BUILDING ON OUR STRENGTHS

THE ORGANIZATION HANK HODGES passed on to Woods Eastland in 1986 was a far cry from the one Hodges inherited in 1978.

Gone were the cattle, grain, ag chemical and fertilizer operations. Thanks to the decisiveness of the Board, gone were the co-op's dwindling market share and its ineffective marketing program. And gone was the seemingly unwinnable battle against synthetic fibers.

Staplcotn had already implemented major strategic decisions about the direction of the co-op with creation of its Mill Sales Program. The new president's mandate was to build upon that and to make sure the most efficient management team was in place.

ENTER ... THE MARKET LOAN

Being at the right place at the right time often has a lot to do with success, and Staplcotn was in the right place at the time the 1985 Farm Bill went into effect in 1986. That Farm Bill introduced a previously unknown concept, the marketing loan. The marketing loan had two effects of great benefit to Staplcotn.

First, it played a major role in doubling cotton consumption by the U.S. textile industry during the subsequent decade. The marketing loan guaranteed the U.S. textile industry that U. S. cotton would be as cheap as any cotton in the world. Because it cost less to deliver a bale of cotton to the Carolinas than to Asia or Europe, the marketing loan often meant domestic mills obtained cotton a little bit cheaper than anybody else.

In the background, the work of Cotton Incorporated was bearing fruit. U.S. consumers were expressing increasing preference for cotton with their dollars. In response to that demand, Memphis territory cotton production increased 87 percent during the same ten year period. The U.S. textile industry was also increasingly concentrating its production into yarns, for which Memphis territory and Southeastern cotton was the most cost efficient. The marketing loan, with its cost competitive features favoring domestic mills, made it a lot easier for Staplcotn to sell cotton. With this huge increase in demand, there was a corresponding increase in supply, and Staplcotn increased its marketing volume.

Second, the marketing loan benefited Staplcotn's Seasonal Option. In years when the adjusted world price was below loan, the price per pound was not based on one marketing decision, but two: the decision of where to hedge the cotton, plus the decision of the price at which to redeem cotton from the loan. The adjusted world price moved weekly, the futures market moved daily and the spread between AWP and futures became the determinant of the total return on loan eligible U.S. cotton.

In the Delta, crop contracts had gone from Hog Round to basis contracts, where an agreed amount is paid for the basis 4134, 1 1/16", premium mic base grade cotton. That caused a number of growers to consider Staplcotn for their marketing.

Staplcotn's Seasonal Option had done an acceptable job of hedging each year. That fact also helped and set the stage for Staplcotn's continued growth, which had been very steady, but then several things happened simultaneously.

With the 1986 crop came a complete change in the background conditions under which the cotton industry operated. The 1985 Farm Bill, which went into effect with the 1986 crop, was so radically different from what farm legislation had been that it really set the change for the explosive growth Staplcotn enjoyed through the 1995 crop.

VARIABLES COMPLICATE MARKETING

Market decisions became more complicated because they now involved two variables. Also, the decision did not have to be made at the same time. "Hedge the cotton now and redeem it from the loan weeks or months from now?" Or, "Redeem it from the loan and hedge it weeks or months from now in order to maximize that spread?"

The tremendously more complicated market played to the advantage of Staplcotn's Seasonal Option. The marketing loan eliminated the protection of the old fixed floor loan. Futures market volatility increased.

Mills could now buy cotton cheaper than before, and offtake increased. That complicated the marketing a lot, and more and more growers said, "I want someone else who I trust to do this for me."

A greater percentage of everything Staplcotn marketed went into the Seasonal Option. The number of acres marketed with Staplcotn dramatically increased every year because of the increased complexity to the producer and because Staplcotn's return was acceptable to large numbers of producers.

"When I first started, I was appalled that so much of the cotton business was a cat and mouse game played between the merchant and the mill," Eastland recalls. "In too many cases, the merchant's idea was to see how shy he could ship the cotton, what he could get by with. Everything was done on samples. The government classed the sample, the merchant classed the sample and then the mill man would class the sample. Besides this cat and mouse game, many merchants would not meet delivery schedules and were late getting cotton," he said.

