso Houston Lubbock Total * Mill buyer, F.O.B. merchant, broker, commission buyer. Original data and reference (2)

22 were next handling about 29 percent. On a state basis, nearly 9 percent of the Texas cottons were handled by these firms as cotton shippers during the season. SOURCES OF PURCHASES The cotton merchandising firms in the four trade areas purchased cotton from farmers, ginners, local buyers, the Commodity Credit Corporation, spot brokers, F.O.B. merchants, and others. During the season, shippers in the Houston and Dallas trade areas purchased 38 percent and 7 percent, respectively, of their cotton from ginners and local buyers. Those in the Lubbock and El Paso trade areas purchased 72 percent and 91 percent, respectively, of their cotton from the farmers. During the season, 44 percent of the cotton purchased by all firms was purchased from farmers; during the season, 45 percent came from the Commodity Credit Corporation; and during the season, 33 percent was from ginners and local buyers. Table 1 shows the percentage of purchases made by the shippers, by sources and in the four trade areas for the , , and seasons. Table 11 reflects the percentage of the firms' annual volume moving to the domestic and foreign outlets for the cotton marketed during the three seasons. During the season, domestic mills used 56 percent of the purchases; whereas, during the prior two seasons listed, 6 to 7 percent of the purchases were destined for foreign outlets. The United States mill consumption amounted to nearly 8 million bales during the season (see table 21 in the Appendix). Table 12 shows the distribution of Texas cotton to various domestic and foreign outlets by shippers in the four trade areas during the season. Fifty-six (56) percent of the cotton was shipped to domestic mills and forty-?four (44) percent to foreign outlets. The largest single domestic outlet, which was the recipient of 21 percent, went to the mills in Alabama and Georgia. Cotton shipments to Japan were the largest single foreign outlet with 18 percent. In other words, nearly 41 percent of the Texas cotton sold in the export market was destined for Japan

23 Table 1, SHIPPERS' PURCHASES OF COTTON BY SOURCES AND TRADE AREAS, , , AND SEASONS, IN PERCENT Market Ginners Trading Farmers Farmers & Local Spot Area Ex-whse Other Buyers CCC Shippers Brokers Others Total Dallas El Paso Houston Lubbock All Markets * * Less than.5 percent. Original data and reference (2,3). Table 11. SHIPPERS' COMPARATIVE DATA ACCORDING TO CJJTLFJPS FOR SHIPMENTS DURING THE , , AND SEASONS Destination Outlets Southeastern New England Other Domestic Total Domestic Europe Orient Other Foreign Total Foreign Total All Outlets Original data and reference (1,2)

24 r-4 S U) CZ O C'Z N - ' ' U)' F\ ' U) S 5 OH 8 o 8 m CIF) clr\ 8 C\l clr\ r-i ig 1) -r4 4 U)' U) N U) UN 1 C U) - '4 S S S N S I S H ' H H C'Z c'1 H H H H HO H CO ' ' H H r4 toc'o t'- LrH U\ QOLt\ Or-4H o S S S S S S S S S S S S I S S 4 U)' 4 CO O H H C\l N N N ' '. S. e S S S e S S S O c\ H C H c 4 H CO CO G) U CO $4 J4 $4 ).,.I G). '1 H N Cn M' N (' 4 '. CO UN C\ VN to H Q) ) HID C) cr C\Z 't\ E-4 N C' ' C) U) S - CO ) H H CO 31 od C) H N c\ C) 4 H to H to N CNI '. U) S S S * '1 5 * * '. H C\Z H o t C99 N N '. U)' m U '.C 4H' ' A u '. H '4 H C '. H CO C'.Z H H H H clq H H c1 H a) U AL '. N H Cl- H H C\l U) -4 C\l c\ '1 (7%1 H S N Cq N N H S S NS C\ U S ' N S US H c L\ C 1 '- H H H H jh 1H ca to )U)OOoj U)) )U)OC)CO rncuoc)co coco4 -)+) CO ) ) H O +)- COCOP.pQU) H HO) H), C ). ) $4 a) H 4 E' H E-' H.E- E-4 H E-4 r m 18 -

