Financing Cotton and Cotton Cloth
No industry shows better than the cotton industry the economic importance
of banking service. No industry, perhaps, utilizes to such a complete
extent the modern instruments of credit, nor is so dependent upon these
instruments for its proper functioning. At no point in the progress from
seed to cloth is the capital represented by the cotton necessarily or
even customarily tied up. And not only may the cotton itself at any stage
be the basis of credit accommodation, but also, the actual added value
which the labor of any factor in the chain may give to the cotton may
itself be realized upon in advance. The credit possibilities of the
industry have grown with the admission of acceptances to rediscount in
the Federal Reserve Banks, and this admissibility has likewise played a
part in the present growth of the warehouse system, the lack of which was
a handicap to the industry in past years.
Credit Necessary from Seed
to Finished Product
In considering the raw cotton and the cloth market it was necessary to
include some account of the financial and banking processes involved in
the various commercial transactions undertaken. It is perhaps advisable,
however, even at the risk of some repetition, to give a quick survey of
the financial and credit aspects of the industry as a whole from the time
the cotton is placed in the ground up to the actual sale to the cutter-up
or the jobber.
The utilization of credit begins, as we have seen, with the very planting
of the crop. Many of the growers, even those who own their farms, are men
of limited means, and are not able to pay for the necessaries of life and
of labor during the long growing season. The country storekeeper,
accordingly, in return for a lien on the crop, allows them credit at his
store, usually charging interest based on the monthly statement of their
ledger accounts. He in turn receives the necessary accommodation for his
own purchases from the local bank, or from the local buyer or factor with
whom he is affiliated. The high prices prevailing during the past few
years have undoubtedly changed to some extent the small grower's
financial position.
Cash for the Grower
From the Local Bank
The larger growers, or the great corporations which let out cotton lands
to renters, usually operate the stores in their villages upon the same
basis, credit being advanced against the renter's share of the growing
crop. Even these large corporations are seldom able to meet the heavy
demands of the growing season without recourse to the credit service of
those to whom they sell their cotton, or to the local banks. The banks,
or buyers, in turn discount at least a proportion of the commercial paper
thus created with their correspondent banks in New York, Boston, or other
financial centers. This credit arrangement, it will be seen, is almost
entirely based on a moral risk, the lien being made upon the growing
cotton which cannot be liquidated until it is grown, picked, and ginned.
When the crop is picked, it is weighed by the merchant before it is
ginned, and the farmer is credited on the merchant's books with the
amount due him, the balance in his favor being given him in cash. His
concern with the cotton is thus ended. In the event that he is able to
finance himself through the season he takes the cotton directly to the
gin, and has it ginned and baled there, paying the ginnery for the
operation, and selling the cotton directly to a local buyer and the seed
to an oil mill. If the gin warehouse is available, and he desires to wait
for a more favorable opportunity to sell, he may store the cotton, taking
a gin receipt for it, against which the cotton will eventually be
delivered. The gin receipt may be collateral for a loan from a cotton
factor, or from a local bank.
Thus, it will be seen that the grower receives accommodation throughout
his season, and is paid cash for his product when it is delivered. This
arrangement puts a heavy strain upon the cotton buyers, particularly upon
those who deal in large lots for the mills. The method by which the
buyers pay the growers is thus described:
The buyers make arrangements with the local bankers where the gins are
located for the payment of the cotton, the banks furnishing the actual
cash against tickets issued by the buyer's representatives, holding the
tickets in question as their collateral in the meantime. When a
sufficient amount of cotton has been accumulated the local banker, at the
request of the buyer's agent, delivers the tickets in question to the
local agent of the railroad, who in turn issues a bill of lading covering
the shipment to the compress point, which then is attached to the draft
drawn by the buyer's agent upon the buyer's head office, which draft
includes the price paid for the cotton plus interest and exchange charged
by the local banker, who is reimbursed for the amount of the draft thus
drawn. When this cotton is ready for export (or for shipment to the mill
in the United States) local bills of lading, covering shipment from point
of origin to compress point, are exchanged by the cotton buyer's banker
for local bills of lading to port or for through bills of lading.
[Illustration: "_Picked 100 pounds today_"]
When cotton is bought at compress points, compress receipts instead of
tickets are delivered to the local banker, who pays for the cotton as
purchased by the buyer's representative from time to time. When a
sufficient amount of cotton is ready for shipment the compress receipts
are exchanged by the banker for local bills of lading to port (or to
mill), or through bills of lading, as the case may be. These bills of
lading are attached to the draft drawn by the representative on the head
office of the buyer, the local bank being reimbursed for the amount thus
drawn.
Buyers must necessarily hold great quantities of cotton in storage, for
they buy whatever cotton is offered, and must sell, as we have seen,
certain grades and qualities to the mills in order that they may weave
the cloth for which their orders call. Cotton must, therefore, be held in
storage, either at the compress points, which is usual, or at warehouses
operated by factors, or by independent corporations, or in their own
warehouses.
While the buyers by cash payments are concentrating the cotton necessary
to fill their domestic or foreign orders, their need for funds is a
pressing one. Their arrangements with local banks we have seen. When the
cotton is shipped, the local bank, by means of drafts on the buyer's head
office, is relieved of the burden it has been carrying, but the cotton
still represents capital, and if that capital is to continue to earn its
wages it must be the basis for credit. The factors and large banks in New
York or Boston, which have been assisting the local bank, must now assist
the buyer and the warehouseman. The methods by which this burden is
shifted to the larger banks are varied, and we can consider only one or
two of their aspects.