Top management at Staplcotn decided the co-op was going to be an "on time supplier, with cotton as good as or better than what the customer bought. It's worked very well for us," Eastland says.

WAREHOUSING RESPONDS

The 1985 Farm Bill set the stage for a dramatic increase in cotton production and space had to be built to warehouse the additional cotton. Staplcotn disproportionally increased its market share because it operated as efficiently as its competitors ... plus, it returned its profits to its co-op members. "I don't think we've operated any more efficiently than anybody else," Eastland said, "but certainly as efficiently, and we just gave the money back to the growers."

The growth in the warehouse business was spurred by the tremendous increase in cotton production in 1986. Producers needed more warehousing, and it quickly became a question of who would supply the additional space.

The first strategic decision to significantly increase Staplcotn's warehouse volume had been made when Hank Hodges persuaded the Board to pay hauling charges to bring the cotton to the warehouse. Growers had to have an incentive to haul their cotton past their nearest warehouse and bring it to Staplcotn's. When the co-op began paying for the hauling, warehouse volume began increasing.

Staplcotn increased the l55,000 bale storage capacity at Rising Sun to about 375,000 bales before it became apparent that warehousing at this location south of Greenwood had reached the point of diminishing returns. In warehousing, the real key to profitability is the efficient use of labor in the shed and not spending too much time going between sheds.

Since it was taking too long to go from one end of the 200 acre site to the other to get all the bales together, further expansion there was halted in the late 1980s.

NEW LOCATIONS

About that time, Staplcotn was approached by warehouse owners in Itta Bena, MS seeking to sell. In 1990, Staplcotn purchased the Itta Bena Cooperative Compress very economically, compared to the cost of building a new one. Since the new warehouse was only nine miles from Rising Sun, there was no need to operate it completely as a stand-alone unit, so equipment and personnel were shifted between the locations as needed.

That was an important move. It gave Staplcotn additional warehouse space for 79,000 bales and could be operated to actually lower Staplcotn's cost per bale.

The Itta Bena warehouse solved an immediate problem. A Staplcotn warehouse in the Memphis delivery zone of the New York Cotton Exchange (within ten miles of the Memphis city limits) took a bit more doing. Staplcotn's marketing volume was so great it needed to have a credible threat of delivering cotton in times when spread relationships of the futures market were unfavorable. The co-op could build a Memphis zone warehouse, but an empty warehouse was of little value. Instead, the strategy was to first get the cotton committed to Staplcotn in Memphis, and then to build a warehouse.

Two things coalesced to help make this happen. Owners of the Tunica warehouse wanted to sell. That plant was very old and badly deteriorated, and they didn't want to spend the money to replace the old wooden buildings with modern metal sheds.

Since Tunica is only 32 miles from Memphis, Staplcotn could take that cotton from the gins and truck it to Memphis, placing the co-op cotton in a Memphis delivery zone warehouse.

In 1992, Staplcotn purchased the 70,000 bale Tunica warehouse and operated this facility for the 1992 and 1993 cotton seasons.

Also, in 1992 and 1993, producers in Tennessee could send their cotton to Memphis Compress as part of Staplcotn's Memphis warehouse program. This was cotton in the delivery area that was in Staplcotn's marketing program.

The 75,000 bale West Memphis warehouse, which Staplcotn had sold to Dunavant in 1979, was repurchased by Staplcotn in early 1993 and was expanded later that year to 125,000 bales by building five new sheds. Further expansion in 1994 brought the capacity to 180,790 bales.

This purchase ended Staplcotn's two year program with Memphis Compress. The following year, all the cotton was hauled to the West Memphis location. The Tunica warehouse was closed and sold in October 1993 with the stipulation that it could not be used for agricultural purposes.

Staplcotn warehousing in West Memphis ruffled some feathers in the ginning and warehousing businesses in Northeast Arkansas and West Tennessee. The general practice there was for warehouse earnings to be paid directly to gins, which then paid the growers. Those gins were privately owned profit centers, unlike gins in Mississippi, almost all of which were gin-at-cost services provided to the growers. As a grower-owned co-op, Staplcotn always paid its earnings directly to its member-growers.

"Jimmy Garrett, head of warehousing, was an outstanding warehouseman,' Eastland says. "He had done it all, and he knew warehousing inside and out. Our great success in warehousing took place under his management."