25 This table also reflects that the shippers sold the Dallas, El Paso, Houston, and Lubbock trade area cottons to the mills located in Alabama and Georgia, ranging from 15 percent to 27 percent of the cotton. However, the firms marketed 1 percent to 63 percent of the El Paso trade area cotton to Group 21 mills. Table 22 in the Appendix indicates the consumption of United States cotton by regions, and the United States as a whole, for the seasons through The largest amount of cotton ever consumed in the United States was 1,654, bales during the season, and the least consumed was 6,315, bales during the season. A total of 2,76,189 bales of cotton was exported by the United States in Of this amount, over 6, bales were shipped to Japan, the leading importer of United States cotton (see table 23 in the Appendix). Data revealed that more than 5 percent of the United States cotton exported to Japan was Texas grown. COST OF MERCHANDISING COTTON IN TEXAS INCREASED The cost of merchandising Texas cotton to the domestic and foreign outlets increased in above earlier season's figures. The reason for the increase was generally due to the inflationary economic conditions that existed in the nation. By use of the Bureau of Labor Statistics Consumer Price Index, it was possible to ascertain the amount that these economic conditions were inflating the general prices in the United States. The prices were 13 percent above the level and 18 percent above the level. As noted earlier, although the combined cost of merchandising Texas cotton to both foreign and domestic outlets indicated a decrease in the cost, this was actually not the case but was due to nearly a reversal in the amount of cotton shipped to domestic outlets that was shipped to foreign outlets in the earlier periods. The cost of merchandising Texas cotton to domestic outlets of $15.1 per bale came up to the predicted costs of merchandising based on the and costs, which were both greater, adjusted by

26 means of the BLS Consumer Price Index. Thus the cost of merchandising to domestic outlets did not increase as much over the same time periods as did other costs. The predicted price based on the cost was $.45 more while the prediction based on the cost was $1.3 more than the actual cost. The cost of merchandising Texas cotton to foreign outlets of $31.74 per bale was found to be $1. a bale less than the predicted price based on the cost and was 8 cents above the predicted price based on the cost. Thus, both the domestic and foreign costs of merchandising can be considered as not increasing as fast as other costs during the intervening periods. Table 13 shows the various cost items of assembling and distributing Texas cotton by trade areas to domestic and foreign outlets for the seasons., , , and During the season, the ance for merchandising cotton to foreign outlets was not obtained. In this table it will also become apparent that the shippers were utilizing the futures exchange during the season to "hedge" their cost of merchandising for the first time in several years. The shippers did not use the futures exchange during the and seasons. The single item that added most to the cost of merchandising Texas cotton was transportation, which averaged $5.56 per bale for domestic outlets and $14.25 for foreign outlets. Other items that added significantly to the cost were compression charges, including patches and marks, tare (22 pounds), and all overhead expenses. The average season overall merchandising cost per bale for the four trade areas of Texas that were surveyed, including the Texas average, for domestic and foreign shipments were: Trade Area Cost Per Bale Dallas $23.64 El Paso Houston Lubbock State average The average cost for receiving cotton at public warehouses and compresses by states and for the United States is shown in table 14. This table shows the receiving casts for the crop years 195 through 1969 for - 2 -

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31 14 of the 16 cotton states. Costs for the states of Florida and Virginia were not included as there were no public storage facilities in operation. During the 195 crop year, the Texas receiving cost was 75 cents per bale compared with 65 cents, the average cost for the United States. For the crop year (1969) covered by this study, the Texas receiving cost was $1.2 per bale compared with 97 cents, the average cost for the United States. During the season, six (6) cotton states, namely, Alabama, Arkansas, Georgia, Mississippi, Missouri, and Tennessee, had higher average receiving charges than Texas. Louisiana and Texas had the same cost during the season. These six states' costs ranged from $1.4 per bale in Missouri to $1.15 per bale in Georgia. The average cost per month for insured cotton storage by states and for the United States is shown in table 15. This table shows the per-bale average insured storage cost for the crop years 195 through 1969 for 14 of the 16 cotton states. During the 195 crop year, the Texas insured storage cost per month averaged 37 cents compared with 35 cents, the average cost for the United States. During 1969, seven states had a higher cost for insured monthly storage than Texas. Arkansas had the highest storage cost with 7 cents per bale. For the crop year 1969, the Texas insured storage cost per month was 6 cents compared with 63 cents, the average cost for the United States. The data in table 15 show that the merchandising cost item of insured storage in Texas increased 62 percent from 195 through 1969 compared with an 8 percent increase for the United States. Compressing bales of cotton to standard density at interior compresses is one of the larger costs adding to the expense of merchandising cotton. Except for those few gins in Texas that have standard density presses, cotton delivered to compresses is in the form of flat gin bales. Cotton shipped to domestic mills is, in most instances, compressed to standard density in order to conserve space in railroad cars. Cost of shipping cotton is based on weight per railroad car; therefore, it is paramount that the maximum bales possible be placed in each car, which is possible only through compression, when one wants to keep down the freight cost. Table 16 gives the average cost per bale for the standard density compression of cotton for the crop years 195 through 1969 for 14 of the 16 cotton states in the United States. During the 195 crop year, the Texas standard density compression per-bale cost was $1.31; and this cost increased 73 percent, or to

