Mobilizing Resources for Global Cotton Production
Before t-shirts and towels are purchased throughout America, the cotton they contain has made a global journey, helped along the way by Staple Cotton Cooperative Association (Staplcotn).
Staplcotn was formed in 1921 with a simple focus: to market its member-owners’ ginned cotton. Those members—now 6,300 strong—raise cotton on more than one million acres. Over the decades, Staplcotn has increased its market share and expanded to 11 mid-south and southeastern states from its Mississippi home. On average, the cooperative sells and ships around 2.5 million bales of cotton each year in the U.S. and 24 other countries.
Getting the cotton from the field to the finished product is a complex value chain, each step of which hinges on the last. This multi-national effort of producing and processing cotton into finished goods has been dramatically complicated in recent years.
“The supply chain was showing weaknesses before the pandemic, which then made an already complex challenge exponentially more difficult,” said Hank Reichle, president and CEO. “We’ve mobilized resources and improved our processes and technology, but much is out of our control.”
From the farm, cotton is hauled to the gin where lint is separated from the seed and compressed in 500-pound bales. Bales are stored in one of Staplcotn’s 15 warehouses or one of the 190+ country warehouses that are part of the cooperative’s storage network. The cotton is sold to domestic and overseas mills, which spin the lint into yarn, which is woven or knitted into fabric and then sewn into apparel and home textile items.
An abnormally small Texas crop and growing global economic concerns combined with the ongoing supply chain issues have led to extreme cotton price volatility which further complicates the cooperative’s risk management. Staplcotn manages this inventory risk with a hedging strategy of options and futures contracts that carry daily margin calls in today’s volatile market. The cooperative pays its members the bulk of what they’re due when their cotton is delivered. Additional progress payments are made during the following year while Staplcotn sells and ships the cotton, during which time prices rise and fall, recently very dramatically.
A long-time CoBank customer, Staplcotn funds its strategy with a $500 million line of credit that’s typically renewed every five years. Instead, to ameliorate price volatility and to address seasonality, this year’s renewal allows for an annual reassessment so financing levels can be right-sized to meet the then-current market conditions.
“CoBank understands that our business is full of price volatility and that we carry large inventory on an annual cycle,” said Reichle. “Our hedge positions require access to significant credit, and I wouldn’t want to finance our inventory and margin calls without CoBank’s leadership.”