The speed of shipping cotton from warehouses has become an important issue for the cotton industry. This paper examines issues relating to costs and benefits of an increased cotton shipping standard. The value chain model is used to identify improvements in incentives, information flow and warehouse filling and management strategies.Industrial Organization,

Kenkel, Philip L.

Kim, Taeyoon

English

Research Papers in Economics

Investigation of the Costs of an Increased Shipping Standard for Cotton 
Warehouses 
 
 
Philip Kenkel 
Professor, and Bill Fitzwater Cooperative Chair 
Department of Agricultural Economics 
 Oklahoma State University 
516 Agricultural Hall 
Stillwater, OK  74078 
Phone: (405) 744-9818 
Fax: (405) 744-8210 
Phil.kenkel@okstate.edu 
 
Taeyoon Kim 
Research Assistant 
Department of Agricultural Economics 
 Oklahoma State University 
Stillwater, OK  74078 
taeyoon.kim@okstate.edu 
 
 
 
 
 
 
 
Selected paper prepared for presentation at the Southern Agricultural Association Annual 
Meeting Dallas Texas, Feb 2-5 2008. 
 
 
 
 
 
Copyright 2008 by Taeyoon Kim and Phil Kenkel, all rights reserved.  Readers may make 
verbatim copies for non-commercial purposed by any means provided this copyright 
notice appears on all such copies. 
Investigation of the Costs of an Increased Shipping Standard for Cotton 
Warehouses 
 
Abstract 
The speed of shipping cotton from warehouses has become an important issue for the 
cotton industry.  This paper examines issues relating to costs and benefits of an increased 
cotton shipping standard.  The value chain model is used to identify improvements in 
incentives, information flow and warehouse filling and management strategies. 
 
