Getting the Best Possible Price for Our Members’ Cotton
By John Johnson
Selling cotton is not as simple as it may seem. It is a complex and detail-oriented process, much like an airline pilot’s pre-flight checklist. At PCCA, selling members’ cotton is all about getting the best possible price, ensuring profitability on each sale and managing risk.
Almost every workday begins with a meeting of the marketing staff to review and discuss inquiries, the previous day’s sales, current cotton prices, and government reports. Daily newsletters and comments by private market analysts also are reviewed to determine the market environment for that day.
Preparing the pool cotton to be delivered to PCCA is an involved process managed by the cooperative gins and assisted by PCCA’s Grower Services Department. When the bales are invoiced by the local coop gins, the cotton then appears in the Marketing Department’s inventory the next morning.
“In the middle of the harvest season, we may receive invoices for 30,000 to 35,000 bales overnight,” says PCCA Director of Sales Grady Martin, “and on occasion we have received as many as 60,000.” The bales then are segregated according to sales commitments, types of sales, whether the cotton is in the loan or not, delivery period, and quality.
“It may take three to four hours for three members of our marketing staff to segregate the cotton into recaps,” says Chris Ford, Domestic Sales Manager. “We look at each bale and decide where it needs to go.” At PCCA, cotton is marketed via three types of sales.
An equity sale can be made to a cotton merchant prior to harvest for a specified number of bales at a fixed equity above the loan value. Upon receipt of the cotton, PCCA places it in the CCC loan program, receives the equity payment and transfers the option to redeem the cotton to the merchant who will ultimately decide when the CCC loan is repaid.
Another type of sale is for a fixed price where PCCA collects the full cash value at the time of invoice for cotton not in the CCC loan. The third type of sale is an unfixed on-call transaction usually made directly with textile mills. PCCA fixes the basis (value) above or below a specific cotton futures contract, and the buyer chooses the futures price when it reaches the desired level to complete the transaction. To manage its risk, PCCA offsets these sales by selling futures contracts. Each type of sale can be based on specific qualities or on an “average of the crop” which allows merchants to build up an inventory they can sell to mills at a later date.
Selling PCCA members’ cotton may begin months before the crop is planted as staff seeks to take advantage of prevailing price levels and guarantee profits in a highly competitive world market. Due to the potential impact of weather on cotton yields and quality, forward sales are carefully managed and are the first to be filled when bales are invoiced. After forward sales are filled, the marketing staff begins sending recaps to its commissioned agents around the world.
“We send our recaps and offers to approximately 20 to 25 of our agents each day at 5:00 p.m.,” Martin explains, “and they forward those to textile mills in their countries.” The recaps are compiled based on knowledge about each mill’s quality requirements for the types of yarn they are spinning. Thus, the opportunity to complete a sale is enhanced. Since the agents receive a commission on each sale, PCCA has no overhead expenses for salaries, office rental, etc.
Frequently, foreign mills will evaluate PCCA’s offers and recaps and begin negotiating the price, delivery period or quality by returning a bid via the cooperative’s agents. Due to time zone differences, bids or inquiries may be received at any time, day or night, according to PCCA’s Export Sales Manager Carlos Garcia.
“Most negotiations with customers in Latin America occur during normal business hours,” Garcia explains, “and we usually communicate with Turkish customers during early morning hours here in Lubbock.” Negotiations with Far East customers, on the other hand, typically happen after PCCA’s business hours.
“Our agents and customers in the Far East usually try to communicate with us between 7:00 and 10:00 p.m.,” Garcia says. “As a courtesy, they try to do it before 8:00 p.m.,” he adds. “During the busiest time of the season, we may hear from agents or customers two to three times per night, and sometimes it can be at 2:00 a.m.” Consequently, Garcia keeps his cell phone and lap top computer at his bedside to log into PCCA’s systems when he receives a bid or inquiry. In addition to export sales, PCCA maintains a merchandising program, a feature upon which the cooperative was founded in 1953.
Merchandise Manager Mike Canale focuses his efforts almost entirely on The Seam to buy cotton from members who use the online system to market their crops. Because Canale competes with up to 100 registered buyers on The Seam’s system, he must pay a competitive price while looking for opportunities to combine the cotton into lots that are more attractive to other buyers and will command a higher price. Thus, the merchandising program generates additional revenue that can be paid as a dividend to non-pool PCCA members. It also provides market information to help members selling their cotton on The Seam to offer their cotton at the best possible price. Meanwhile, the price information can be used by the rest of PCCA’s sales staff as they send offers to domestic and foreign customers.
Once Canale completes a transaction on The Seam, he notifies Sales Administrator Ken Spain who executes cotton futures orders to hedge PCCA’s position and manage market risk in order to obtain the most return in members’ equities.
“When Mike buys cotton on The Seam, I call one of our brokers to sell futures and hedge the position,” Spain says, “and when he sells the cotton, we buy back the futures.” Spain uses the services of several brokers to maintain confidentiality of PCCA’s marketing strategies. At the height of the season, he may call brokers six to seven times per day. He also executes sales and purchases of futures options to hedge pool sales. Thus, he may have to execute the orders at night when export sales are made to Far East customers.
“After business hours, I always have my iPad with me because the futures market opens at 8:00 p.m. central time,” he says. Spain’s other duties include updating the adjusted world price on PCCA’s system and sharing other market information via Grower Services for members who sell their cotton on The Seam. He also prepares monthly futures reports for the cooperative’s Accounting Department and sends required export sales and shipment reports to the U.S. Department of Agriculture.
After each export sale is negotiated, a contract is written and sent to the appropriate agent after it is reviewed by seven members of the Marketing Department staff to ensure accuracy. Any mistakes can result in penalties that impact the profitability of the sale. The contract specifies:
Number of bales
Growth and crop year
Rules and arbitration
Marketing millions of bales of cotton produced by PCCA members each year is a daunting, time consuming task. It takes a dedicated team of skilled professionals studying the market on a daily basis, negotiating with customers, and managing market risks. The logistics of shipping cotton to customers is another critical factor in marketing. At PCCA, this function is performed by the Traffic and Invoicing Department.
“Everything we do is focused on getting the best possible price and adding value to PCCA members’ cotton,” says Vice President of Marketing Lonnie Winters. “It is the reason this cooperative was founded, and we never lose sight of that.”