Plains Cotton Cooperative Association Business Information, Profile, and History

Company Perspectives:

The Plains Cotton Cooperative Association mission is to add significant value to the cotton marketed for our members by being the supplier of choice to our business partners in terms of quality, service, and value.

History of Plains Cotton Cooperative Association

The Plains Cotton Cooperative Association (PCCA) is one of the largest cotton handlers in the United States, representing 2.5 to 3 million bales annually, from 15 to 18 percent of the nation's total cotton crop. Marketing services to cooperative members include electronic marketing via TELCOT and The Seam, pool marketing, and crop contracting. The PCCA serves more than 28,000 stockholders in Texas, Oklahoma, and Kansas, with field offices, and warehouses in Oklahoma and Texas, and affiliated cotton gins and compressors throughout member territory. The PCCA operates two denim mills, the American Cotton Growers plant in Littlefield, Texas, and the Mission Valley plant in New Braunfels, Texas. The company's finished denim products are promoted through sales and marketing offices in New York and San Francisco.

1953 Formation of Cooperative Helpful to Cotton Farmers

With combined funds of $12,000, a group of cotton farmers formed the PCCA in 1953 to provide an outlet for obtaining the best price in the cotton trade. The member-owned cooperative brought together cotton farmers of the high plains of Texas, to the south, east, and north of Lubbock. The affiliation of cotton gins and compressors with PCCA streamlined the process of transforming cotton from the field, through ginning and baling, and then storage until purchased by textile mills or cotton merchants.

Formation of the cooperative provided a platform for marketing cotton, using a trading dynamic similar to that of a stock exchange. A regular offer allows buyers to bid blindly on a cotton lot offered for sale, with product going to the highest bidder, bidding occurring within a limited period of time. A firm offer provides buyers with an opportunity to evaluate the lots of cotton offered before making a selection based on a firm price; counter offers are allowed. When hedging the future price of cotton is desirable, the PCCA offers crop contracting. Under a crop contract the PCCA establishes a minimum price based on specified acreage, irrigated cotton preferred. The PCCA took responsibility for the contracts, acting as principal, marketing contracts to cotton buyers, and handling payments. Although crop contracts do not rely on margin futures or guaranteed quantity, the program has drawbacks. For instance, premiums for high-quality cotton are rare and the contract price is not guaranteed.

The PCCA's success in obtaining good prices for cotton and in providing services attracted cotton farmers, ginners, and compressors to the organization. In 1963 the cooperative extended membership to cotton producers in the rolling hills area to the west, northwest, and southwest of Lubbock. This essentially expanded PCCA territory to all of west Texas, an area referred to as "the world's biggest cotton patch."

In 1973 the PCCA assisted in the formation of the American Cotton Growers Association (ACG), a farmer-owned cooperative, also serving west Texas cotton producers. The intent of the organization was to provide pool marketing and to improve the ginning, processing, storage, and general management of the pooled cotton supply. ACG began construction on a cotton textile mill in Littlefield, Texas, north of Lubbock, in 1975. Under PCCA management, the mill went into production the following year. Applying state-of-the-art technology to produce optimum yarn strength, ACG manufactured heavyweight denim exclusively for Levi Strauss & Company; ACG shipped fabric to jean manufacturing facilities in the southwestern United States and worldwide.

1970s and 1980s: Development of Electronic Marketing Systems

During the 1970s and 1980s PCCA transferred its system of cotton trading, used for decades, to an electronic platform. In 1975 the PCCA introduced TELCOT, a computer-based system that allowed buyers and sellers to trade cotton in a central place. In addition to simplifying transactions, TELCOT extended the reach of PCCA marketing capabilities to additional cotton merchants and textile mills. The system incorporated all existing trading options and improved on them. The PCCA formed TELMARK, Inc. in 1985 to provide TELCOT services to independent ginning outfits and cotton producers in Texas and Oklahoma. This extension of the system increased its sales volume, thus lowering operating costs. TELCOT's effectiveness in facilitating the cotton trade earned it the title, "Window of the Marketplace."

The PCCA also introduced an Online Gin Bookkeeping (GBK) system. GBK replaced paper bookkeeping with an electronic system designed for cotton gins. In addition to regular payroll, financial statements, and tax accounting applications, the system included special features like Bale Accounting.

In February 1989 TELCOT processed the trade of 385,599 bales of cotton in a single day, a record that signaled the need for improvements to make the system more efficient. That year PCCA enhanced the TELCOT system with the Electronic Title System (ETS). ETS eliminated the need for paper warehouse receipts by recording all transactions electronically; it also facilitated shipments to textile mill customers. The system provided economic benefits as it reduced costs for gin operators and cotton buyers.

1987: Introduction of Pool Marketing

In 1987 PCCA purchased the denim cotton mill from ACG. The mill brought more than $100 million in revenue to PCCA members in west Texas and, by this time, southwestern Oklahoma. Acquisition of the mill provided security that the mill would remain in operation for the long term under regional cooperation. The acquisition furthered vertical integration of cotton processing, from cotton field to textile market, by adding the textile mill process. With new competition from overseas cotton producers, the mill provided a sure outlet for PCCA member cotton as well.