Same Mills Pay Cash, Relieving
Factors of Burden
Some of the larger New England mills pay cash for the cotton which is
shipped to them, buying sufficient in the season to carry them through,
or nearly through, the year. Their buyers, therefore, need support, if
they need it at all, only during the period of concentration. They may
have their private banking arrangements, and may be able to utilize their
warehouse receipts or bills of lading, or their mere notes based upon
mixed collateral, for an advance of sixty to seventy-five per cent. of
the value of the cotton, the line having been arranged in advance. Credit
may be obtained by the buyer directly from the warehouseman, who thus
becomes a factor in his own right, being supported by arrangements
previously made with his own bank. Credit may also be obtained from a
bank, upon bills of lading which are exchanged for warehouse receipts
when the cotton is delivered at the port or at any warehousing point; or
the credit obtained from the bank may be settled and a new credit opened
with the warehouseman when the cotton is shifted from cars to storage.
Warehousemen as Factors of
Growing Importance
The growing importance of the warehouseman has been mentioned. His
services have developed with the need of mills for greater credit, and
their unwillingness to tie up their working capital in cotton held in
their own warehouses. Mills which formerly bought all their year's supply
during the buying season, so-called, now take their cotton from
warehouses as they want it, buying it from their buyers, and making
payment according to the individual standing arrangements. The advent of
the warehouseman who is either a banker, or closely affiliated with a
bank, has undoubtedly done much to make the financing of cotton a more
elastic and feasible proposition, distributing the risk over a wider
circle and making credit more readily available at any point in the
succession.
[Illustration: _Weighing gin bales in a ginnery yard_]
[Illustration: _Cotton warehouses in the South_]
The mill, we have seen, frequently pays cash for its raw stock, or else
buys upon short term notes. The average mill does not have a working
capital large enough to enable it to tie up the thousands of dollars
necessary for such a proceeding, as well as the funds which must
constantly be paid out for wages, for operation expenses of all kinds,
for upkeep, and all other overhead. Mills, as a matter of fact, are
frequent borrowers, either from general banks, or from textile banks or
factors, or from their selling agents, who, as we have seen, combine
their primary and original function of selling with that of supplying
financial assistance.
Mills which purchase cotton from their buyers and pay cash, or
approximately cash, for it, usually buy such cotton to fill orders which
they have already received from their selling agents. They may, in
certain instances, obtain an advance from their agents of a proportion of
the whole selling price of the order, and out of that advance pay for the
purchase of cotton, or they may hold the cotton in warehouses, using it
only as needed, and putting up the warehouse receipts as collateral for
loans.
The raw cotton itself, however, represents only a portion of the mill's
operating expenses and it cannot be the entire basis for financial
operations of the magnitude often needed. These broader financial wants
may be met out of the prospective selling price of the cloth by means of
loans from the selling agent; or, they may be met by direct relations
with a commercial bank, which may make loans on ordinary collateral, on
acceptances, or, as frequently happens in the case of mills of undoubted
integrity, on the mere note of the company operating the mill.
Selling Agent May Shift
Burden to Banks
When the burden is assumed by the selling agent, or factor, he in turn
may shift it to the bank, either by indorsing the note of the mill, or by
indorsing the note of the purchaser of the cloth or by borrowing directly
from the bank on his own paper.
The converter, as a rule, is not a factor, but a merchant pure and
simple, seeking accommodations from a factor or a bank as his needs may
require it. Inasmuch as he usually buys for cash or on short-term notes,
and sells to jobbers or retailers upon more extended terms, his needs are
frequently heavy. His relation with his factor may be, and frequently is,
upon the basis of accounts receivable, or he may borrow upon his own
collateral, or, if he is counted an "A1" risk, upon his unsecured note.
These, in brief are the financial steps in the progress of cotton from
the grower to the jobber. A cursory view is all that is possible, because
in the words of a textile banker of standing "every textile banking
transaction is a law unto itself." Yet enough has been said to show the
all-important part which banking plays in the cotton industry, and to
indicate how dependent are the turning of wheels and the distribution of
cotton and of cloth upon the credit which banks and bankers are able to
provide.
Factors and Their Wide
Financial Service
Frequent use has been made of the word factor, and no adequate definition
of its meaning has yet been given. The factor is, briefly, the commercial
banker of the industry, and his duty is to provide, at any stage of the
cotton process, the financial assistance which may be necessary, either
from his own resources or through his affiliations with some large bank.
It is true, of course, that some factors work only with those dealing in
raw stock, and some confine their services to mills. Some factors are
cotton buyers, some are selling agents, some deal with buyers and some
deal with selling agents. Some are employed only by the mills. Recently,
however, the tendency has been to develop under one roof a unit
institution capable of handling every textile banking transaction. It
will be interesting to enumerate here, briefly, the various functions and
facilities of one such institution:
1. It makes loans to cotton buyers and to mills
on cotton held in warehouses or in transit.
2. It checks the credit of the mill's prospective
customers.
3. It cashes accounts receivable.
4. It makes advances against merchandise for
the account of mill, converter, or jobber.
5. It finances merchandise and raw material requirements,
and current operations.
6. It deals in acceptances, specializing, of course,
upon paper arising out of transactions in the
textile industry.
7. It maintains an Industrial Department, which
includes:
(a) the services of a consulting architect, expert
in mill construction.
(b) the services of a production engineer,
skilled in the laying out of plants in the line
of greatest efficiency, and in diagnosing
and correcting the production mistakes
of an inefficient mill.
(c) information as to the newest mill practice,
which it is ready to provide for its
clients and others.
(d) readiness to assist customers in the expansion
of their business either by financing
new mill construction or by providing
sales representatives in other countries.
(e) maintenance offices abroad, either for the
buying or selling of textiles or equipment,
or raw materials, or for the complete and
direct financing of such transactions.