Of great importance in the cotton trade is the business for future delivery, and that in a two-fold form. All transactions in "futures" are governed by the stringent rules of the respective Exchanges, which refer, particularly, to the price differences caused by the fluctuations in the market, and the safeguarding of the interests thus created.
Indirectly, every buyer comes frequently into contact with the "future" business, because, for years past, the importing of cotton has not been done at fixed prices, but at so many points "on" or "off" certain "futures" in New-York, for instance, a purchase is made of "goodmiddling" October/November shipment at 200 points "on" December, or lowmiddling at 200 points "off". At any period up to the time of shipment, or even of arrival of the cotton, the buyer can elect to fix the price on the market of the following day. Should then December in New-York stand at 20 cents, the price for "goodmiddling" would be 22 cents or 18 cents for "lowmiddling".
Very peculiar is the "hedge" business, to which reference has been made, and it might be advisable to give a few examples as an explanation.
A spinner is obliged to buy cotton to prevent stoppage of his mill, a sale of yarn is impossible for the moment and he decides on a "hedge" transaction. He buys "goodmiddling" at 22 cents, and sells at the same time in New-York 200 December "futures" at 20 cents. Later on, the market advances to 22 cents, and at this price the spinner covers his "future" contract, thereby, losing 2 cents. The purchase price of his 200 bales is now not 22 but 24 cents. As the movements of cotton and cotton products run on parallel lines, he has the same chance, for the sale of his production, on the basis of 24 cents, as he had at 22 cents. He gained a longer period to effect a favorable sale, while the chances of the market remained the same. It would have made no difference had the market declined to 18 cents, with a consequent gain of 2 cents, instead of a loss of 2 cents. The cotton would then have cost 20 cents, but this would have been no advantage to him, as the opportunity for selling his yarns would also have been on the basis of 20 cents.
A spinner sells his yarns for a distant delivery, at that moment, however, it does not suit him to buy the cotton, he prefers to cover himself in futures, and therefore buys 200 bales December "futures" in New-York at 20 cents. He has calculated that the sale price of his yarns allows him to pay 24 cents for goodmiddling. He watches the market for a favorable opportunity to buy "goodmiddling", he succeeds in buying 200 bales at 300 "on" December. On arrival of the 200 bales, he fixes the price with his seller, now he must be careful to liquidate his "future" contract at the same moment. Both are done at 18 cents, and he loses 2 cents on his "futures". The cotton, however, costs him 18 cents, plus the 300 points "on", equal to 21 cents, he therefore makes a profit of 3 cents on the calculated purchase price of 24 cents, from this are to be deducted, the 2 cents loss on the "futures", remaining, one cent net profit. The fluctuations of the market had nothing to do with this profit, which he had, so to say, in his pocket right from the commencement, as he had sold his yarns on the basis of 24 cents for cotton, with "futures" at 20 cents, in fact, he bought his cotton at 300 "on" for goodmiddling, with the value of "futures" at 20 cents, which equals 23 cents. The hedge business, therefore, does away with the market risk, now in what consists its value? The profit on cotton does not lie in the fluctuations of the market, one has to look for it elsewhere. The chances of profit-making are to be found for the merchant in judicious buying, while, for the manufacturer, they consist in the lucrative production of his finished articles.
