June, 1931. In the face of this increase in consumption cotton prices continued a general downward course throughout the 1930-31 season. As a result of this decline, the value of the cotton held by cooperatives was reduced to a point where it could not be sold for enough to repay their loans from the board. As explained in the section on the cooperative marketing of cotton, the board had made these loans for a maximum of three years. When values declined below the loan level, the cooperatives were faced with selling at a loss, holding the cotton and refusing to sell to their mill customers, or selling to the trade and buying futures contracts to maintain their net position. With the board's approval they took the third course in the belief that at some time within the designated period, which ends July 31, 1933, they will be able to liquidate their holdings at prices profitable to their grower members. At the date of this report the transaction between the board and the cotton cooperatives remains incomplete. Its final outcome will depend on world business conditions, world consumption of cotton, and the degree of adjustment which cotton farmers themselves are able to make as between production and demand. It is expected that the futures contracts now held by the American Cotton Cooperative Association will be replaced by spot cotton of the 1931 crop as soon as the latter begins to move in quantity. This operation in itself will take about 1,000,000 bales of new-crop cotton off the market and will proportionately benefit new-crop prices. The total of 1930 cotton thus held off the market, whether as spots or futures, by the cooperative associations was 2,073,178 bales on June 30, 1931. This amount, added to stabilization stocks of 1,310,789 bales makes a total of 3,383,967 bales which were being held off the market with the assistance of revolving-fund loans on that date. (Fig. 4.) The cotton cooperatives borrowed $64,435,398.65 from the revolving fund in handling the 1930 crop, and on June 30, 1931, had repaid $25,680,013.10, leaving $38,755,385.55 outstanding. Other board loans to the cotton cooperatives amounted to $6,095,553.74, making a total of $44,850,939.29 outstanding to them on that date. Advances to the Cotton Stabilization Corporation from the board outstanding on that date amounted to $74,953,881.54, making a total of $119,804,820.83 then outstanding on cotton in advances made from the revolving fund. In addition the Cotton Stabilization Corporation had outstanding loans from commercial and Federal intermediate credit banks of $35,707,991.96. RESULTS OF COTTON OPERATIONS, 1929-30 AND 1930-31 A complete appraisal of the effects of the operations in cotton since the passage of the agricultural marketing act is not yet possible. The stablization cotton has yet to be sold and the cotton cooperatives are maintaining their position with more than 2,000,000 bales of cotton for which the board has pledged financial support over the period to July 31, 1933. It is not possible to determine the costs to the revolving fund of these operations until the present holdings of cotton are sold. Until then no one can cast up the balance between benefits derived and the losses sustained. It is already possible, however, to appraise some of the economic results. They affected (1) cotton prices, (2) consumption of American cotton, (3) farm income of the South. FIGURE 4.-Cotton held by cooperatives and stabilization corporation holdings, August, 1929, to July, 1931 BALES MILLIONS 3.5 3.0 2.5 2.0 1.5 1.0 5 AUG. SEPT. OCT. NOV. DEC. JAN. FEB. MAR. APR. MAY JUNE JULY AUG. SEPT OCT. NOV. DEC. JAN. FEB MAR APR. MAY JUNE JULY The stocks of unsold cotton held by the cotton cooperative associations on June 30, 1930, were subsequently mostly acquired by the Cotton Stabilization Corporation. Most of the additional quantities of cotton received by the cooperatives from the 1930 crop were also withheld from sale. The total quantity withheld from the market is the sum of both holdings. Combined holdings are shown by the upper line. COTTON PRICES The stablization operations and cooperative activities supported the price of cotton somewhat above what it would have been on the basis of supply and demand forces alone, in the 1929-30 season and again in 1930-31. Holding more than 1,300,000 bales of cotton off the market in the 1929-30 season and over 2,000,000 additional bales in the 1930-31 season kept prices above what they would have been had cotton growers been forced to dump their cotton on an unwilling market. It is extremely difficult to measure the extent to which the price of American cotton was affected by these operations. It is possible to observe the changing relationships between cotton prices in domestic and foreign markets and between different months on our markets. 