Spring 2004

To Provide a Written Framework for Future Pool Operations

PCCA Board and Pool Committee Approve Recommended Changes for
West Texas/Oklahoma/Kansas Marketing Pool

by John Johnson

The Board of Directors and West Texas/Oklahoma/Kansas Marketing Pool Committee of Plains Cotton Cooperative Association (PCCA) have approved numerous changes for the West Texas/Oklahoma/Kansas (WT/O/K) marketing pool's policies, strategy and operation following an exhaustive review by a Special Study Committee comprised of pool members. The changes were approved at the regular, monthly meetings of the Board and Pool Committee on April 21.

Earlier this year, the Board and Pool Committee approved recommendations from the Study Committee, chaired by PCCA Director Eddie Smith of Floydada, TX, to provide improved communication with pool members and a better method to compare the pool's performance against competing pools.

In another development, PCCA Chairman Jackie Mull announced on April 1 that he had accelerated his plan to retire from PCCA's Board of Directors and that his retirement would become effective immediately rather than later this year. Consequently, the Board elected Eddie Smith to serve as PCCA chairman. The Special Study Committee, under Smith's direction, met weekly from March 26 to April 16 to review a broad range of topics.

"We looked at every issue raised by any member or any district having to do with our pooling operations," Smith explained in a letter to WT/O/K pool members on April 16. "We went through the pool's position, sales, and trading activities day by day throughout the season," Smith continued.

"While we didn't undo the Study Committee's work earlier this year, we did change a number of their recommendations and explored and made recommendations on a number of areas not previously considered," Smith stated. "Specifically, we focused our attention on pool policies and strategy, the marketing pool committee, pool reporting, and pool management. One goal was to provide a written framework for future operation of our pool," he added.

"Accordingly, we came up with written guidelines and policies in a number of areas in an attempt to provide better information, more transparency, and better communication between the pool committee, the pool members and staff," Smith wrote in his letter. "Additionally, we approved the special audit procedures to be done on this year's pool as authorized by the board of directors. That work has begun, and the report of the independent accountant on those procedures should be available in a few weeks." The following recommendations are effective immediately.

Pool Marketing Strategy:

The West Texas/Oklahoma/Kansas Pool will be marketed in a timely, orderly fashion with the objective of obtaining a strong seasonal price.

Timely marketing is defined as: Marketing that takes advantage of historical cycles in the market and individual year market opportunities.

Orderly marketing is defined as: Marketing that is done in conjunction with a flexible plan over an entire season.

Having an annual review, early in the marketing cycle, to develop guidelines for entering the marketing year and suggesting an appropriate percentage of the expected pool to be marketed pre- harvest.

Discussion in the Pool Committee relating to acceptable and desirable pricing levels will be considered in carrying out this marketing process.

Risk management tools, such as the New York futures market, will be used and managed in accordance with the pool's approved hedging policy.

"Whole Farm" Policy:

Members will have the option to exclude/include separate tracts of land under the same farm number and deliver every bale or every other bale by tract.

WT/O/K Pool Sign-in/Out:

The sign-in/out period for this year has been extended to at least the end of June.

Hedging Policy:

1. Short Futures

   If the futures market reaches a level at which PCCA's staff feels that a portion of the Pool should be fixed and the Pool is not able to sell physical bales, PCCA's staff will sell futures contracts for the Pool in order to lock-in the price and return a sufficient equity to the Pool.During the course of the marketing year, the Pool will buy futures contracts in order to exit the short futures position.

2. Two instances that may make it necessary for the Pool to hold long futures:
   1. To protect the Loan Deficiency Payment (POP) on forward sales.

      If the pool makes a forward fixed price sale when the AWP is below the loan, all or a significant portion of the equity the Pool expects to generate from that sale may depend upon the POP. By purchasing long futures against the forward fixed price sale, the Pool can attempt to protect the expected equity. If the market moves higher the decrease in the POP should be offset by the increase in the value of the long futures. If the market moves lower the increase in the POP should offset the decrease in the value of the long futures.

   2. When a customer fixes the price for an On-Call sale.

      Domestic mills want to forward purchase cotton On-Call in order to secure a steady supply of raw materials to their mill without fixing the price at the time of purchase. When the mill decides to fix the price they will notify PCCA of their intent to do so. At fixation time the mill either gives long futures contracts to the Pool or PCCA purchases long futures for the Pool.

