Thank you Mr. Chairman.
As you know, the Packaging and Distribution Committee’s Flow-Shipment resolution 10h calls for a study of the industry’s use of rack samples. As the chairman of the Council’s Rack Sample Study Committee I’d like to provide the Board with an update.
Two directives of this resolution call for the Committee to encourage NCC to study the practice of maintaining rack samples and to determine if this practice can be altered or eventually eliminated.
The committee elected to begin the study by surveying the industry about how samples were handled and used. The Rack Sample Survey was designed to define current warehouse sample-handling practices and associated costs and to determine how and why samples are being used. The survey was not designed to determine if samples should be eliminated.
The committee is very pleased with the response rate and feels as though the results are a fair representation of actual sample-handling practices and costs.
The 86 warehouse locations that responded represent almost 7.5 million bales or 41% of 2003 production.
Fourteen merchants responded to our survey, representing approximately 5.6 million bales or approximately 31% of 2003 production.
The 16 mills that responded to our survey have a combined consumption of just over 5 million bales, accounting for 80% of total mill consumption in 2003.
The survey identified four sample-handling practices. For those not familiar with these practices, definitions of these practices are included on page two of your handout.
At the bottom of the slide you’ll see that Mid-South warehouse represented 39% and Southwest warehouses accounted for 41% of volume. In terms of bales stored, each of these regions account for about 3 million bales. Southeast warehouses represent slightly less than a million bales (13% of total response volume) while the remainder of the warehouse responses comes from the West.
Traditional Racking -- represented by the dark blue bars -- accounts for three-fourths of bales stored by respondents in both the Mid-South and Southeast. The Southwest – driven by economics – has moved to primarily On-Demand Cut & Pull. Similar economic forces appeared to have prompted some Mid-South warehouses to alter their practices as well.
Respondents in the West utilize Store in Bag as their primary sample storage method. This is likely a function of marketing practices used in this region.
With the practices defined, we turn our attention to understanding regional differences in the fraction of bales requesting samples.
The gray line represents the weighted average percent of total respondent volume that had a sample requested each year. For example: In 2000-01, 20% of all bales stored by respondents had a sample requested. By 2003-04, respondents told us that this percent fell to 16%.
For the Southeast, 41% of bales stored in 2000-01 had a sample requested. By 2003-04, a little more than a quarter (27%) of the bales stored in the Southeast had samples requested.
In the Mid-South, 27% of bales stored had a sample requested in 2000-01. By 2003-04, a fifth of the bales stored in the Mid-South had samples requested.
Compared to the Southeast and Mid-South, bales stored by respondents from the Southwest and West had significantly fewer samples ordered. One sixth of the West’s bales stored by respondents in 2000-01 had a sample requested. That same year, an even lower amount (11%) was requested of bales stored in the Southwest.
Perhaps the most striking observation is that only 5% and 4% of bales stored by respondents in the West and Southwest, respectively, had samples ordered in 2003-04.
For each of the handling practices, respondents were also asked to provide cost information for their operation. Based on that data, average net costs per buyer’s sample provided have been estimated.
At $4.23, ‘Traditional Racking’ represents the highest total costs per sample provided with the largest portion of this amount involving costs for labor, materials, shipping and transportation.
On-Demand Cut & Pull
For respondents pulling samples upon request, the total cost of providing a single sample is $4.17. While significant labor time and equipment are required to fill sample orders, there are no fixed costs or revenues associated with this practice.
Storing in Bag
Storing samples in bags had the lowest reported total costs at $1.12 per sample provided. Lower variable costs result since considerably less time is required to work samples where merchandizing practices allow sample orders to be retrieved for whole blocks (sequential bales) of cotton rather than random samples.
Store in Bale Head
Storing samples in the bale head also had modest total costs at $1.56 per sample provided. Variable costs are low because less labor is required than other practices. However, due to limited number of respondents indicating use of this practice, costs associated with storing samples in the bale head may not be truly representative.
If we apply per-sample costs to the regional sample-handling practices, we can estimate regional costs of providing buyer’s samples. Summing regional costs, we are able to estimate total net costs of providing buyer’s samples for both survey respondents and the whole warehouse segment.