Garrett retired in 1996 and was succeeded by Shane Stephens, who had joined Staplcotn in 1985 as a cotton specialist in Staplcotn's Blytheville, AR, office.

"Technology is forcing big changes on the warehousing industry," Eastland noted. "When you have an agricultural commodity all produced at harvesttime but consumed throughout the year, it needs warehousing. The system of bales starting out in one warehouse and moving to another warehouse, whether it's at the mill or merchant, is terribly inefficient.

"Warehouses are going to be larger," Eastland predicts. " A 200,000 bale warehouse pool is needed to get the right 90 bale mix, instead of a pool from a gin with just 10,000 or 20,000 bales. Economic forces are driving the warehouse industry to become the location where this inventory is aggregated. From this inventory, specific mills can find the right quality mix delivered to them on time. That's going to be a change away from small warehouses connected to gins."

Not long after Eastland became president, executive vice president Dexter Walcott left Staplcotn to begin farming in Washington and Sunflower Counties. At the time, he was in charge of Stapldiscount and was replaced by Jerry Hoover, who had joined the firm in 1975 as a loan officer.

STAPLDISCOUNT'S RISK LOWERED

The 1985 and 1990 Farm Bills benefited Stapldiscount because they took much of the financial risk out of farming. The target price was initially set above the cost of production. If a farmer made an average yield, Stapldiscount was almost assured of being repaid.

Over the years of the 1985 Farm Bill, the target price came down, the cost of production (with a kind of underlying inflation rate) went up, and growers are not in that economic situation anymore. However, during crop years 1986 through 1989, farmers dramatically improved their balance sheets because the high target price was in effect.

The 1985 Farm Bill had a great effect on Stapldiscount. Every money lending operation worries about its downside, but the farmer has much more downside risk than most commercial borrowers. Growers deal in an environment which always has the capacity, fertile acres, for overproduction. The possibility is always there that Mother Nature might significantly raise yields in any one year. When producers are ready to sell, the price may be below the cost of production, and nothing can be done about that.

Target price payments in the 1985 and 1990 Farm Bills got bigger as prices dropped below the target price, which removed the risk for the producer. It also removed the risk for Stapldiscount and others financing the producer.

LAND BANK PROBLEMS

Stapldiscount was a big beneficiary of the problems of the Federal Land Bank in New Orleans when the washout in agricultural credit took place in the late 1980s. The Land Bank had so much bad debt it had to keep its interest rates high.

Stapldiscount had not really been in the land loan business, but a lot of its production loan customers asked the co-op to start a land loan program, which it did. Stapldiscount increased its daily balance of long term loans on land to about $12,000,000 a year.

These new Stapldiscount loans had been some of the best loans the farm credit system formerly had. The Land Bank's pricing structure was almost guaranteed to lose its best customers. These growers could find financing other places. The Land Bank was left with those borrowers who had nowhere else to go. Stapldiscount was the beneficiary.

Year in and year out, Stapldiscount has had the lowest cost of funds of any agricultural production lender. Most co-op lenders have differential prices, but Stapldiscount charges every borrower the same interest rate and pays every borrower the same rebate.

"We try to offer the type service and product that top producers want." Stapldiscount vice president and CEO Jerry Hoover explains. "A producer must be very credit worthy to qualify for a loan at Stapldiscount. We've been very fortunate that we've been able to stick with that position."

Stapldiscount has not pursued an aggressive expansion policy, "probably because everything else has been growing so much," Eastland says. " We avoided management headaches by not trying to grow Stapldiscount at the same time everything else is growing. Since marketing and warehousing have been bigger and better every year, this has satisfied that innate yearning management has," he says.

In 1993, Sterling Jones succeeded retiring Cotton Services vice president Walter Rayner. Jones joined Staplcotn in 1982 as a chemical and fertilizer specialist. When the divisions were sold, he transferred to the Cotton Services Division as a cotton specialist.

Eugene A. (Gene) Stansel, a Ruleville farmer for 20 years, joined Stapldiscount as a loan officer in 1985 and was named vice president for Human Resources and secretary in 1995.