Background Issues 
The U.S. cotton industry has been in a state of change for the past three decades.  
The industry has undergone a structural shift from a primarily domestic market to 
increasing dependent on exports (Jung and Lyford).  Approximately two thirds of U.S. 
production channeled to overseas destinations, a substantial increase from the historical 
level of approximately 40%.  China currently accounts for over 30% of U.S. exports. 
Textile manufacturing in the U.S. has declined dramatically. These shifts have increased 
the week-to-week volatility of cotton flow and placed more pressure on logistics and 
transportation.  Historically, domestic mills sourced cotton lint at a relatively constant 
rate throughout the year.  In contrast, international market opportunities are often driven 
by time sensitive changes in import tariff restrictions.  The shift to export markets has 
therefore put particular pressure on cotton warehouses and cotton merchants.  The 
industry has responded with both technological and policy based changes.   
The cotton industry has rapidly adopted improvements in information technology 
such as high volume instrumentation (HVI) quality testing, electronic warehouse receipts 
and permanent bale identification.   HVI was developed by the Texile Research Center 
(now named the International Textile Center) at Texas Tech University in mid 1960’s.  
The technology which was subsequently commercialized and widely adopted by the cotton industry facilitated the rapid measurement of quality measures such as strength, 
micronaire (fineness), color, length and length uniformity and trash content.  HIV 
replaced the hand classification systems and facilitated the marketing of cotton on an 
identity preserved, quality differentiated basis (Welch et al.).   
The HVI technology complimented TELCOT, another information technology 
system. TELCOT is a computer-based trading system which was developed by the Plains 
Cotton Cooperative Association (PCCA) in the mid 1970’s.  TELCOT greatly improved 
priced discovery mechanisms, reduced administrative costs and allowed buyers to screen 
cotton on the basis of specific quality characteristics, warehouse or gin location or crop 
year (Lindsey et al.)  The large volume of cotton traded on the TELCOT system in turn 
led to the development of Electronic Title System (ETS), an online system which 
replaced paper warehouse receipts.  The ETS improved efficiency, reduced costs and 
expedited the shipment of cotton to textile mill buyers (Cockerell).  The TELCOT system 
eventually became the foundation for “The Seam” another online trading system which 
provided both grower to business and business to business trading among cotton growers, 
cooperatives, merchants and mill (Welch et al.)  The cotton industry also adopted 
barcode-based permanent bail identification systems.  These technologies allowed textile 
mills and other users to develop electronic fiber selection systems that selected specific 
cotton bales with uniform fiber properties and specific milling characteristics.  Some of 
the systems became sophisticated enough to consider containerized shipping weight and 
volume limits as well as quality characteristics. 
Policy changes have also impacted the cotton supply chain.  The cotton industry 
supported regulations for cotton warehouse throughput.  The standard was incorporated into the United States Warehouse Act specifies a rate at which cotton warehouses must be 
able to ship cotton.  This standard requires warehouses with USDA Commodity Credit 
Corporation (CCC) Commodity Storage Agreements (CSA) to have the capability of 
shipping 4.5% of their CSA approved storage capacity each week baring uncontrollable 
events.  This regulation impacts the labor and rolling stock costs of cotton warehouses.  
Warehouse managers typically maintain a base level of employees and lift trucks that 
allow them to meet the shipping standard with overtime operations.  Because peak level 
orders occur infrequently maintaining the capacity to meet the cotton flow standard 
requires many warehouses to maintain a larger labor force and rolling stock than would 
otherwise be economically justified. 
While technologies increased the flow of information and quality signals across 
the stages of the cotton marketing system and shipping standards have attempted to 
impact international competitiveness, these changes have also decreased the operational 
efficiency of cotton warehousing operations.  In order to fill orders, warehouse operators 
have to locate and assembling specific bales located at various locations within one or 
more warehouses.  Most warehouse operators adopted computerized warehouse 
management systems which track bale locations and route lift trucks.  However the 
process of locating and pulling bales randomly located over vast warehouse space is 
inherently inefficient.  Many warehouses have shifted from block stacking systems, 
which maximize warehouse space utilization, to row stacking systems that optimize 
access to individual bales.  While reducing useable warehouse capacity by over 50%, row 
stacking allows warehouse operators to retrieve any targeted bale without repositioning 
another bale.   While all aspects of the cotton industry have been proactive on the cotton flow 
issue, cotton warehouses operators and merchant shippers have had somewhat differing 
opinions toward shipping standard issues.  Merchant shippers have advocated that the 
industry further increase shipping capacity.  They maintain that a more rapid cotton flow 
would make US cotton more competitive and ultimately lead to increased sales and/or 
improved prices.  This view was reflected in comments by Bobby Greene, chairman of 
the National Cotton Council’s Performance and Standards Task Force, a group created by 
then National Cotton Council a Farm Press interview at the recent National Cotton 
Council Annual Meeting in Austin, Texas . 
“The volatility of the number of bales needed to supply demand as we changed 
from a domestic to an export market represents a huge change…”  “We often 
have a short time to ship. China buys U.S. cotton at various times during the 
marketing year, often on short notice. China will need U.S. cotton as soon as they 
exhaust other supplies…”  “We have to be ready to ship all the cotton China will 
need (from the United States) in a short period. We are concerned that 
warehouses will need to ship more cotton in a shorter period of time than they are 
used to. We also wonder if we have the infrastructure to move it quickly enough.” 
 
Warehouse operators, who bear the cost of increasing throughput capabilities, are 
less supportive of a higher shipping standard.  Comments from an Oklahoma cotton 
warehouse manager characterize the warehouse operators’ viewpoint; 
 
We all recognize the need to keep U.S. cotton competitive.   The cost of every 
employee and every forklift in my warehouse is ultimately borne by our farmer 
owners.  During the last five years I have only been asked to ship at the maximum 
rate for one 12 week period.  The real question is whether an increased shipping 
standard benefits the merchants or the farmers.  
 
