DOCUMENTS DEPT. BOBl'lZ'NVP'lVd S.13:>IBI\[ SUMMARY OF REPORT OF THE FEDERAL TRADE COMMISSION ON COMBED COTTON YARNS April 14, 1921 WASHINGTON GOVERNMENT PRINTING OFFICE 1921 SUMMARY OF REPORT OF THE US FEDERAL TRADE COMMISSION ON COMBED COTTON YARNS April 14, 1921 WASHINGTON GOVERNMENT PRINTING OFFICE 1921 l4T^f [p:urvii UMENrS DEPT. FEDERAL TRADE COMMISSION. Huston Thompson, Chairman. Nelson B. Gaskill. John Garland Pollabd. Victor Murdock. John F. Nugent. J. P. YoDER, Secretary. .• e • • LETTER OF SUBMITTAL. Federal Trade Commission, Washington^ April IJf^ 1921. To the Speaker of the House of Representatives. Sir : Submitted herewith is a report on Combed Cotton Yarns made in response to a resolution of the House, April 5, 1920 (Res. No. 451, 66th Cong., 2d sess.) , which treats of the increase in the prices of such yarns during the years 1914-1919, inclusive, in relation to the increases in the cost of raw cotton and of labor entering into their production. The most important facts brought out in this inquiry, briefly stated, are as follows : 1. The country's total production of combed yarn is much less than that of carded yarn, but combed-yarn spinning is a very im- portant branch of cotton manufacture. Its product includes the finest counts of yarn used in fine fabrics, thread, and lace, as weU as the strongest coarse counts used in coarse fabrics, such as automobile tires. 2. Long-staple cottons that are used in combed-yarn manufacture comprise only about one-eighth of the total American cotton crop. In recent years there has been a large increase in demand for combed yarn, which has in turn resulted in increased demand and high prices for long-staple cotton. Domestic production of long-staple cotton has also increased, but not enough to obviate the necessity of sup- plementing American growth by importations, especially of the longest staples. Because of the increased demand for long staples, and their relative scarcity (partly due during the war period to re- duction in cotton imports) there was a greater advance in the market prices of long-staple cotton than of short staple, especially in the last half of 1919, when the demand for combed yarns was at its highest. 3. The inquiry of the Commission into the costs, prices, and profits of the combed cotton yarn industry involved an examination of the books of a number of combed-yarn manufacturers both in the North and the South for the years 1914-1919. The production of these companies was about 25 per cent of the country's total produc- tion of combed cotton yarns marketed as yarn in 19i9, the only year for which total production of combed market yarns is Iniown. The proportion covered was probably about the same for 1914, but it was considerably smaller for the intervening years (1915-1918), because for those years reports were secured from fewer companies. 4. Throughout the period of rising prices from 1916 to 1919 the average price realized for yarns advanced in about the same pro- portion as the average cost of cotton in yarns, but more rapidly than labor cost and other conversion costs, thereby resulting in 46006-21 444137 ^ COMBED COTTON YARNS. greatly iripreft|ed -profits from 1916 to 1919, inclusive. (Though the average "Bellifig 'p'fices realized by manufacturers increased greatly, their. a^v^llC^ W^s* Jess: than the advance in the current market prices oiyamt^, because* munufacturers followed their usual practice of selling a considerable part of their output on contracts for deliveries extending over considerable periods, and were therefore able to take advantage of spot prices on only part of their product.) 5. The profits realized by manufacturers, whether reckoned per pound or on investment employed, were lowest in 1914 and highest in 1917. Prices, however, were lowest in 1915 and highest in 1919. The earnings on total investment employed by eight companies were 6.6 per cent in 1914, 12.1 per cent in 1915, 25.6 per cent in 1916, 37.8 per cent in 1917, 26.6 per cent in 1918, and 25.7 per cent in 1919. They averaged 23.4 per cent on the total investment for the eight companies for the six years. 6. During the last half of 1919 prices advanced much more rapidly than costs and the profits realized were larger than during any other period of similar length from 1914 to 1919. 7. The price advance of the second half of 1919 was in response to a very large demand for combed yarns, part of which was of a speculative nature. Manufacturers with full order books bid for the available supply of lon^-staple cotton, the prices of which fol- lowed yarn prices to very high levels, though relatively not so high as yarn. 8. Since May, 1920, there has been a great decrease in demand for all cotton manufactures, including combed yarns, in consequence of which the prices of both combed yarns and long-staple cottons have shown a heavy decline. Respectfully, Huston Thompson, Chairman, Nelson B. Gaskill. John Garland Pollard. Victor Murdock. John F. Nugent. SUMMARY OF REPORT ON COMBED COTTON YARNS. The Federal Trade Commission by a resolution of the House of Representatives (H. Ees. 451, 66th Cong., 2d sess.) was requested to inquire into the increase in the price of combed cotton yarns during the years 1914—1919, inclusive, to ascertain the cause or necessity for and the reasonableness of increased prices during the period in rela- tion to the increase in the cost of raw cotton and of labor. COMBED YARN MANUFACTURE. Combed cotton yarn spinning differs from carded yarn spinning only by the use of longer staple cotton and by the introduction of the combing process, which improves the smoothness and tensile strength of the yarn by removing the shorter fibers and more fully parallelizing the remaining longer fibers. Combed yarns are more expensive to produce than carded yarns because of the higher quality of raw