      On-Call purchases of cotton are a standard business practice for the domestic textile industry. If PCCA refuses to sell to domestic mills on an On-Call basis they will buy from another supplier.

3. The use of stops is not contemplated.

Structure and Function of the Marketing Pool Committee:

Requirements for Service:

Committee members must be active pool members and must be a member of the delegate body, duly nominated and elected to represent his/her district on the committee. Each committee member serves a one-year term.

Districts are encouraged to elect active producers with a good understanding of markets, hedging, etc.

Committee Size and Structure:

The committee size will normally be 27 members, an average of three per district.Each district will have a minimum of one representative on the committee.  The first committeeman for each district will be elected based on volume and any subsequent committeemen will be elected based on one gin, one vote.There is a limit of one marketing pool committeeman per gin.There are no alternates to the marketing pool committee.

The number of representatives by district will be reviewed every two years (even numbered calendar years) based on a three year rolling average of the last three crops.The caucuses of the delegate body representatives to elect members to the marketing pool committee will be held in June with the exception of District 1 that will caucus in May.

Marketing Pool Committee shall meet monthly to:

Review reports from management regarding pool sales, sales over The Seam (when appropriate), hedging activities, comparative data on other pools (when available) and any other special reports regarding the pool that were previously requested by the committee.

Discuss current and projected market conditions with appropriate staff representatives.

Participate in discussions and provide guidance to the staff regarding the current market and the plan for marketing of the pool and continue to authorize the maximum sales allowable from the pool.

Participate in any training and developmental activities relative to their service on the Marketing Pool Committee, as the committee may request.

Internal Checks and Balances:

1. CEO and CFO will review pool position with Sales, no less frequently than weekly and will sign-off on position. Forms will be developed to document such approval.
2. Any combination of futures orders over 250 contracts or any order that would put the day's total over 250 contracts will require dual approval – Sales and CEO or CFO.
3. Options will not be purchased or sold until further notice. Approval by Pool Committee will be mandatory for any options transactions in the future.
4. Long futures will be used only:
   1. As customers call to lock in price on On-Call sales or
   2. To protect the Loan Deficiency payment on pre/early season sales made below the CCC loan or
   3. With the express knowledge and approval of the Pool Committee
5. Open futures position will not exceed 20 percent of the projected pool size or more than 250,000 bales (whichever is less) without specific authorization of the Pool Committee.
6. Any specific sale of physicals that would total 50,000 bales or more will require approval of the CEO/CFO and Sales.

Marketing Pool Committee Meeting Format:

The meeting will be more structured and "formalized" in the current location or moved to another location.

Marketing Pool Committee Meetings:

The Committee will meet monthly.

Remaining Recommendations from the Prior Study Committee:

• The pool should maintain a conservative strategy regarding all advances.
• Agent fees for handling pool cotton should be standardized at $1.00 per bale.
• The method of invoicing on the initial advance should be changed to a Recap type of invoice that shows deductions for first month's charges plus additional storage, if any.
• Information regarding the pool should be provided in the delegate body meetings.
• The current timely delivery, premium for strength, and quality adjustment programs will be discontinued.
• These will be replaced with a Market Adjustment program. This program will be targeted to a cost no greater than total pool pounds delivered times 40 points.
• No other types of pools should be offered at this time (call pools, high risk, specialty, etc.)

To improve communication with pool members, information regarding the pool will be presented at all PCCA Delegate Body meetings and at quarterly compress meetings in Sweetwater and Altus. Also, a weekly pool status report including futures market data and market commentary will be provided online via PCCA's Member Access system to be viewed by pool members and gin personnel.A pool question and answer section also will be available to all members.

Additionally, monthly reports reviewed by the pool committee have been completely overhauled to include more information and more transparency as to pool results.

"PCCA will be a stronger company, and the West Texas/Oklahoma/Kansas marketing pool will be a better program as a result of the changes that have been approved," Chairman Smith said. "I want to thank each member of the Special Study Committee for their dedicated effort and faithful attendance at our meetings," Smith concluded.

Marketing Pool Special Study Committee

The following pool members served on the Special Study Committee of the West Texas/Oklahoma/Kansas Marketing Pool.