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Rh to the same grade of cotton, and are drawn up according to certain forms and circulate on the exchange as media for the shifting of risks connected with purchase and sale. The latter are not “real” purchases in the sense given to that term above, but fictitious because delivery of the cotton is not desired. It will no doubt aid the understanding of the functions of the latter if some explanation is offered of the needs met by the former, which are sometimes known technically as “deferred deliveries.”

When a spinner is required to quote prices of yarn for delivery in the future he is fixed on the horns of a dilemma. If he does not at once buy cotton, but quotes on the assumption that price will remain steady, he may be involved in serious loss through his estimate being mistaken. If he determines

to buy cotton at once, others who risk more, and trust their judgment of the future, may secure the contract. On first thoughts it would seem desirable that all spinners should buy cotton outright to cover their contracts, but on second thoughts the social disadvantage of their doing so becomes apparent. Much buying might take place when stocks were scanty, with the result that prices would be needlessly forced up; and when stocks were plentiful demand might be weak and prices, therefore, be unduly depressed. It is evident that the buying of cotton on the principles suggested would be calculated to cause great unsteadiness of prices, especially as cotton is not continuously forthcoming, but is produced periodically in harvests. Demands for yarn cannot be expected to come always at the most favourable time socially for the distribution of the cotton. One way out of the difficulty is that the spinner should exercise his judgment and buy his raw material at what seems to him the most suitable times. But to this course there are three objections. The first is that spinners would be performing the two functions of industrial management and cotton buying (together with others perhaps), and that in consequence the best industrial men would not necessarily be able to maintain their position in the trade because as buyers of cotton they might be unfortunate. The second is that spinners being required to give attention to two distinct classes of problems would be less likely as a body to become complete masters of either. The third, which is not distinct in principle from the two preceding, is that such limited speculation in cotton buying on the part of spinners worried with other matters would not be likely to steady the cotton market in any high degree. It may be assumed as desirable that the demand for cotton should be so spread as to keep its price as steady as possible—“steadiness” will be defined more exactly later—and that to this end it is essential that specialists should devote themselves to the task of spreading it. Such specialists have appeared in the cotton brokers and dealers who make their living out of bearing the risks connected with anticipating demand and supply in relation to cotton. To-day a spinner who is asked to quote for deliveries of yarn for, say, the next six months, may obtain from a broker quotations for deliveries of the cotton that he needs, in quantities as he needs it, for the next six months, and upon these quotations he may base his own for yarn. If a spinner is pressed by a shipper to make quotations with refusal for two or three days to give time for business to be settled by cable, it is evidently not impossible for the spinner to shift the risk involved by getting in turn from his broker refusal quotations for cotton. But spinners do not try always to take the safest course.

Now it is evident that brokers in turn require some means of passing on the risks that they are bearing, or some portion of them from one to another, or of sharing them with other market experts, as they find themselves overburdened, and as their judgment of the situation changes. The means have been provided in the “futures” which circulate on the Cotton Exchange. The risks of anticipating are carried by those who create or hold “futures” without a hedge. In order to facilitate business, “futures” are all drawn in the same unit (100 bales), and are all based on the same class of cotton, namely Upland cotton of middling grade of “no staple” (i.e. with a fibre of about in.) and of the worst growth. American cotton, we may remind the reader, is graded into a number of classes, both on the Liverpool and New York Exchanges, and an attempt is made in each market to keep the grades as fixed as possible. But what, it may be inquired, is the value of “futures” relating to “middling” cotton to a broker whose contracts with spinners are not in “middling” cotton? The answer is that though the ratios between the prices of the various grades alter, the prices of all of them move generally together, and that the “futures” of the Exchange at least provide a hedge against the latter movements. Other things being equal, the broker would be better off if he could hedge with equal ease against all his risks. But other things are not equal: the market would be more confusing and quotations would be complicated if “futures” were in use for all grades.

We may now examine the exchange “futures” in minuter detail. They are quoted as a rule for about ten months ahead. Thus in January the futures quoted will be January (technically termed “current,” “present month” or “near month,” “futures”), January-February,

February-March, March-April, April-May, May-June, June-July, July-August, and perhaps two or three more. Each group, it will be observed, except “current futures,” culminates in two defined months. The rule is that on the first of the two months the seller of “futures” may, and before the last day of the second month must, deliver cotton against them, or, what comes to the same thing, buy back the “futures” on the basis of the price of “spot” cotton of middling grade. Various grades of cotton are tenderable against “futures”: if this were not so “futures” would be in danger of defeating their object, because the price of the grade upon which they were founded would probably at times be thrown widely out of relation to the general level of prices in the cotton market. The lowest grade tenderable used to be “low middling,” but since October 1901 “good ordinary” has also been accepted. Arbitrators report on deliveries and award allowances on those of grades above “middling” and deductions of price from those below. A sample is taken from each bale and the “points on or off” are fixed for each bale separately. If either party is dissatisfied with the award, he may appeal to an appeals committee on paying £3:3:0: which is refunded to him by the other party if the appeal be upheld. The detailed arrangements described above are those of the Liverpool market. The great bulk of “futures,” however, are bought back and not delivered against.

Beneath are the official Liverpool quotations of “futures,” as they appeared on the morning of the 19th of April 1906:—