32 C/)I LA N LA C c CA N ' H C N H C C2 m -4 U) c > I N ' ' ' N N H C' U) H c CA H c C' c I CA-.t 4444 *LA LA4 LALALALALA LALALAtc\ - r-- (7% NH H LALALr (A (A 4-4 -t LA LA LA LA LA LA LA LA LA '.1 LA H' LALANNNH cc(n H ('1 C\ C1 H NO CA -t - -t -t St - - LA LA LA LA LA LA LA LA LA LA LA LALA'(7' 44 LA LA LA LA LA LA LA -t 4 LA LA LA LA LA LA LA O LA LAO' NO' ' ' ' C C\1 (A LA (A S4LA44LALA4LALALALALA U) N4LA' ''N\O'U9 U) U)' NNU) - (A LALAt444LALA rx4c' CA (A C 4 CA LA LA LA xi-\'q LA LA --t N- (A A (A (A (A - LA LA LA LA LA LA LA LA LA'C) (A LA NLA ' 4 LA N U) (A (A 444 (A (A 444 LA LA LA LA LA LA LA LA '. 1. E4 rfdlr\ ' OH to HLAH (A (A - LAU)HHHOHCO4AOO' 4 -t LA LA LA LA LA LA LA LA LA ' O O '' ' H H LA -t N N N NO N N U) H 444 LA 4 LA LA LA LA LA LA LA LA LA LA LA LA ' (ACALA' LA N' Or-I 4 44#44#44#LALALALA CA #4N U) U) LA N LA LA *Q 4(A(ACA##LALALALALALALALALAO N OON(ALALAHHQO''HHO''QO (A (A (A LA LA LA 44 LA LA LA LA ' '. U) H LA N to N to 444 U) '. LA LA C H (A UN LA LA LA LA LA LA LA LA '.O to t- H C (A 4 LA '.O N U) (O' H C'J m 4 LA 1 N to ' LA LA LA LA LA LA LA LA LA LAs.O '. ' '. '. '. NO ' ' all O'O'.O' ' ' ' ' ' ' O'O' O''' ' \O'.' Hr-IH H HH Hr-I HHI-1HH r-ihhh H H H

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34 $2.27 per bale in For the same years, the United States per-bale cost was $1.17 and $2.8, respectively. The United States domestic compression costs reflected a 78 percent increase. Only Oklahoma had a higher cost of $2.5 per bale than Texas during the season. The preceding sub-cost items of (1) transportation, (2) receiving at warehouses and compresses, (3) insured storage, and (4) compression to standard density are applicable to all shipments regardless of their destination, be it domestic or foreign. DOMESTIC COST FACTORS The cost of merchandising Texas cotton to domestic outlets is made up from the expenses of the various services performed by the shipper. The largest single item during the season was the transportation of cotton to the spinner, which amounted to 37 percent of the total cost. This item was also the one which had increased the most. Compression of the bale to standard density, patching the bale and marking it was the next largest expense which amounted to 15 percent of the total cost. Both of these expenses were greater in 1969 than in the previous periods (see table 13). Overhead expenses was the next at 14 percent of the total cost. This cost had decreased from earlier years by about 4 cents. The only other item which decreased in the season in comparison with earlier years was other warehouse services (receiving, outhandling, reweighing, resampling, etc.). Compression, transportation and overhead costs represented 65 percent of the total average cost of $15.18 per bale in merchandising of Texas cotton to domestic outlets during The perbale total cost to merchandise Texas cottons to domestic outlets was only $1.35 above the figure. Two expenses remained the same in as compared with earlier seasons, and they were the selling and miscellaneous costs, which amounted to 94 and 26 cents per bale, respectively. FOREIGN COST FACTORS Cotton exported from the United States is compressed by port presses to high density. This is done for the same reasons as cotton is pressed to standard density for domestic shipments to conserve space and to lower