Warehouse managers point out that other factors such as information flow within 
the marketing channel, shipping logistics, and the scheduling and staging of cotton 
shipments also impact overall cotton flow.  Many managers in the warehouse industry question whether the benefits of a higher shipping standard outweigh the costs.   
Warehouse operators question the rationale for further investment to enhance peak 
throughput capacity when such capacity is infrequently requested.  This question is 
particularly pertinent for farmer-owned cooperative warehouses.  Since warehouse costs 
are passed on to the farmer-owners, cooperative managers only support changes that 
ultimately benefit their membership. 
The contrasting views on the advisability of a increased shipping standard also 
highlight another important issue.  The distribution of the benefits (if any) of an increases 
shipping standard among the participants in cotton supply chain is not apparent.  .  
Conceivably, a more rapid cotton flow could potential make US cotton more attractive to 
international buyers or allow US merchants to capture time limited quota opportunities.  
However the impact of these factors on the price received by US producers is extremely 
difficult to project.  USDA statistics on prices received by producers (Table 1) do not 
fully reflect the price volatility facing individual producers.  They also do not reflect 
potential prices from export sales that could have been obtained with a change in the 
shipping standard.   
The price data does provide some insight into the arguments surrounding the 
shipping standard.  During the 1997 to 2007 period the difference between the minimum 
and maximum monthly cotton price was as low as 5.56 cents and as high as 22.4 cents/lb.  
Variation from one month to the next ranged from 3 cents/lbs to over 12 cents/lb.  Using 
the monthly variation as an admitably imperfect proxy for the possible price enhancement 
from moving cotton rapidly, would give a benefit range of $15 to $50/bale.  Quantifying 
the benefits of an increased shipping standard would require both more precise estimates of possible price enhancement and an estimation of what portion of the crop sales would 
receive the higher price. 
 
 
 
 
Table 1: Average Cotton Prices Received by Producers  ($/lb.) 
Year Average  Minimum Maximum
Yearly 
Variation 
Monthly 
Variation 
1997 0.772167  0.722  0.826 0.104 0.079 
1998 0.740833  0.693  0.789 0.096 0.033 
1999 0.677833  0.638  0.694 0.056 0.041 
2000 0.649333  0.611  0.697 0.086 0.062 
2001 0.517  0.428  0.581 0.153 0.068 
2002 0.498083  0.431  0.58 0.149 0.049 
2003 0.38925  0.278  0.521 0.243 0.078 
2004 0.336333  0.267  0.443 0.176 0.07 
2005 0.5165  0.454  0.678 0.224 0.121 
2006 0.6225  0.616  0.633 0.017 0.011 
Source: USDA 
 