Along with the acquisition of the mill, the PCCA introduced pool marketing to its members as an alternative to regular trade and crop contracting. Pool marketing, already available to ACG members, involved combining cotton from various producers and marketing it as a group. Not only did the pool provide baling, storage, and stock management, the division employed professionals to sell the cotton for participants in the program, allowing farmers to focus on the work of cotton production. Sales occurred before, during, and after the harvest, and hedging through futures and options could be utilized to minimize risk. With the aim of obtaining a good average price, the program provided year-round income for farmers through an advance loan payment prior to harvest and a year-end dividend; general book credits provided savings to offset potential losses. Members participated through a perpetual marketing agreement, with a sign-in and sign-out period of one month offered annually. A committee of elected members provided oversight of pool marketing activities.

The PCCA introduced the Mill Option Program, allowing members to obtain earnings from the profits of the mill. Participation involved a perpetual marketing agreement, with a sign-in and sign-out period from April 1 to June 30 each year. Under the program the PCCA withheld a capital retain of $5 per bale of marketed cotton. Returns from mill earnings were shared on a per unit basis.

In 1988 the PCCA extended its services to cotton producers in south Texas. South Texas encompassed five geographic regions: the Lower Rio Grande Valley along the border with Mexico; Winter Garden south of Uvalde; the Coastal Bend at Corpus Christi; the Upper Coastal Bend at El Campa and Danevang, southwest of Houston; and the Blacklands of central Texas. Members in these areas participated in all PCCA programs.

Late 1990s: Years of Uncertainty for U.S. Cotton Producers

During the late 1990s foreign competition in cotton apparel and textiles increased, leading to market overstock and lower prices. The 1997 Asian financial crisis and the devaluation of currencies further intensified competition, as pricing of imported fabrics cut into the U.S. market share. Export buyers found the overseas markets more difficult to maneuver as well. Another concern in the cotton trade at this time involved a market oversupply, with more cotton being produced than consumed, causing a decline in mill use and high carryover stock from the previous year.

The PCCA addressed member concerns about the cotton market by implementing a "20/20 Vision Equity Plan" to improve cash payouts to cooperative members. The goals of the program were to achieve a 20 percent return on equity and a $20 per bale cash payment at the end of each fiscal year. Cash distribution occurred in January, based on the previous year's crop pools, and at the end of the June 30 fiscal year, based on total net margins. The PCCA surpassed its 20/20 Vision goals in 1997. The PCCA reported net margins of $27.4 million and the denim mill alone contributed $17.7 million from net margins. Total cash distribution of $34 million included $13.4 million in dividends, $17.1 million in stock retirements, and $3.5 million in retirement of per-unit capital retains.

Another uncertainty entered the picture when Levi Strauss informed the PCCA and other textile producers that it would no longer guarantee volume purchases of fabric. The ACG mill produced 36 million yards of heavyweight denim annually, almost exclusively for Levi Strauss. The change meant that the PCCA had to compete in the open market for business from Levi Strauss and find other customers.

In order to expand the ACG mill's manufacturing capabilities and attract new customers, the PCCA purchased Mission Valley Textiles, northeast of San Antonio, for $25 million in May 1998. The textile mill, renamed Mission Valley Fabrics (MVF), brought one of the leading producers of yarn-dyed woven fabric under PCCA control. With 18 million yards in annual capacity, including broad width textiles, MVF produced more than 100 different fabrics for use in making apparel, upholstery, and home textiles. MVF provided needed versatility, including the ability to produce short runs for special orders. The nature of MVF business differed from ACG in that it required a sales and marketing team to attract buyers.

The PCCA combined the capacities of the MVF and ACG mills to create a full line of denim in light-, medium-, and heavyweight fabrics. ACG wove denim with ring-spun yarn produced at MVF. The new denims were directed to the market for fashion-forward fabrics in ripstop, bleached, and rinsed looks.

To accommodate variable market demand and provide capacity for different shades of indigo and different colors of denim fabric, as well as different fabric weights, the PCCA upgraded ACG's mill equipment. The cooperative replaced 247 looms with 81 state-of-the art airjet looms, providing improved denim quality and lower production costs with speedier equipment. A second dye was added, to provide flexibility, particularly for small lots. One dye range could be prepared while another machine was in operation. Other equipment upgrades included automated mixing at the eight vats. Production expanded at ACG's Littlefield mill in June 1999.

In November the PCCA began an $11 million upgrade of equipment at the MVF mill. The cooperative replaced 202 looms with 77 state-of-the-art rapier and airjet looms; these operated at more than triple the speed of the old looms. With the new equipment and the 22 looms retained, the facility had the capacity to produce 16 million yards of fabric annually. Upgrade of the facility was completed in May 2001 with the installation of new cards, draw frames, ring-spun, and roving equipment.

