Calcot Ltd. Business Information, Profile, and History

Company Perspectives:

Calcot has evolved as agriculture has evolved. We have fewer members today than we did in 1960, but we handle more cotton. There are fewer farms, but they are larger. That has made competition for marketing their production more intense and while it has not made cooperatives less important, it has changed the nature of the original idea--that of representing the small grower in a world dominated by a few buyers&mdashø one of partnership, operating as the direct marketing arm of growers' individual operations, providing first rate service at the lowest possible cost, allowing the grower to keep more of the actual selling price of their cotton, rather than paying a middleman to handle the risk.

History of Calcot Ltd.

Calcot Ltd. is one of the largest cotton cooperatives in the United States, with average annual sales between $650 and $700 million. It is cooperatively owned by approximately 2,200 cotton farmers in California and Arizona, and it sells about 1.6 million bales of raw cotton annually. Calcot markets 40 percent of all the cotton grown in California and more than 60 percent of the cotton grown in Arizona. It sells its cotton to customers in approximately 40 countries, most of which are located in Asia. Since 1999, Calcot has also represented almond farmers.

Cotton farmer Frank Green, a former Army officer and lawyer, first had the idea of organizing a cooperative for cotton growers in California's San Joaquin valley in 1926, after the Capper-Volstead Act of 1922 gave farmers the right to band together without violating anti-trust laws. Cotton had been grown in California for many years, and the cooperative was seen as a way of alleviating a number of problems faced by the state's cotton farmers, including high labor costs, uncertain supplies of water, and, in particular, dependence on powerful cotton firms who controlled cotton prices. The cooperative, as Green proposed it, was to be a non-profit entity organized by and operated for the benefit of cotton growers themselves and would thus assure growers the best price possible for their crop.

In February 1927, 151 growers met in Delano, California, a farming community about 30 miles north of Bakersfield, and unanimously approved the terms for a co-op called the San Joaquin Cotton Growers Association. By late summer 1927, the Association had 500 members representing about 40,000 acres. An important incentive for growers to join the Association was its loan program, offering 6.5 percent interest instead of the eight percent demanded by banks. It also instituted a program whereby members could sell part of their crop in advance to raise money for growing and harvesting in the coming season. A major flaw in the early organization, however, was a loophole that allowed members to deliver as much or as little of their cotton crop as they wanted--or even none at all&mdashø the Association, though the negative implications of this situation did not become apparent until years later. In its first year of existence the Association handled 10,000 bales of cotton.

Following a bad 1928-29 harvest, Association members voted to sever ties with a Los Angeles cottonseed company that had helped finance its loans. As a result the cooperative formed its own finance arm, the California Cotton Growers Finance Company, which was capitalized for $200,000, money advanced to farmers for the 1929 crop. At the same time, the Association changed its name to the California Cotton Growers Association.

Depression in Cotton Markets

The 1929 harvest was a good one. Unfortunately, in a market glutted with cotton, prices fell and were driven down even further by the onset of the Great Depression at the end of the year. As the Depression worsened, Association members became increasingly dissatisfied with Green's leadership. Although he initiated a plan for surviving the crisis, including partnering with the American Cotton Cooperative Association (ACCA) and adopting a new name: California Cotton Cooperative Association (CCCA) to emphasize their cooperative status. The plan was adopted, but members remained unhappy with Green's leadership, and in June 1930 a new president, J.W. Guiberson, was elected by the Association's board of directors. However, Guiberson refused to take office due to the disarray of the organization's finances. In September, C.O. Moser, of the ACCA in New Orleans, was brought in to lead the California cooperative. After studying the situation, Moser recommended strengthening the membership agreement which, he said, would result in reasonable volumes of cotton reaching the Association.

Despite the bad economic time, the Association, now known as the CCCA, processed more than 40,000 bales and paid more than $2.4 million to its members in 1930. It also named a new president, Clarence Churchill Selden, a successful cotton merchant, who instituted a series of cost-cutting measures. He also persuaded the Board to move the Association's headquarters from Delano to Bakersfield, a move that finally took place in late 1931, a year of legal strife.

By 1933, the CCCA was handling 25,000 bales annually, about 20 percent of the San Joaquin valley's total production. It was debt free and had about $23,000 in the bank. The CCCA acquired member cotton through open bidding and advanced growers the price the ACCA was paying. Baled cotton was classed as soon as it arrived from the harvest. Previously farmers had been paid a standard price regardless of the quality of their cotton. Grading thus enabled farmers to get the best, fairest price possible.