L.A. (Larry) Gnemi joined Staplcotn in 1975 as accountant. He was named assistant treasurer in 1980, internal auditor four years later and vice president of Sales Control and Traffic in 1985. The following year he became vice president of Systems and Controls, responsible for accounting systems and computer systems.

Gnemi and Cotton Services Coordinator Wayne Peacock headed the team that converted Staplcotn's 1.8 million warehouse receipts from paper to electronic warehouse receipts in 1995.

Patricia Hodges succeeeded Larry Gnemi as vice president of Traffic. She joined Staplcotn's Accounting Department in 1981 and moved to the Traffic Department the following year, handling traffic accounting, export sales and merchant sales before succeeding Gnemi in 1986.

Staplcotn now generates a lot of its own statistics, as most of the big merchants do. David Camp is in charge of the operation Staplcotn uses to develop the information used to make marketing decisions.

MOVING INTO THE SOUTHEAST

In 1985, Tracy Scott, Staplcotn specialist from McGehee, AR, brought a group of Donaldsonville, GA, farmers to Greenwood because of their interest in Staplcotn marketing their cotton. At that time, Staplcotn declined to serve this group.

However, once the boll weevil had been eradicated from Georgia and the Carolinas and farmers throughout the Southeast had seen the benefits Mid-South farmers enjoyed under the 1990 Farm Bill, cotton returned to that area in a rush.

"The Southeast didn't really have a co-op presence," Board chairman Billy Percy recalls. "Producers there were selling cotton to the same people we sell our cotton."

Cotton production in the Southeast began to expand rapidly with the 1991 crop.

In 1994, Staplcotn qualified to do business in Georgia, Florida, South Carolina, North Carolina and Virginia for future growth. In 1996, Staplcotn's first year operating in the Southeast, Stan McMikle signed up 50,000 acres.

"Clearly, there's a need for it, and our presence in the Southeast market helps us tremendously. It raises the price of their cotton, and then we're competing on the same basis. The move into the Southeast will be very successful and a very valuable tool for Staplcotn in the future. It was a no brainer," Percy said.

"The organization needs to continue to grow," Percy says. "Not growing becomes complacency. To keep management and staff motivated they have to keep thinking about growing, and they all think about being bigger, and better and more efficient," he says.

"If you ever say, 'This is as big as we are going to get and we're just going to sit back and enjoy the fruits of our labors; at that point, you start getting fat and lazy," he says.

"However, at some point, added volume starts affecting efficiency. There is a point when you make it too big. Well, that hasn't happened. We've had no trouble selling the cotton. The more volume we have, the less cost per bale. We're handling more cotton all the time with fewer people all the time, and our efficiencies are much greater now than they were ten years ago. Until that stops, there's no need in not growing," Percy says.

Eastland foresaw that the future of the cotton industry would be dominated by great changes due to technology driven by foreign competition. In 1970, total cotton content of textile goods consumed in the U. S. was 8,594,000 bales with the U S. textile industry supplying 89.2% percent. By 1987, total consumption was 11,735,000 bales with the US. textile industry supplying only 58.4%. Between 80 and 85 percent of all cotton grown in the Mid-South is sold in the domestic market.

Rapid changes in the cotton industry present challenges to Staplcotn with more and more mills going to "Quick Response" or "Just in Time" inventory, which means smaller inventories will be maintained at the mill.

"The company that can respond quickly to meet the mill's request for shipments will be the one to survive the changes," Eastland said. "Mills will begin forming partnerships with suppliers, buying based on service and price, not just price. How Staplcotn responds to these challenges will determine whether it maintains its position as a dominant marketer of Mid-South cotton," he said.

Today, Staplcotn has offices in Greenwood, Clarksdale, Greenville and Yazoo City, MS; Rayville, LA, West Memphis, Blytheville and McGehee, AR, Brownsville, TN; and Albany, GA.

For the past several years, Staplcotn has obtained a better average price about 98% of the time, based on the average market prices quoted by the USDA.

"The mission of Staplcotn and Stapldiscount is to enhance members' incomes by providing cost effective marketing, warehousing, financing, and other authorized services in a manner that fosters their trust and confidence in the cooperative and meets exemplary standards of business and personal conduct. As long as we do this, this company is going to do fine," Eastland said.