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Published By: THE NORTH CAROLINA AGRICULTURAL EXTENSION SERVICE

North Carolina State College of Agriculture and Engineering of the University of North Carolina andthe U. S. Department of Agriculture, Cooperating. N. C. Agricultural Extension Service, R. W.Shoftner, Director. State College Station, Raleigh. Distributed in furtherance of the Acts of Congressof May 8 and June 30, I914.

July, 1962

COTTON GINNING:VOLUME, COST, PROFITS AND PLANT REPLACEMENT

Prepared byM. Elton Thigpen, Extension Cotton Marketing Specialist

Introduction

Changes in cotton production have put a stress on cotton ginners.

Movement of cotton acreages from one area to another is causing declining

volumes for some ginners, while on the other hand other ginners are pro-

cessing increasing volumes overtime.

Whatever the situation is in your area, you should be concerned with

maximizing returns from present and future investments in your ginning

operation. Let's examine the cost structure of cotton gins and determine

the volume necessary to profit from investing in one.

Long Range Planning

The purpose of the long range plan is to assist gin managers in making

profitable investment decisions. Logical steps in developing a long range

plan are: estimating volume; planning necessary facilities and figuring

out a financial plan.

- Volume Planning: The average volume per active gin in the state

exceeded 1,000 bales during two of the last three seasons. Make an estimate

of the amount of cotton that will be available in your area before deciding

what type of plant you want to operate. Be sure you consider production

trends and prospects, and what other gin plants may be available in the

future.

In Table 1 you will find the trends in the average number of bales of

cotton ginned during a given period. Only counties with three or more gins

are included in the table.

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Table 10 Fivenyear averages of cotton ginned by counties and percentagechanges, 1946-50 and 1956-60°

Avg . ginnings Avg. ginningsPercentage changesin avgo ginnings from

County 1946~50 1956-60 1946-50 to 1956-60

(bales) (bales) (percent)

NORTH CAROLINA 456,588 288,755 -37Anson 15,698 6,937 -56Bertie 3,652 4,103 +12Cabarrus 5,552 1,328 -76Catawba 6,352 577 -91Chowan 1,568 1,931 +23Cleveland 59,762 20,779 -65Cumberland 9,510 5,678 -40Edgecombe 10,194 6,881 _-32Franklin 9,061 5,456 -40Halifax 20,395 20,095 - 1Harnett 17,917 13,898 -22Hertford 3,618 * 4,218 +17Hoke 10,064 5,859 -42Iredell 12,319 4,111 -67Johnston 17,440 14,635 -16Lee 2,387 1,753 -27Mecklenburg 11,519 3,671 -68Nash 14,705 12,057 -18Northampton 17,584 19,778 +12Pitt 4,825 7,225 +50Richmond 3,618 1,136 -69Robeson 39,532 32,559 ~18Rowan 6,621 1,686 -75Rutherford 10,392 2,524 -76Sampson 13,681 15,453 +13Scotland 19,953 13,401 -33Stanly 3,764 1,097 -71Union 19,975 8,201 -59Wake 7,175 2,539 -65Warren 10,177 5,254 -48Wayne 10,011 9,428 - 6Wilson 9,940 8,509 -14

* Four year averageo

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Notice that average ginnings increased in only five counties during

both periods while ginnings declined in 27 counties. The decline in the

number of gin plants accounted for the increase in the average volume per

gin in some counties.

This information gives some trends in county and state ginnings but

does not show the full impact of cotton allotment transfers under the

Release and Reapportionment Program which began in 1960. Nor does it show

the decline in the total number of gin plants and how the volume of cotton

processed in a particular gin territory is affected.

Over 19 percent of North Carolina's 1962 cotton acreage allotment was

voluntarily released from the farms to which it was allocated. It was

distributed to other farms whose operators wanted to plant more cotton than

their base allotment. As a result, there was a transfer of 97,000 acres

of allotment--38,000 moved between counties. This had a severe impact on

the ginning industry.

Table 2 relates the distribution of cotton volume by individual gin

plants from 1956 to 1960. The number of gins in each volume category

fluctuates widely from year to year. Most of the 93 gin plants that became.

inactive during this period were constantly in the less-than—SOO bale group.