By the spring of 2000 the PCCA realized the difficulty in finding customers to replace business lost from Levi Strauss. With competition from less expensive imports, denim prices were low and denim production in North America was at 15 to 20 percent overcapacity. The sales and marketing team from MVF introduced a "trend service," displaying the new denim styles at trade shows in Europe and Tokyo. Growth in the home fashions market in 1999 prompted the PCCA to place greater emphasis on home fabrics.

Pool marketing increased dramatically during the late 1990s, as farmers sought to reduce the risks involved with an uncertain market. Since it was implemented at ACG, pool marketing had proven itself a safe alternative to the open market. By 2000 pool prices averaged higher than nonpool prices for 23 out of 24 years.

As pool marketing became a more attractive marketing alternative, PCCA members used the TELCOT system less, making it less cost-effective. In May 2000 PCCA formed a joint venture to transfer TELCOT to an Internet platform for trading cotton and cotton products and services online. Participants in the joint venture were cotton merchants Allenberg Cotton Company, Dunavant Enterprises, and Hohenberg Brothers. Avondale Mills and Parkdale Mills, the nation's largest users of cotton for textile manufacturing, joined the venture in June. With 175 cotton gins with 53 U.S. cotton buyers using the TELCOT system at this time, the PCCA provided the volume of trade needed as a foundation for expansion through the Internet. The presence of large merchants and textile manufacturers in the venture was intended to attract cotton producers.

The new company, named The Seam, was formalized in November and online trading began in December. The Seam provided access to more cotton trading opportunities through a larger number of cotton buyers, providing more competitive prices for cotton and a more efficient transference of cotton from field to merchant or mill. A business-to-business site allowed for anonymous cotton trading among cotton merchants.

Worsening Situation, Followed by Improvement: Early 2000s

A slow economy in the United States exacerbated the problem of competition from imported fabrics. With Asian currencies at 40 percent below previous values, the United States experienced a dramatic increase in imported textiles in 2000. In 1999 and 2000 the textile industry cut 55,000 jobs nationwide. Congressional action on behalf of the textile industry was not sufficient to offset the PCCA's decline in sales, particularly in home fabrics. Hedging proved ineffective and low cotton prices caused farmers in west Texas and Oklahoma to abandon their crops.

In fiscal 2001 the PCCA reported its first net loss since 1985. Although the PCCA expected sales of $50 million from the MVF mill, decline in textile sales and expenses of mill conversion contributed to the loss. Loss allocation from the Textile Division was taken against book credits of members participating in the mill option since 2000; members reported the loss as a tax deduction. Other PCCA losses were allocated to a reserve fund of $7.5 million in nonpatronage income.

During the summer of 2001 the PCCA began converting the MVF facility to all denim production to meet increasing demand from Europe. The change required the cooperative to eliminate 370 positions in sales, management, and production, retaining 40 percent of the workforce. Supervisors handled the movement of equipment to reduce expenditures. The worsening U.S. economy after the attacks on the World Trade Center and Pentagon required the layoff of an additional 130 employees in November 2001. Foreign competition and a slow denim market could not sustain production.

At the MVF mill, the PCCA maintained operations that served customer needs, including production of ring spun yarn and finishing 68-inch-wide denim produced at the ACG plant. MVF closed the Creative Textiles warehouse and moved its textile inventory to vacant space at the MVF mill. The decision to retain some operations at MVF proved wise as the PCCA exceeded its product quantity sales goals in 2002. Denim prices remained low, however, and the Textile Division reported another loss at the end of fiscal 2002.

After a period for cotton producers that the PCCA likened to the Great Depression, the denim market improved. The PCCA continued to develop denim styles with new dye methods and finishes, as well as a new stretch Lycra and cotton blend fabric. In late 2002 Levi Strauss placed new orders for denim with a new flat finish for its Type One jeans. Levi Strauss also introduced a new Signature brand line of low-priced denim clothing for exclusive sale at Wal-Mart stores beginning in July 2003.

Principal Divisions: Marketing Division; Pool Division; Electronic Marketing Division; Textile Division.

Principal Competitors: Calcot, Ltd.; Cargill, Inc.; Dunavant Enterprises, Inc.; Staple Cotton Cooperative Association.

Chronology

• Key Dates:
• 1953: Plains Cotton Cooperative Association (PCCA) is founded.
• 1963: The Association expands to include cotton farmers in the rolling hills of west Texas.
• 1973: ACG is formed to provide pool marketing to west Texas and Oklahoma cotton producers.
• 1975: The TELCOT electronic cotton marketing system is launched.
• 1976: ACG begins production at the denim cotton mill managed by PCCA.
• 1987: PCCA acquires the ACG denim mill.
• 1997: The Asian financial crisis lowers the price of cotton imports and intensifies competition.
• 1998: The PCCA acquires the Mission Valley textile mill.
• 2000: The Seam transfers the TELCOT system to the Internet, expanding the geographic reach of the cotton trade.
• 2002: Denim manufacturing rebounds, although prices remain low.