90613-31-33 Experience has shown that the way in which purchases are made has a direct influence upon these price relationships and price spreads. In the spring of 1930 the cotton cooperatives accepted delivery of actual cotton on a large quantity of futures contracts. A considerable part of these contracts had been accumulated prior to the passage of the agricultural marketing act. This operation checked the decline in cotton prices and advanced the prices of cotton at the 10 spot markets from less than 14 cents early in March, 1930, to nearly 16 cents early in April, and maintained them above 14 cents until the last of May. (Fig. 3.) The cooperatives were saved from heavy losses in transferring their contracts, and during this period from 500,000 to 1,000,000 bales of cotton were sold from southern farms at a price well above what it otherwise would have been. The results were unsatisfactory, however, in that the spread in price between near and distant futures was not maintained at approximately carrying charges; instead, the distant futures fell below spot cotton and near month futures. Hence, the usefulness of the futures market for hedging purposes was sharply limited during this period, and spinners and merchants carrying hedges in May against their warehouse stocks of cotton and cloth were not able to transfer those hedges to later months, except at a considerable loss. This experience demonstrated to the cooperative and the board that this was an undesirable way of acquiring large volumes of spot cotton for stabilization purposes. In the 1930-31 season, after it was decided that some effort to check the extreme decline was justified, cotton prices were supported by loans to cooperative associations. Optional and pool cotton delivered to the cooperatives was not covered by sales on the futures markets. In this way the market was relieved of part of the pressure of hedging sales made by cotton buyers to offset cotton purchases from farmers. As the cooperatives sold cotton they replaced those sales by futures purchases in order to maintain their market position for reasons explained earlier. They distributed these purchases over various future months and made their transfers from near to distant months well in advance of the time for the actual delivery. This procedure held the price of American cotton, and to a lesser extent the price of foreign cottons, above what they would have been on the basis of production and consumption conditions alone. As an illustration of the effect of these various operations, the course of cotton prices may be compared with the course of prices of industrial securities. Figure 5 shows that cotton prices in the 1929-30 season declined less rapidly than industrial securities in New York. There is evidence that during the 1930-31 season a similar result occurred. (See Fig. 6.) CONSUMPTION OF AMERICAN COTTON The consumption of American cotton in the United States dropped rapidly from the end of the 1928-29 season to the end of the 1929-30 season, falling from an annual rate of about 7,000,000 PER CENT FIGURE 5.-Indexes of prices of cotton and industrial stocks, weekly, 1929-30 bales to about 4,300,000 bales in August, 1930. This decline was due largely to the falling demand which accompanied a sharp falling off in business activity. Approximately two-thirds of the cotton consumption in the United States ordinarily is for industrial uses PER CENT - 110 FIGURE 6.-Indexes of prices of cotton and industrial stocks, weekly, 1930-31 Both in 1929-30 and 1930-31 the declines in cotton prices were much less than the declines in prices on the stock market belts, conveyors, tires, etc. Domestic consumption is therefore peculiarly sensitive to business conditions. The consumption of American cotton in the United States increased materially during the 1930-31 season, advancing from a low in August, 1930, equivalent to about 4,300,000 bales annually, to a rate of about 6,000,000 bales annually in June, 1931. Apparently, prices fell faster than consumers purchasing power, and cotton consumption turned definitely upward many months before any improvement in general business activity. (Fig. 7.) Consumption of American cotton abroad was probably restricted to some extent by the operations described. Other factors, however, caused the major part of the decline. The business recession, affecting as it did the industrialized countries of Europe, curtailed European cotton consumption. The decline in the prices of raw material exports from the Tropics and Orient greatly curtailed exports of cotton goods from Europe and Japan to such countries. The em FIGURE 7.-Consumption of American cotton, August, 1925, to September, 1931 This chart shows the monthly consumption of cotton expressed in terms of the equivalent annual total. Cotton consumption declined throughout the world as business activity decreased from the middle of 1929 to the middle of 1930. After that, consumption slowly gained in spite of declining business. bargo against British goods in India and the acceleration of business activity in China by the silver inflation stimulated the consumption of Indian and Chinese cotton in these two great consuming countries, and thereby reduced the imports of cotton goods from Europe and Japan. Russia continued to increase her production, and changed from a net importing country for American cotton to a net exporting country during these two cotton seasons. The reduced purchasing power of people everywhere has resulted in a shift in demand to the cheaper goods that can be made from Indian and Chinese cotton. In the face of this unfavorable competitive situation the consumption of American cotton abroad showed no indication of declining |