As the Depression wore on cotton consumption declined while cotton availability increased. Prices plunged, eventually reaching five cents a pound in 1933. The same year cotton pickers went on strike for higher wages. Encouraged by Lloyd Frick of the San Joaquin Valley Labor Board, growers resisted. Violent clashes ensued, but eventually the pickers lowered their demands. So impressed was the CCCA with Frick's leadership, he was voted president, beginning an association that would last 38 years.

In 1935, CCCA initiated its own ginning program, which further eroded the control cotton companies had over growers. Unfortunately, the ACCA refused to extend loans for the program and the CCCA was forced to find its own financing. The following year relations between the two groups were further strained when the ACCA tried to block the CCCA from giving its manager C.C. Selden a $1,000 raise. By 1937, CCCA's situation had stabilized. It handled a record 130,000 bales and could offer members a complete package of services, including advances, hedges, ginning, and government loans. That year, the situation was reversed and the ACCA came to the CCCA for financial assistance. Its request was refused. Finally, in August 1939, CCCA's board resolved to create its own independent financial structure and separate itself completely from the national organization.

Struggling into the 1940s

During the 1939-1940 cotton season new procedures were put in place for purchasing cotton from CCCA members. Unfortunately they could not be fully implemented until the end of the summer, and by then it was late to start making sales arrangements. It soon became a disastrous situation for the Association. By November 1939, when mills had already purchased the cotton they needed through January from other sources, CCCA had sold only 700 bales. By January, they had sold only 4,200 of 32,000 bales they had on hand. Growers, angry because they had yet not received their promised advances, threatened to sue. In February business was so bad that Selden asked the board to consider disbanding the CCCA entirely, a move that was unanimously rejected.

The cotton economy turned around decisively when the United States entered World War II in late 1941. Enormous quantities of cotton were needed for the war effort, for uniforms, blankets, bags, and tents. The government called on cotton farmers to increase their production. Nonetheless, despite the good times, the CCCA continued to struggle. Although California cotton production reached about 600,000 bales in 1945, the CCCA never sold more than 30,000 bales any year during the war. One thing that hampered the Association was its inability to borrow enough money to purchase reasonable amounts of cotton from its members. There was also the perennial problem of members not delivering to the cooperative the portion of their crop they had contracted for. Yet another problem was low storage capacity. However, when members were polled whether the CCCA should obtain its own warehouse, the response was a resounding negative.

All was not well at the CCCA. In 1942, Selden announced significantly lower overhead and a $175,000 profit. Two years later, though, auditors discovered that the CCCA's bookkeeping was faulty, which resulted in a loss of $192,000 for the 1943-44 season. Selden died later that year after a prolonged illness and was replaced by J. Russell Kennedy. Kennedy proved to be a dynamic, innovative executive, who would put the CCCA firmly on its feet again. The son of Texas cotton farmers, he was sympathetic to the problems growers faced; as a former USDA cotton specialist he knew his way around government programs. His first act was to sell off all of CCCA's cotton inventory to pay off its debt and finance the coming cotton season.

Postwar Regrouping

California experienced a postwar boom that affected the entire agricultural sector. Expanded irrigation in the state was added to the changes cotton farming as a whole was undergoing with the introduction of advanced practices and such modern equipment as automatic harvesting machines. Cotton acreage in the state exploded. In 1944 Kennedy introduced a plan for the CCCA that was radical in its simplicity and returned the Association to its original purpose as a cooperative working for its members. Under the plan, the CCCA would no longer bid for member cotton like other cotton buyers. Instead the cooperative would take member cotton, market it, and return the money to the growers. Growers would get payments when the cotton was ginned; that money would be an advance on the final income. Kennedy also cut the cooperative's staff and forged closer ties with cooperative gins in the San Joaquin valley, which strengthened the cooperative nature of the entire cotton industry there.

In 1947 the California cotton crop was worth $157 million. It had become the state's top income-producing crop, surpassing even citrus. Cotton's phenomenal expansion brought the CCCA a new set of problems. In particular, warehouse space was suddenly at a premium. Before the war, the CCCA had warehoused its inventory at sites throughout the United States; Kennedy had centralized them all in a warehouse in Galveston, Texas. Finally, in 1947, the CCCA built its first warehouse on land purchased near the Bakersfield headquarters. In 1948, when production expanded even more, six more storage facilities were built.

