not be tendered on contract in New York there is no doubt that other mills would spring up in the South and create a demand for these low grades. A cotton merchant and banker in North Carolina said, in substance: The argument that low grades should be deliverable in order to make a broad contract is not a sound one, nor is the argument that the delivery of lower grades is an advantage to the farmer a sound one. In the first place, a cotton merchant can always sell low-grade cotton, or any other grade, at its market value. The use of a future market is protection to the cotton merchant and the cotton manufacturer, but to afford protection the contract must be a valuable one. The exclusion of low grades would certainly add value to the contract. In the second place, undesirable grades are an instrument in the hands of manipulators to hammer the market, and it is wrong to allow a million bales of low-grade cotton to be used for the purpose of depressing the price of 12,000,000 bales of good cotton. The argument that the elimination of low grades will conduce to corners has no force. The moment that a corner was apparent, the holders of cotton would pour it into New York and break the corner. The argument advanced in several of the foregoing statements that a broad contract tends to depress the price of cotton obtained by the grower will be discussed in a later part of this report. CHAPTER II. SUGGESTED SPECIFIC CHANGES IN RANGE OF CONTRACT GRADES. The general arguments for and against some restriction upon the range of grades deliverable on future contracts have been outlined in the preceding chapter. Numerous specific suggestions looking toward such restriction were submitted to agents of the Bureau during the investigation. Owing to the radical differences of opinion in the cotton trade as to the wisdom of some of these changes, it is desirable. to present in some detail a discussion of their merits. Section 1. Specific contracts. The first suggestion is for specific contracts; that is, for a series of contracts, each specifying on its face a single grade or at most a very narrow range. Arguments in favor of such contracts were for the most part submitted by persons not familiar with all features of the cotton business. A number of spinners advocated such a contract on the ground that it would be greatly to their advantage; but it is condemned by nearly all other interests in the cotton trade as utterly impracticable. The general feeling of cotton merchants toward specific contracts is well illustrated by the following excerpt from a statement obtained from a member of the New York Cotton Exchange: A spinner's contract on an exchange is an impossible condition to have. Their contracts are supplied them by merchants. If the exchanges dealt in what are known as spinners' contracts, there would not be any sellers of those contracts except at a higher price than what they would have to pay merchants. This is because they would have to take the contracts, but the merchant could always sell a spinner's contract and hedge, and would never have to sell it at the price of competition. There would always be somebody that might pay more. To have spinners' contracts dealt in on the exchange in the quantity in which the present contracts are dealt in would be a Utopia and not possible or practicable; but the merchant does make contracts with spinners for their special qualities, governed by the rules of the exchange as far as reclamations, differences, and arbitrations go. ARGUMENTS ADVANCED IN FAVOR OF SPECIFIC CONTRACTS.-The principal argument advanced in favor of specific contracts is that the buyer is entitled at the time he makes the contract to know what grades he will receive when the contract matures, and that he should not be compelled to take any assortment that it may suit the seller to tender. - A cotton merchant of Natchez, Miss., one of a very few who advocated a system of specific contracts, said, in substance: Now, you know that years ago the trading in cotton on orders from the other side was very largely on what is known as "basis" orders; that is, they sent their orders over here, basis middling, so much off for grades under middling and so much on for grades over middling; and I suppose the future contract. that was made at that time was intended to be in line with the orders that were coming into the market. But all that now has changed. Your orders now, if you get any orders at all, are not basis, but the bulk of the trading in spot cotton is generally made on firm offers; that is, you state just what you have, whether it is Liverpool good middling or Liverpool fully middling or Liverpool fully good middling whatever grade you have, you state it. It appears to me that sooner or later these cotton exchanges will have to adopt the same system; that is, if they sell a contract on the floor of their exchange they will have to state what they are selling and, between us, that is my idea of a fair and equitable contract-that a buyer who goes in and buys a contract shall know what he is going to get. I might go in there and buy a hundred bales of Octobers, and when October comes I will get fair cotton when I probably want good ordinary; or I may buy a hundred bales of Octobers and want strict middling, but get good ordinary. It is absolutely worthless to a spinner. I think it should be so that a man who buys a contract should know what he is going to get. I recognize the fact that it will reduce the volume of speculation and reduce it materially. I also recognize the fact that it will advance the price of cotton materially. I think to-day if you had a contract of that kind that middling cotton, instead of being what it is, would be 2 or 3 cents a pound higher, because it is scarce and the market would have been cornered. I think that is the only fair way of trading that is, for a man to get what he buys. I think they ought to have, not