cotton used and because of the extra expense of the additional combing process and the extra loss of cotton in the form of waste resulting therefrom. Combing is a necessary step only in the production of the finer yarns, but it is employed in making yarns for certain coarse fabrics, such as are used for the manufacture of automobile tires, airplane cloth, and the like, where strength is important, as well as in the pro- duction of the finest yarns for thread, laces, fine woven fabrics, and fine hosiery and knit goods. The production of combed yarns is carried on mainly in New England and North Carolina. In both regions are found some yarn manufacturers who themselves use all their production of combed yarns in the manufacture of cloth in their own weaving mills; other combed-yarn manufacturers have no weaving mills, but produce their yarns exclusively for sale as yarn on the market. The number of companies engaged primarily in the production of combed yarns is small as compared to the number of companies making carded yarns, and few of those specializing in combed yarns, except those engaged exclusively in fine yarns, comb all of their product. Since the production of combed yarns is confined largely to fine yarns and to medium coarse yarns for particular purposes, the volume of such yarns produced, measured in pounds, is small as compared with that of carded yarns. Not more than 12 or 15 per cent of the total quantity of raw cotton consumed in the United States is used in the manufacture of combed yarns. On account, however, of the uses made of combed yarns, the industry is a more important branch of cotton manufacture than its volume of pro- duction would indicate, and it is growing more important from year to year. FLUCTUATIONS IN DEMAND. The growth of the automobile-tire industry alone has been a large factor in the growth of combed-yarn spinning. To the in- 5 6 COMBED COTTON YARNS. creased demand for tire j^arns there has been added an increasing demand in recent years for fine fabrics. These increased demands have brought about a situation in which the quantity of raw cotton best suited to combed-yarn manufacture has become scarcely ade- quate for the production of combed j^arns. Formerly nearly all the cotton used for this purpose was l^-inch staple or longer, but now liV-inch staple is used to a considerable extent. This reduction of length of staple has been necessary in order to meet the demand for combed yarns. From 1914 to 1919 the demand for fabrics made of combed yarns increased more rapidly than the domestic production of long-staple cotton, thereby laying the basis for extremely high prices for both long-staple cotton and for combed yarns. As the result of the in- creased demand, market prices of combed yams and of long-staple cotton, from which they are made, advanced during the war period somewhat more, respectively, than carded yarns and the short-staple cotton from which carded yarns are made. Normally a considerable part of the finest combed yarn used in the country had been imported, mainly from England. During the war these importations were reduced or entirely cut off, thereby increas- ing the demand on American spinners. Following the armistice there was a marked slump in both cotton and yam prices during the first half of 1919. This price decline was based largely on the feeling that the war being over conditions would promptly revert to something comparable with prewar times. Con- ditions hoped for, however, failed to develop, and during the last half of 1919 the pressure of demand for combed yarns, a part of which arose out of speculative activities of yarn and cloth jobbers and brokers, was so great that the market price of combed yarns advanced to unprecedented levels. Under the stimulus of these high prices manufacturers bid against each other for the available supply of long-staple cotton, with the result that the prices of such cotton ad- vanced far more than those of short staples, though not so much as combed yarns. COSTS AND PROFITS PER POUND. In order to obtain exact data as to the cost, prices, and profits of combed yarn manufacturers the Commission examined the books of account of a number of representative companies. For the years 1914 and 1919 comparative data were obtained from 11 companies, and for the whole 6-year period annual data were obtained for 8 iden- tical companies. The 11 companies produced in 1919 about 25 per cent of the total output of combed yarns marketed as yarns. The relative increases in costs, prices, and profits differed for the two groups of companies in 1919 compared with those of 1914. For the smaller group of companies the average cost of sales per pound of yarn in 1919 was over two and a quarter times that of 1914, but the average price realized per pound was nearly two and a half times that of 1914, and the average profit per pound was nearly four times as great as in 1914. For the 11-company group the cost of sales in 1919 was nearly two and two-fifths that of 1914; but the average price realized was two and two-thirds times that of 1914, and the COMBED COTTOX YARNS. 