Some 10Whvolume gin plants invested in modern equipment and therefore, have

increased their ginning volume.

Table 2. Volume of cotton handled by North Carolina gins.Number of gins

Bales ginned 1956 l 1957 1 1958 | 1959 I 1960500 or less 123 158 133 71 102501 - 1,000 110 98 82 79 87

1,001 - 1,500 60 52 43 68 431,501 — 2,000 40 25 29 39 262,001 - 3,000 32 8 20 34 213,001 and over 8 l 5 7 1

TOTAL 373 342 312 298 280

.4-

Planning Proper Facilities: As a result of mechanical cotton har-

vesters, it has been necessary to purchase additional conditioning and

cleaning equipmento Due to the need for this additional equipment and

price inflation, the level of investment required for a modern gin plant

is at an all-time high. Larger volumes per gin plant are needed to provide

a desirable return on this investment.

Look at the functional parts of your gin and determine what is neces-

sary to do the job that will make profits for your operation. Quality of

service and your operation capacity are very important aspects of profit-

able cotton ginning.

The following order of equipment represents the maximum amount needed

for proper handling of damp and trashy machine-picked cotton: 3/

1. Automatic feed control 5. Tower drier

2. Tower drier 6. 6-7 cylinder hot air cleaner

3. 6&7 cylinder hot air cleaner 7. Large extractor feeder

4. Burr extractor or stick and 8. Gin stand

green leaf machine 9. Two stages of lint cleaning

Adjust driers to give a lint moisture of 6 percent. The list repre-

sents gin facilities for processing the roughest cotton usually received;

therefore, some of the machinery can be by-passed if you process cleaner

cotton.

Consult ginning specialists, ginning research personnel and gin

manufacturers for assistance in selecting the amount and type of equipment

needed for your operation.

A! Recommended by the USDA Cotton Ginning Research Laboratory, Clemson,South Carolina.

-5-

The Financial Plan: This is one of the most important steps in long

range planning. The first step is to study cost and return records for

typical yearso After that, develop a budget of expected costs and returns

for the volume of your planto

Table 3 represents a budget for a gin plant costing $150,000 which

gins an average volume of 3,000 bales a year° In the space allowed, work

out a financial plan for your gin.

Ginning Costs: Separate costs into variable costs and overhead costs.

The costs in Table 3 are consistent with recent records in North Carolina.

The per bale cost provides reasonable figures to check against individual

ginners' recordso If your figures exceed those noted, this may indicate

an area in your operation that needs further investigationo

For example, if labor costs exceed $2,50 per bale, it may be that you

need to reorganize your gin crew, particularly during slack periods, there-

fore, reducing the cost per bale by an appreciable amount. Some items may

exceed those given in Table 3. For instance, fuel costs for drying and

conditioning cotton will be higher during a rainy harvest season. These

factors have to be taken into account when comparing costso

Overhead Costs; These are the costs that remain the same regardless

of the volume of cotton ginned. They include insurance on buildings and

equipment, property taxes, depreciation and interest on borrowed capital.Depreciation and interest comprise the bulk of overhead costs° Therefore,

overhead costs are mainly determined by the amount of investmento

On a per bale basis, total overhead costs vary with ginning volume.The more bales you can process, the lower your overhead costs on each

baleo

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Table 3. Analysis sheet: Ginning costs and returns for 2 high capacitygin stands with related equipment averaging 3,000 bales per year

Your recordItem Total Per bale Total I Per bale

(dollars) '

I. Receipts:Gross ginning charge 43,500 14.50Net receipts, cottonseed 10,500 3.50Net receipts, seed cottonNet receipts, cotton lint

TOTAL RECEIPTS 54,000 18.00

II. Variable costs:Baggings and ties 7,500 2.50Electric power 2,250 .75Social security and

compensation 900 .30Drier fuel 1,800 .60Ginning supplies 210 .07Office supplies 600 .20Telephone 360 .12Legal and professional

fees 300 .10Advertising 300 .10Labor 7,500 2.50Water and heat 90 .03Repairs 2,400 .80Auto and truck

a) Repairs 1,200 .40b) Gas and oil 1 800 .60

TOTAL VARIABLE COSTS 27,210 9.07

III. Overhead costs: #Insurance 1,350 .45Taxes (city and county) 540 .18Depreciation (annual)

($12,000 b1dg.,$138,000 equip.) 9,500 3.17

Interest (annual avg.) 4,500 1.50

TOTAL OVERHEAD COSTS 15,890 5.30

IV. TOTAL COSTS 43,100 14.37

V. RETURNS TO MANAGEMENTBEFORE TAXES 10,900 3.63

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Variable Costs: These are the costs that vary with the volume of

ginning. In other words, it costs more for fuel, baggings, repairs, office

supplies, etc. with increased volumes of ginning.