one contract, but a series of contracts. My idea would be that you ought to have a good ordinary contract, a good middling contract, a fair contract, and so on, and then allow the delivery on that contract to be a half grade below or a half grade above the stipulated grade. * * * I think that it is the only fair kind of a contract that a man can introduce on an exchange or anywhere else, for I do not think it is fair for me to go into a market and buy something and not know what I am going to get. I know that it will reduce the volume of speculation simply immensely. * * * * * ** * * * I think there will always be plenty of speculation there to take care of the crop-plenty of it. Of course, I recognize that my ideas about that kind of a contract are radical, and that it will take some years before they get around to it, but I believe that sooner or later they will come to it. It will take a great while, * * * maybe, to reach that conclusion, but I think that sooner or later ** * OBJECTIONS TO SPECIFIC CONTRACTS.-While the arguments in favor of a specific contract seem on their face reasonable in that their principal basis lies in the contention that the buyer should be permitted to know exactly what he will receive, the practical objections-some of which have been suggested in the preceding chapter-are almost insurmountable. The fundamental objection is that it would be almost impossible to find sellers of such contracts in sufficient numbers to make a practical future market. It will be apparent on a moment's consideration that under a contract for the delivery at a distant time of a specific grade of cotton the risk of corners as a result of unexpected changes in crop conditions would be enormously increased. The great uncertainty which always obtains as to the supply of particular grades in any given crop is a vital objection to the adoption of a specific contract for organized future trading purposes. Whereas in the summer conditions might be almost ideal for a yield of very high grades, the quantity of such grades in the final harvest might be reduced to insignificant proportions either as the result of such a storm as occurred in September, 1906," or of exceptionally early and heavy frosts. It is argued that, under a specific contract, wealthy speculators, having no interest whatever in the welfare of the cotton trade, would make it their particular business to bring about corners and squeezes in specific grades, and that the seller of specific contracts would thus be constantly subject to enormous losses. This argument unquestionably has much force. The method of trading in specific stocks on the New York Stock Exchange, referred to in the above statement, it may be pointed out, is by no means a parallel case, for the very important reason, in the first place, that the quantities of stocks "listed" for trading purposes are ascertainable at a moment's notice. These amounts, furthermore, a See page 116, Part I. can not be increased without application involving due notice to members of the exchange, such application being subject to action by the governing committee of the New York Stock Exchange, which, moreover, usually considers such applications at several meetings before finally passing on them. It will be seen, therefore, that the situation is radically different from that presented by the cotton market, where the supply of any particular grade of cotton is always involved in great uncertainty until the crop is finally harvested, whereas long before this time, under modern methods of doing business, a large part of the crop has been sold. In the second place, on the stock exchange the buyer," except in occasional instances, is obliged to take up and pay for the stocks tendered him within twenty-four hours after the purchase is made. Sales of securities for future delivery are seldom made on the New York Stock Exchange, and, when made, deliveries are rarely postponed for more than thirty days. The first objection, however, is the really vital one. In the stock market the seller can know almost to the last share what the outstanding supply of a given security is at the time he enters into his transaction. In cotton, on the other hand, the seller at the time he enters into his forward contracts is wholly unable to estimate even approximately the ultimate supply of specific grades. In normal years, to be sure, he may be able to guess fairly closely, but in abnormal seasons it is utterly impossible for him to know at the time the bulk of his commitments are entered into what the supply of individual grades will be. This distinction between the two markets is a vitally important one. A further serious objection to specific contracts for general trading purposes is that the requirements of most mills are so exacting that even specific contracts would not give satisfaction. It is contended that within the range of a single grade of cotton, as that grade is ordinarily established for contract deliveries, there may be such a wide subrange with respect to quality, length, strength, smoothness of fiber, or other characteristics, that it would be impossible, by simply dealing in specific grades, to meet the wants of the ordinary spinner. Thus, of several mills using so-called middling cotton, some might require cotton of 14-inch staple and be utterly unable to use staple of 1 inch or less without changing their machinery; while other mills, also using middling cotton, might have their machinery set for short staple and be unable to use staple of 14 inch. Strength of staple shows a wide degree of variation. Smoothness of fiber is also a The broker may, of course, do this in behalf of the real buyer. Short selling of securities is of course similar in principle to future selling of cotton contracts. Of course, only a small portion of this outstanding supply may be available at any given time in the open market for purposes of speculation. |