Expansion into Europe and Arizona

CCCA processed 13 percent of California's total production in 1949: 123,000 bales, up from only 30,000 five years earlier. Kennedy toured Western Europe that summer, touting the state's cotton and signing up new customers in Britain, France, Germany, the Netherlands, Belgium, and Switzerland. In 1952, despite the new warehouses added every year since 1947, space was still a problem. It was solved in an unexpected way when it was noticed that smaller bales processed in a new compress enabled the cooperative to store twice as much cotton in its existing space. Moreover, the new process made it possible to get cotton to market more quickly because it bypassed other compressing.

The board changed the cooperative's name to Calcot Ltd. in 1953, a change members formally approved in 1956. In April 1955 Lloyd Frick expressed the desire to retire from the presidency, an office he had held since 1933. Rather than lose his experience, Calcot created a new position for him, chairman of the board. At the same time, the manager title was changed to president and chief executive officer.

By the mid-1950s, Arizona cotton farmers had expressed an interest in forming their own cooperative based on the Calcot model. When they realized what it would take, financially and administratively, to start their own association from scratch, they asked to be allowed to join Calcot themselves. The Board agreed on the condition that Arizona farmers deliver at least 25,000 bales to the cooperative annually. Uncertain at first--until then they had never harvested more than 10,000 bales a year--Arizona agreed. They ended up sending 40,000 to Calcot, and the following year the cooperative built its first Arizona warehouses in Phoenix.

The cooperative was entering a period of prosperity. In 1956-57, Calcot handled a record 459,000 bales, nearly 25 percent of California's crop and 12 percent of Arizona's. In March 1959 the cooperative dedicated a new headquarters building in Bakersfield. By the 1960s, Calcot agents were active in 23 countries throughout the world. In 1963 it sold its largest single block to date, 60,000 bales that went to a U.S. mill. In 1965, the cooperative had 54 permanent employees, 148 warehouses and 4,000 members, who delivered a record 837,000 bales.

Threats and Advances during the 1960s

Synthetic fibers such as rayon had been on the rise since the mid-1950s and in the 1960s became a serious threat to cotton. As a result of the growing popularity of synthetics, the total U.S. cotton market experienced a decline of 300,000 bales in 1962. By 1964 the total pounds of synthetics and cotton used in the United States were equal, and the following year the amount of synthetics used by American textile mills surpassed cotton. To combat the ascendancy of synthetics, Calcot considered expanding its activities in the textile marketplace into spinning, weaving, and promotion to the retail level. Ultimately, however, the cooperative decided to remain within its core competencies.

Calcot continued to modernize its processes throughout the 1960s. In 1965 it introduced an automatic sampler which removed a small portion of lint from a bale for sampling. This did away with over-sampling, which the cooperative estimated accounted for thousands of dollars in losses by members every year. By 1968 cotton was analyzed by optical devices which fed their results to a small computer. Computers also expedited the handling of cotton in Calcot's warehouses. More and more often truck transport was used instead of rail, while foreign orders were containerized before being shipped.

A jump in cotton prices in the fall of 1967 caused many growers to sell cotton they had promised Calcot to outside buyers, and the cooperative realized it had to further tighten its marketing agreement with members. A five dollar penalty was established for every undelivered bale; in extreme cases, membership could also be terminated. At the same time, Calcot began developing alternative marketing options for its members. It resurrected the 'call pool' which allowed growers to anticipate price rises and determine their own prices instead of relying on Calcot's marketing department do it.

In 1972, following Russell Kennedy's retirement, Calcot made its first inroads into the Eastern European market, resulting in sizable purchases by both Romania and Poland. In 1973 Calcot was the first Western cotton company to sell directly to the People's Republic of China. It was a substantial sale of 45,600 bales. By the mid-1970s cotton had recovered much of the market share that synthetics had taken, and in 1975 Calcot announced it had handled a record 1.4 million bales from members. Ten new warehouses were built to accommodate the increased demand, and more were added in following years. By 1977, the year Tom W. Smith took over as president and the cooperative's 50th anniversary, gross sales had reached an all-time high of $516 million.