35 the freight cost. Table 17 gives the average cost per bale for the high density compression of cotton for the crop years 195 through 1969 for 14 of the 16 cotton states in the United States. During the 195 crop year, the Texas high density compression cost was $1.32 per bale; which increased 73 percent up to $2.28 per bale in In 195, the United States cost averaged $1.31 per bale compared with $2.37 per bale in The United States foreign high density compression costs reflected an 81 percent increase. As was the case with domestic shipments, transportation made up the largest single expense for the foreign shipments at 48.6 percent of the total cost of merchandising during the season. Ocean freight alone represented 39.2 percent ($12.43 per bale) while the expense of the freight for moving a bale to the port amounted to 9.4 percent of the total. Freight or transportation was the item which increased the most in relation to the cost of merchandising to foreign outlets as it was in domestic merchandising costs. In the sub-item expenses of merchandising to foreign outlets, none of the items remained constant for the three seasons as had been the case of two items in the domestic merchandising costs. The item of other warehouse services did decrease in the season for foreign shipments as compared with earlier periods, just as it had done with domestic shipments; and there was a slight reduction in the expense of selling from the two earlier seasons. After transportation, the other item which increased the most for foreign shipments was found to be the overhead expense. The cost of compression, transportation and overhead during the season represented 8 percent of the total average cost of $31.74 per bale in the merchandising of Texas cotton to foreign outlets. The cost was only $1.16 per bale more than the season's cost. The volume of cotton exported from the United States to various foreign countries for specified seasons is shown in table 24 of the Appendix. Of the 2,768, bales exported in the season, about 23 percent was shipped to Japan, the leading importing country, and 9 percent to India. The data in the table reflected that the volume of cotton exported, starting with the period , decreased steadily to where during only 12.5 percent was shipped to European countries. The reverse was true for the exportation of cotton chiefly to countries in

36 H 4 N çq' 4 r\' (\ N- O 4' 4 ' ( U) N- E;i g iiiiiii IIIIIIHI lii 4 C4 olt 4(\4-U)44U) O'O' C-U) Co CO CO U) 'H HHHHHHHr-IHHHC'4 tw\(\'. HC\HHU).' CO CO ( HHHHC\ZCZ C) C'Z ' U Lr ' c 'co ' ' N N 4 c\ tf\ L(\ L(\ c t1\ t(\ L(\ ct\("o' CO c N-NO ' ' C O C' N 4Lt\ HHHHHHHH CC 21 iii I I Lr L(\ C' U t' -t\ U) 8 8 r\ U) Z NCOU)U)U)U)COU)U)U)COO' C\tHC' HHHr-4HHHHHHHH ClCC\l Lct\HC' '-''OU)U) C1 z rh(t'n 't HHHHcC'JCZ 44 N U) U) CO ' 4 Lt\ N'4 C N H C N L(' H r-4h H H HC'ClC'2 i I Hill r 8 U) 1 CCOU H \' U) 4C'Z HH.C\ t\ t' N N N C-- C-- U) U) U) ' ON H H C\ 4 HHHHHHHHHHHHH C'(\1N UN 4 xnvn o'nu) HHHC'CZCl -.. ''' U) U) ' ' ' C' 4-4 'i: H L\ C-- -t' ' to c\ ' NO u 4 U 4' U) ' H HHHHHHHHHHC\ZC H C' 4 UN ' C- U) ' H C (' 4 16C\ -1 N U) ' U V\ L(\ VN 1\ Lf\ L(' ' ' ' ' -C ' ' HHHHHHHHHHHHHHt-4HHHHH - 3 *

37 the orient. The volume exported increased from 32.2 percent during the period to 87.5 percent for the season. Table 25 of the Appendix shows the volume of all cotton consumed by various countries of the world, including the United States, for periods to Percentage-wise, the United States and Russia consumed a like amount of the world's total with 15 percent each. China with nearly 14 percent and India with 1 percent were the next top leaders in cotton consumption. Japan with 6 percent ranked fifth to bring the consumption for the five countries to 6 percent of the world's total of 53,476, bales during the season. The merchandising costs varied among cotton shippers doing business in Texas. The size of the firm did not necessarily indicate a low or a high cost of merchandising. Rather, it was the quality of the cotton handled that had a direct bearing on the cost. The firms that handled the better quality (grade and staple length) cotton, in most instances, had a higher cost of merchandising than those firms that merchandised the lower grades and short staple lengths of cotton. The higher grades and longer staple lengths generated increased costs in the expense items of buying (commission), insurance, interest and exchange. This was reflected in the cost of merchandising by firms in the El Paso trade area compared with other areas covered in this study (see tables 1 and 13). SOME POSSIBLE METHODS OF REDUCING THE COST OF MERCHANDISING COTTON IN TEXAS 1. While the number of cotton shippers in Texas have decreased in recent years through reduced sales and attrition, the shippers' personnel has also declined in those firms still remaining in business. Consolidation by some shippers with other firms could, in some instances, result in the reduction of costs (due to overhead, salaries, travel, etc.), while service to their clientele would be enhanced. 2. A reduction in the cost of bagging and ties through the use of different materials than are currently utilized would reduce the cost of ginning to the producer, and could reduce the cost of production. Some of the new materials being used are cardboard, cotton fabrics, plastics, wire bands, etc. The use of some of these can reduce the