7 average profit realized per pound was nearly five and three-quarters times that of 1914. The average selling price in 1919 increased over 1914 in about the same proportion as did the cost of raw cotton, which represents about 60 per cent of the total cost of sales ; while labor and the other items of conversion cost did not increase so much as cotton. Hence, prices advanced considerably more than the total cost of sales, thereby lay- ing the basis for the much higher profits per pound in 1919. The average price realized by five companies for which complete semiannual cost and profit and loss statements were secured for 1919 increased in the second half of the year much more than costs, and consequently yielded profits per pound much greater than those of the first half of the year and probably greater than those of any other like period during the six years. During the second half of the year, for these five companies, the average cost of sales was 74.09 cents (11 per cent greater than the first half of the year) ; the aver- age selling price per pound was 96.53 cents (25 per cent greater than in the first half) ; and profit per pound was 22.44 cents (over twice that of the first half of the year). Owing to the fact that manufacturers contract a considerable part of their product in advance, the average prices realized did not advance as much as quoted market prices. In 1919 the average prices realized by the two groups of companies were for the 8 companies 148 per cent higher than in 1914, and for the 11 companies 166 per cent higher, while the average quoted market prices for 17 typical yarns were 245 per cent higher in 1919 than in 1914. PROFITS ON INVESTMENT. During the period from 1914 to 1919 the total capital investment used in the yarn business by the 8-company group increased from $3,247,326 in 1914 to $5,131,320 in 1919, an increase of 58 per cent. During the same period the number of spindles operated by the eight companies increased from 161,780 in 1914 to 188,340 in 1919, an increase of but 16.4 per cent. Consequently the increased capital investment was due less to the installation of new equipment than to larger inventory values of raw cotton, stock in process, and finished yarns, and to the increased amount of customer's accounts that it became necessary to carry as the prices of raw cotton and yarns advanced. Although capital invested showed an increase of 58 per cent, the profits of the yarn business in 1919 were such as to yield a percentage of net profit on investment several times greater than in 1914. For all companies covered in the inquiry the rate of net profit before pay- ing interest on borrowed money or income or excess-profits taxes, to the total capital invested, including capital stock, surplus, and bor- rowed money, but excluding outside investments, was 4.2 per cent in 1914 and 31 per cent in 1919. For the smaller group of eight identi- cal companies for which data were secured for all six years the in- crease in rate computed on this basis was from 6.6 per cent in 1914 to 25.7 per cent in 1919. For the six-year period the average rate of earnings for the latter group was 23.4 per cent. The mill village investment of those companies owning housing facilities for their operatives has been included as a part of the investment in the yarn business. 8 COMBED COTTON YARNS. Computed on another basis, namely, that of net profit on the stock- holder's investment, including capital stock and undistributed sur- plus, but excluding outside investments, the rate of earnings for all companies (before paying income and excess-profits taxes, but after the deduction of interest paid on borrowed money) increased from 3.2 per cent in 1914 to 43.4 per cent in 1919. For the eight iden- tical companies running through the six years the rate increased from 6.6 per cent in 1914 to 32.7 per cent in 1919, and averaged 29.6 per cent for the entire six years. The first effect of the war as reflected in the costs, prices, and profits of the eight-company group for the year 1915 was a consider- able reduction in all costs. As compared to 1914 the average cost of sales per pound decreased 15 per cent, the average price realized per pound decreased somewhat less (12 per cent), and the average profit realized per pound increased 15 per cent. Failure of prices to de- crease as much as cost of sales accounts for the increase in average profit per pound. During the remaining years costs and prices show increases in each year from 1916 to 1919, inclusive. Throughout the years from 1915 to 1919 cotton cost comprising, as stated above, over 60 per cent of the total cost of sales shows larger increases in each year than any other item of cost. Throughout the six years also the tendency was for prices to keep pace in their ad- vance with the advance in cotton cost. During 1916 and 1917 the average price realized advanced relatively even more than cotton cost and in 1918 and 1919 slightly less than cotton. In thus closely fol- lowing the item of cost showing the greatest increase, prices for the period as a whole advanced more rapidly than the total cost of sales. Although average prices were at their highest point for the eight companies in 1919, average profit, whether measured in terms of average profit per pound, per dollar of sales, or per dollar of capital invested in the yarn business, were greatest for the year 1917. Dur- ing both 1918 and 1919 the prices realized were markedly greater than in 1917, but the price advances of the last two years were at- tended by even greater advances in costs, the greater part of which advances occurred in cotton and labor. DECREASED DEMAND — 19 20. Since May, 1920, there has been a period of great decrease in de- mand for combed yarn products. The prices of combed yarns and long-staple cotton have moved sharply downward, cotton being now at less than the prewar level, though yarns are still considerably above it. Because of this market condition, combed-yarn spinners have greatly reduced their production. As prices of raw cotton and yarns fell manufacturers apparently tried to work off the stocks of raw cotton and yarn acquired during the period of high prices in such a manner as to result in the least possible loss. Owing to the strong financial condition of these manu- facturers generally, arising out of large earnings during the period of high and advancing prices, the losses resulting from this period of decline in prices appear to have been absorbed without any wide- spread difficulties or failures. o 144137 UNIVERSITY OF CALIFORNIA LIBRARY