A Simulation Analysis of Cotton Gin Financial Viability Under Risk

Cotton ginning is a vital component of the cotton industry in Texas and the Texas High Plains Region (THP). The industry is presently experiencing significant management and financial stress brought on by increased cotton production within the region and a declining number of gins which has increased the volume of cotton each gin processes annually. Gins in the region are facing decisions regarding upgrading present facilities or constructing new ginning plants to handle the increased ginning volumes.

The general objective of the study was to analyze a cotton ginning firm’s capacity decisions and financial viability given the variability and uncertainty of annual ginning volume. Simulation analysis was used to evaluate financial performance measures based on stochastic variables and projections. This study is the first of its kind that uses audited  financial information from individual gins to evaluate financial performance under risk.

Representative gins were selected for four size classifications based upon their historical annual ginning volumes. Ten-year simulations were then made for each representative gin using three different decision scenarios. The financial measures analyzed were net income per bale and ending equity.

            The results indicated that the representative gin with less than 30,000 bales in annual volume has some risk of a negative average net income over the time period under the status quo scenario; however, this gin has much greater risk under the two new investment scenarios.  Only the gin with a volume greater than 60,000 bales annually appears to be able to invest in a new ginning plant without significant financial risk.  As expected, the results indicate that as gin size increases the risk associated with stochastic production and additional debt has less negative effect on long-run financial viability.