In 1978, however, Calcot entered another rocky period. Bad winter storms that caused growers to delay planting the new year's crop were followed by a lygus infestation. The result was the worst harvest in 25 years. Calcot responded by allowing growers to fill their contracts with cotton from the following year and extending special loans to get them going into the next growing season. That season turned out to be one of the best in history. Calcot, expecting prices to drop, hedged a larger portion of its cotton holdings than normal in futures markets. Unexpected purchases by China, though, abruptly made cotton futures volatile. Before the cooperative could respond July futures were trading below May contracts. Caught in this inverted market, Calcot found itself saddled with a $3.2 million loss. Competitors and the media zeroed in, claiming the cooperative was on the brink of collapse. The market recovered before the end of the year, but not before Calcot's reputation had been tarnished, and ill will had grown among many members.

In the mid-1980s, Calcot was the U.S.A.'s largest cotton shipper, sending over 30 containers a day to port. Sixty-five percent of all its cotton&mdashout one million bales a year--was sold to overseas customers. Nineteen eighty-three was a particularly good year: The U.S.S.R. bought about one million bales from the United States, about half of that supplied by Calcot. The late 1980s were a time of continuing innovation for Calcot. It initiated its 'Zero Contamination' Program when it was discovered that increased mechanization combined with less-frequent human supervision resulted in greater amounts of contamination in cotton bales. The program became imperative when important Japanese customers began shopping elsewhere for cleaner cotton. A large part of the program consisted of an awareness campaign targeted at growers and cotton gins. The first harvest of the program saw contamination reduced by as much as 50 percent. In another innovation, by the 1990s, most of the classing of cotton had been taken over by high tech equipment, processes Calcot believed would ultimately lead to better yarn and productivity. Bar code systems, portable scanners, and computers streamlined warehousing and shipping as well.

By the early 1990s Calcot had introduced three new options that gave growers even more latitude in determining the final price they received for their cotton. The 'seller's call,' the 'minimum price program,' and the 'basis call,' in addition to the more traditional marketing options, allowed growers to settle for a fixed but safe price at the beginning of the season or to take varying degrees of risk on prices determined by futures markets.

In March 1994 Calcot made a sale to China that broke all company records: 233,000 bales at a price of $90 million. In fact, by July 1994, it had sold 900,000 bales to the People's Republic and booked near record sales for the year of $818 million. The Far East remained Calcot's strongest market throughout the 1990s. In 1996 a group of cotton importers in Indonesia lodged a formal complaint against the cooperative, claiming some 5,000 tons of Calcot cotton was infected with a rare bacteria. No samples of the shipment were made available for independent analysis, however. A government spokesperson supported Calcot, speculating the Indonesians were, in essence, trying to renegotiate a contract following a drop in world prices.

Calcot's membership declined in the closing years of the 1990s, contributing to a 29 percent downturn in revenues--dropping from $685 million in fiscal year 1997 to $488.1 million for the twelve months ending in January 31, 1999. One reason for the decrease was a move by farmers away from cotton to more lucrative crops, including grapes and almonds. In response to the shift in California agriculture, in 1999 Calcot began marketing almonds in addition to cotton.

Principal Competitors: Plains Cotton Cooperative Association; Dunavant Enterprises Inc.; Staple Cotton Cooperative Association; Weil Brothers Cotton Inc.; Southwestern Irrigated Cotton Growers Association.

Chronology

• Key Dates:

• 1927: Co-op organized by Frank Green in Delano, California.
• 1930: In a period of financial crisis, C.C. Selden becomes manager.
• 1931: Headquarters move to Bakersfield.
• 1936: CCCA initiates its own ginning program.
• 1939: CCCA severs ties with American Cotton Cooperative Association.
• 1945: CCCA begins marketing cotton for members instead of buying it outright from them.
• 1947: First CCCA warehouses built.
• 1950: CCCA offers first financing to co-op cotton gins.
• 1953: Board changes name to Calcot Ltd.
• 1955: Arizona farmers join Calcot.
• 1959: Calcot builds a new headquarters in Bakersfield.
• 1973: Calcot becomes first Western company to sell directly to China.
• 1989: 'Zero Contamination' Program initiated; additional marketing options introduced for members.
• 1994: Calcot makes record sale of 233,000 bales to China.
• 1999: Calcot becomes involved in almond marketing.