Ginning Receipts: Total ginning receipts usually come from several,

but related activities. Receipt records are most useful for analyzing an

operation when they show-each activity sgparately. For example, note the

receipts subentries in Table 3. They include gross ginning charge, net

receipts from cotton seed purchase and sale, net receipts from lint cotton

purchase and sale and net receipts from seed cotton purchase and sale.

Records on each activity may reveal strong and weak points in your

total operation. In one instance, cottonseed activity may be showing a

good profit and offer an opportunity for strengthening the competitive

position of your gin with an increase in seed price. On the other hand,

lint merchandising may show losses and need adjustments to make it profit-

able.

In the final analysis each activity should aid in reaching the goals

of the total operation-«whether profitable in itself or not. For example,

it may be possible to attract additional cotton to the gin by paying a

high price for lint and taking a small loss on buying the cotton when

ginning charges and seed handling margins more than cover the ginning

costs, seed handling costs and the loss on buying the cotton.

Note in Table 3 that the only receipts shown are for ginning charges

and net for cottonseed handled. Analyze your total operation before

deciding to add to it or close a major part of it.

Testing: You must test the profitability of the long range plan in

terms of goals established for your business. A major goal is usually

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measured in terms of a satisfactory return on the investment at an

acceptable level of risko

The risk of incorrect volume estimates may be tested by determining

the volume necessary to cover all costs, with no return to management.

This can be done by applying the break-even formula to the per bale cost

and receipts data in the sample budget in Table 3. The break-even volume

is the amount of cotton necessary for total receipts to equal total costs

and is determined by the following formula:

total overhead costsBreak-even volume in bales = . . .recelpts per bale minus variable cost perbale

From the example in Table 3:

Total overhead costs = $15,890

Receipts per bale = $18

Variable cost per bale = $9.07

Break-even volume = ig’gigus 9007 = 1,779 bales per year

This gin must process 1,779 bales per year to cover all costs. At

less than 1,779 bales the gin will operate at a loss. Beyond 1,779 bales,

a profit will be made.

You can further test your financial plan by determing the effect of

less receipts or additional cost per bale on the break-even volume. Either

$2 less receipts of $2 additional cost per bale would increase the break-

even volume to 2,293 bales per year.

The question that faces many of you is, ”Am I willing to risk the

necessary investment for the estimated return?” Or to use the example, "Is

the estimated $10,900 average annual return before taxes adequate return to

attract my investment of $150,000 in a ginning operation?”

-9-

Analysis of North Carolina Ginning Records

The following information is an analysis of gin plants in the state

in 19512] along with cost records analyzed for individual firms for the

1959 and 1960 seasons.

Investment in buildings and equipment for plants in these studies

ranged from about $10,000 to $175,000. Most of the plants were in the

$25,000 to $60,000 range.

The average break-even volume was about 20 bales annually per $1,000

investment (Figure 1). The average ginning cost declined rapidly up to

about 15 bales per $1,000 investment and then declined more slowly at

larger volumes. The average break-even volume at the gins studied in 1959

and 1960 was higher per unit of investment than those studied in 1957~be~

cause of lower ginning charges in 1957 and the more efficient, higher

capacity gin in this example.

-g/ Source: W. G. Tussey, Costs of Ginning Cotton in North Carolina1957, A. E. Information Series No. 72, N. C. State College, December, 1959.

(dollars)

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Approximatebreak-evenpoint

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Balesofcottonginnedannuallyperthousanddollarsininitialinvestmentinginplant

(bales)

Figure1.Averagecostofginningcottonperbaleatvariousannualvolumesperunitofinitialinvestment