38 cost as much as $4.86 per bale or over one cent a pound on a netweight basis. This reduction would also mean reduction in the merchandising expenses of interest, exchange, etc., in the trade channels. 3. Some of these new materials utilized in bale covering are lighter in weight and would further reduce the costs involved in merchandising cotton. Certain materials amount to a savings of over 13 pounds per bale. Based on the merchandising cost for the season, this would result in a savings in transportation, interest, insurance, etc. This reduction amounts to cents per bale or $14.87 per hundred bales or domestic shipments. On shipments to foreign outlets, the savings increase to cents per bale or $55.56 per hundred bales shipped. 4. The cost of transportation (domestic and foreign) is one of the major expense items in merchandising. Since transportation requires considerable labor and costly rolling stock to move cotton, it will be a problem to obtain reduction in this cost item. However, a saving as it relates to the transportation expense could be brought about by the increased use of containers for shipping, mainly to foreign outlets. The labor cost reduction on handling containerized shipments should be substantial. In addition, contamination possibilities are minimized and an additional cost savings are possible in reduced insurance and country damage claims. The relocation or construction of cotton mills in Texas or west of the Mississippi River would reduce the cost of transportation to domestic mills by bringing them in closer proximity to the large cotton production areas. 5. The installation of automatic mechanical samplers at gins would be one way to reduce the cost of sampling, as the bales would not be sampled,, every time a bale changes ownership or when the cotton is offered for sale but not actually sold. It is safe to say that a bale of cotton consumed domestically is sampled on an average of at least five times. Those bales that are exported are usually sampled three or four additional times before they are consumed. The shortcomings of the present method of drawing a sample from each side of the bale has long been recognized. During the season, there were l,l29active cotton gins in Texas. Of this

39 number, only29 were equipped with mechanical samplers; and 17 of the 29 samplers were operated either part time or for the entire season. Because of the small number of mechanical samplers used so far, farmers, ginners, buyers, and warehousemen have had very little experience with them. Most objections to this method of sampling are based on misunderstandings. People who have handled mechanical drawn samples indicated that the samples were more representative of the entire bale because they contained segments of the bale throughout the ginning process. Too, the samples were more nearly the same size and were uniform. Unlawful tampering with the mechanically drawn sample can very easily be detected. Usually a mechanically drawn sample is cut into two or three equal parts. One sample part is submitted to the USDA classing office for Form 1 classification (green card) under the Smith-Doxey Act, the second part is given the farmer for selling purposes, and the third part is retained in case of "review classification." This means that all of the parts of the mechanical sample are representative of the bale as originally sampled. The United States bale of cotton has long been criticized for its poor appearance resulting from the repeated sampling. A certain amount of contamination results from exposure of the cotton when samples are cut, and the fire hazard is greater than on uncut bales; the use of an automatic sampler would help to eliminate this. 6. The installation of standard density presses in cotton gins would be another way to reduce marketing costs. In , there were only 26 of 1,129 active gins in Texas equipped with standard density gin presses. Twenty (2) of these presses were located in the Pecos- El Paso area of the state. The cost of compression of the bale to standard density could be eliminated before the cotton moved to the domestic mill or port for exportation. Thus the bale would not have to be pressed at an inland compress and could move directly to the domestic mill or port saving time and expense. A savings on the cost of transportation from the gin to the next step in merchandising might also be realized