Warehouse respondents represent approximately 41% of total 2003 storage volume. Total costs of providing samples for these respondents were $4 million. Significant differences in sample-handling costs and the portion of bales stored having samples requested impact the regional distribution.
If we assume that warehouse survey results are representative of the U.S. cotton warehouse segment, results can be extrapolated to represent the whole segment. Total calculated costs of providing samples are $10.8 million, which is $0.60 per-bale. Mid-South and Southeast warehouses account for 91% of total sample-handling costs. The Southwest, despite producing 25% of U.S. cotton production, represents only 7% of the total cost of providing buyer’s samples.
To summarize the warehouse segment:
First, there are significant regional differences in both the handling practices and the number of samples being requested. Given differences in merchandizing practices and the market being serviced by each region and trade rules, these results are of little surprise.
Second, costs of providing buyer’s samples vary significantly by handling practices.
Finally, the estimated cost of providing buyer’s samples is approximately $10.8 million.
Let’s take a look at the merchant and mill segments to see how and why these buyer’s samples are being used.
The merchants that responded to our survey represent approximately 5.6 million bales or 31% of production.
Merchants request samples both for their own use -- to facilitate the purchase and sale of cotton -- and at the request of their customers -- both domestic and foreign. The primary set of information we sought to obtain from merchants includes the number of samples ordered and the number of samples provided to customers.
Respondents indicate they typically ask for samples on one-third of the bales they trade. This portion has not significantly changed over the last several years.
Merchant respondents indicated that they provided buyer’s samples to customers on 22 to 25% of total bales traded.
Given recent changes in cotton’s customer base, it is important to understand the role that samples play in marketing cotton to domestic and foreign customers.
We see that samples are provided on approximately 50% of the bales sold to domestic mills.
We also see that samples are provided on approximately 10% of the bales sold to foreign mills.
To summarize merchant responses:
Merchants reported ordering samples on roughly one-third of volume traded, and most samples are passed to mills. Their domestic customers are more likely to request samples than their international customers.
Now we turn our attention to the information provided by domestic mills.
As previously stated, mill responses represent approximately 5 million bales, or 80% of domestic mill consumption.
Respondents indicated that, on average, they ask for buyer’s samples on approximately 25% of the bales they consume. Additionally, mills confirmed that a portion of bales consumed is sampled on delivery. In 2000-01, 28% of the bales consumed had a sample pulled after they were delivered to the mill. The fraction has declined in more recent years to 18% in 2003-04. It is important to note that the bales that had samples provided by merchants and the bales that had samples cut at the mill are not necessarily the same bales.
We thought it prudent to understand who is ordering these samples or, more precisely, the distribution of the mills ordering samples.
Respondents were asked ‘What percent of bales consumed had a buyer’s sample provided by merchants?’ For each answer, the percent of responses is weighted by consumption.
This survey illustrates that there are three distinct groups:
Mills who do not depend on merchants to provide samples (59% of total consumption)
Mills that order samples on some of the bales they consume (13% of total consumption)
Mills that order samples on most bales they consume (29% of total consumption)
Survey results indicate that 25% of all bales consumed by respondents have a sample provided. Of all bales consumed by respondents, 22% were reviewed. 3.2% of bales consumed had samples reviewed that resulted in a bale rejection and .3% had a price adjustment.
Changing gears… Think about these statistics in terms of the 25% of bales consumed which had samples provided by merchants. Mill respondents indicated that 90% of these samples were reviewed. 15% of the samples reviewed resulted in a bale rejection while 1.4% had a price adjustment.
Predominant reasons given for price adjustments or bale rejections include extraneous matter, leaf grade and color.
To conclude this report, I’d like to share with you two points the committee continues to discuss. While economics are driving warehouses to alter their handling practices, ensuring continued timely delivery of samples is paramount to the industry. Also, encouraging continued improvement in HVI measurements particularly for leaf grade, color, and extraneous matter. By providing a more precise classification, buyer’s dependence on the physical samples may be reduced.
While the study establishes the role that buyer’s samples currently serve in the marketing chain, the committee recommends that:
- More investigation into the economic benefits at the merchant and mill level,
- Continued monitoring of sample handling practices and uses to identify industry trends, and
- Communicate relevant survey information to Quality Task Force to facilitate improvements to the USDA classification.
This concludes the Rack Sample Study Committee report and current recommendations.