The distribution of the price impact between cotton merchants and cotton 
producers is also an important issue.  Cotton merchants (often called merchant shippers) 
periodically purchase cotton from producers and elect to continue to store it (at their 
expense) at the existing warehouse location.  Merchant shippers would therefore 
presumable capture a portion of any price enhancement since they hold a portion of US 
cotton stock.  This could be an important issue since the producers would presumable 
paid the full cost of an increased standard through higher warehouse fees. 
The costs of a change in the cotton shipping standard are also difficult to 
determine.  Warehouse operation costs and throughput capabilities vary across 
warehouses and regions due to wage structures, equipment compliments, transportation 
logistics and other factors. The cost of increasing shipping capabilities also likely varies across warehouses.  Some warehouses may be able to exceed the current shipping 
standard with moderate changes while other warehouses might face substantial additional 
costs.  The role of warehouse layout and filling strategies, spot weight procedures, and 
warehouse management systems on either costs or cotton flow is also not known. A joint 
research project at Oklahoma State University and Texas A&M University is 
investigating this important issue.  
Value Chain Framework 
  The concept of a value chain is frequently used to provide insights into issues, 
such as the cotton flow issue, that overarch various stages of the marketing system.  The 
term “supply chain” is generally used to describe the chain of activities from farm 
production, processing through retailing.  Hobbs Cooney and Fulton describe a value 
chain as a vertical alliance or strategic network between a number of independent 
business organizations within a supply chain.  In describing value chains the authors 
point to shared vision and common goals, mutual decision making, sharing of risk and 
benefits.  They also suggest that value chain participants can use shared information to 
enhance the chain’s profits and competitiveness.  Various authors have contrasted the 
collaborative aspects of a value chain with the adversarial business relationship typically 
found in the agri-food industries where each enterprise attempts to extract gains at the 
expense of the other market place players. 
  The U.S. cotton supply chain has adopted aspects of a value chain.  Technologies 
such as the HVI system, TELCOT, permanent bail identification systems and ETS have 
allowed quality-based price signals to effectively flow across the various levels of the 
marketing chain. As previously mentioned, the Seam, on-line trading network has facilitated transactions and information flow between businesses at various level of the 
cotton supply chain.  However, the value chain framework is a useful tool to identify 
additional coordination that could be mutually beneficial to cotton producers, ginners, 
warehouse managers and merchants.   
Increased coordination of information could be beneficial for the cotton flow 
issue.  The electronic fiber selection programs used my textile mills and end users 
typically have the ability to consider information on warehouse location, but do not 
consider bale location within a warehouse or even specific warehouse building locations.  
It is conceivable that these systems could consider order filling logistics as a secondary 
optimization criteria, similar to how the systems evolved to optimize containerized 
shipping parameters. 
As in most issues, improved incentives could align the goals of the marketplace 
participants.  A frequent comment from cotton warehouse managers is the assertion that 
they would be willing to upgrade order filling infrastructure if merchants would provide 
incentives for faster shipping.  Merchants counter with the argument that their current 
purchase patterns reflect preferences for shorter order filling times.  Specific premiums 
for shipping speed would obviously help align incentives of the market channel 
participants.  Research quantifying the impact of shipping speed on cotton price would 
also be useful. 
  A final research area which would address the cotton flow issue would involve 
the warehouse filling strategies and management strategies.  Cotton warehouse managers 
currently fill warehouses on a first in basis or may segregate by gin source.  Bales are 
generally not segregated by quality because cotton classing information is not available at the point of bale delivery to the warehouse.  A collaborative effort involving ginners, 
warehouse managers, merchants and textile end users might develop improved 
warehouse filling strategies which would improve order filling logistics. 
Concluding Discussion 
The cotton shipping standard problem is an intriguing issue facing the cotton 
industry.  The issue highlights the need for research on a wide variety of topics.  
Quantifying the costs and benefits of an increased shipping standard would be an obvious 
first step.  Other potential areas for investigation include systems to improve information 
flow on bale logistics, improved warehouse filling strategies and warehouse management 
systems.   
 
References 
Cockerell, L. “2003 Marks the Golden Anniversary of Farmer Owned Coopertive”  
Communicator, Spring 2003 pp. 4-5, 17.  
 
Hobbs, J.E., A. Conney and M. Fulton.  “Value Chains in the Agri-Food Sector” 
Department of Agricultural Economics, University of Saswatchewan, September 2000. 
 
Jung, S. and C. P. Lyford.  “Positioning Cotton in the Market for Quality:  An 
Application of Market Segmentation for West Texas” Selected paper Southern 
Agricultural Economics Association 2007 Annual Meeting, Mobile Alabama, Feb 5, 
2007. 
 
Welch, J. M., C. P. Lyford and K. Harling.  “TheValue of Plains Cotton Cooperative 
Association”  Review of Agricultural Economics, Volume 29, Number 1, 2006. pp 170-
185,. 
 
Lindsey, D., P.H. Cheney, G.M. Kasper and B. Ives.  “TELCOT: An Application of 
Information Technology for Competitive Advantage in the Cotton Industry”  MIS 
Quarterly, December 1990, pp. 347-357. 

Positioning Cotton in the Market for Quality: An Application of Market Segmentation for West Texas” Selected paper Southern Agricultural Economics Association

Investigation of the Costs of an Increased Shipping Standard for Cotton Warehouses

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