40 7. The method of harvesting cotton, although not a direct cost of merchandising, does enter into the cost in the marketing system. Data show that various cottonseed breeders are developing improved varieties of stripper-type cottons. Some areas of the state where machine-picked cotton has been prevalent are reportedly changing to machine stripping. This method of harvesting is less costly than machine picking. In addition, the machine and its upkeep are less expensive. However, there are other factors to weigh before making a change-over. One must consider the amount (in weight) of foreign material harvested by machine stripping compared with machine picking. In a normal harvesting season, it requires an average of about 2,3 to 2,5 pounds of stripped cotton to turn out a 5-pound bale compared with 1,5 to 1,6 pounds of machine-picked cotton for a bale of similar weight. In some years, however, depending on the weather, up to 4, pounds of cotton (and trash) or more would be required to turn out a 5- pound bale. This example indicates the increased cost of ginning a machine-stripped bale compared with a machine-picked bale. Based on a ginning charge of 75 cents cwt (seed cotton) would mean at least $6. a bale increase in the cost of ginning the stripper-harvested bale over the cost of machine-picked cotton. In addition to the increased cost of ginning a stripper-harvested bale, the quality of the cotton from this method of harvesting also must be considered in determining the method of harvesting to employ. The grade, staple length and micronaire readings, the three factors presently used in pricing cotton, are definitely affected by stripper harvesting. The chief reason for the lower quality is primarily the result of mixing immature top crop cotton with the mature bottom crop. In many instances, this method of harvesting will cause grass, bark and other foreign matter to be included in the harvested cotton. In classing this cotton, grades are usually reduced one or more grades because of the foreign matter, and of course the value of the bale is further reduced

41 8. Cotton has been grown, traditionally, in rows spaced 32 to 42 inches apart. Row widths of 4 inches were standardized for uniformity in mechanization of all production operations. During the past 15 years, much research has been done on narrowrow cotton production, which had its start in 1954 at the Texas Agricultural Experiment Station near Lubbock, Texas. In 1969, the cooperative off-station narrow-row cotton pilot study was conducted over a 1-county area. Twenty-two plots were planted in 18 test locations. Comparisons with 4-inch rows were made for some locations. Yields of narrow-row cotton exceeded that of 4-inch row cotton by 12 percent when totaled across all locations where comparative yields were available. The growers' income from narrow-row cotton also exceeded that from 4-inch rows by an average of *1.85 per acre. No differences were found in fiber quality. The primary objective in narrow-row production is to reduce production costs through reduced tillage operations and rapid harvest, yet maintain yield and fiber quality. Considerable more acreage will be devoted in the future to narrow-row cotton production as many cotton-producing states feel that the narrow-row, high population, once-over harvest cotton production is the one way to reduce production costs, and the only new hope for future cotton production. 9. The concept of central ginning (operation of one ginning plant in an area for a longer period of time than several plants in the same area are currently being operated) would reduce the cost of ginning per bale. This central ginning concept could be augmented with the use of field seed cotton storage extending the ginning season and further reducing cost of ginning. This reduction in ginning cost would tend to increase the actual income to the producer and reduce the cost of producing the cotton, which in turn would mean less merchandising cost to the shipper for such items as interest, exchange, insurance, commissions, etc

42 The above listed items, with their brief explanations, may not all directly affect the merchandising cost of cotton, as some have beneficial indirect relationship with cotton's cost and its continued movement through the marketing system. While changes are necessary to overcome or reduce some of the high costs of merchandising, there will be some in the trade that will offer strong opposition to change in any form. One thing is certain the entire cotton industry must work together and take a long hard look at changes and possible improvements if the United States cotton industry is to remain competitive with other fibers

43 APPENDIX

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50 Table 2. PRODUCTION AND PERCENTAGE DISTRIBUTION OF COTTON BY REGIONS, UNITE) STATES, THROUGH SEASONS Production 1/ Percentage of United States South- Delta South- South- Delta South- West west States east United West west States east United Seasons 2/ 3/ 4/ 5/ States 2/ 3J 4/ 5/ States ,523 3,171 3,495 1, ,223 4,724 3,78 12, , ,787 5,17 18, ,571 3,7 11, , ,52 111, ,36 4,122 3,54 12, , ,417 1, ,746 5, , , , ,138 11, , , , ,716 9, ,412 2, , , ,532 3, ,536 14, ,65 4,878 2,512 16, , ,669 1, , ,34 15, ,98 4,72 5, , ,166 4, , , , ,57 2,24 13, ,52 5,313 2,75 14, , , ,1 1,52 1, , , , ,84 4,448 1,934 14, ,155 4, , ,128 5, , ,753 5,423 2,328 15, , , ,34 5, , , ,5 1, , Thousands of 5-pound gross weight bales. / California, Arizona, New Mexico, and Nevada. / Texas, Oklahoma, and Kansas. / Missouri, Arkansas, Tennessee, Mississippi Louisiana, Illinois, and Kentucky. J Virginia, North Carolina, South Carolina, Georgia, Florida, and Alabama. Reference (7,8)