A great market has the duty to adapt itself to all the requirements of
the Trade, and these are ever changing. For instance, new districts are
opened for commercial enterprise, new methods of doing business
develop, bringing increased activity in their train, and all this, has
to be regulated or arranged for.
Many things did not bother us in the past, as the following few
questions will show:
How can we, without risk of the market, sell cotton in Spring,
which will only be grown in Autumn?
How can a planter sell the cotton which he has picked, when there
are no buyers at the moment?
How can a manufacturer protect himself against a decline in the
price of cotton, while his goods are being prepared for the market?
How can a manufacturer accept orders for late deliveries, without
possessing the cotton?
How can an importer take advantage of the great quantity of offers,
which flood the market, during the first few months of the
gathering of the crop?
To anybody in the cotton trade, these questions present no difficulties,
but, for the outside world, be it mentioned, that it is the "future"
market that furnishes the means to overcome these apparent anomalies.
It is the "future" contract, which eliminates the risk of the market
from the carefully managed cotton business.
Anybody who sells new crop cotton, buys a "future" contract as
provisional cover, it is then immaterial to him, whether the market
advances or declines. His actual sale price is the stipulated price,
and the differences which arise from the "future" contract, are added
or deducted. A planter, who cannot sell his cotton for the moment,
sells the equivalent amount of "futures". A bank takes charge of the
cotton and the "future" contract, and pays the price of the day. When
the cotton is finally sold, the bank is reimbursed by receiving the
then existing price of the day: plus or minus the differences on the
"future" contract.
A spinner finds himself, now and then, in the position that he cannot
effect sales against his production. With a decline in prices, mostly,
the cessation of the demand coincides. By selling a "future" contract,
he can safeguard himself. When the demand is brisk, a spinner may find
himself obliged to book orders, although the time for buying the raw
material is not propitious. Here also, the "futures" give the necessary
assistance.
The receipts of cotton are naturally biggest in the first few months of
the new season. Should an importer miss this opportunity of acquiring
most desirable cotton? No, he can buy, with impunity, as much cotton as
he considers advisable, for against each purchase, he can put out a
provisional sale of "futures". In the cotton trade therefore, two
transactions are frequently coupled. The main transaction, is the
trading in the actual article, while the accompanying "futures", are a
safety measure against the fluctuations of the market. This combination
of actual cotton and "futures", is called a "Hedge"--the origin of this
name is obscure. The "hedge" is a peculiarity of the cotton trade, it
may even be called, its life condition. The supreme Court of Law has,
in many decisions, upheld this condition. The endeavours of the cotton
trade have always been directed towards the minimising of the market
risk, and for this reason, "futures" have always played an important
part in cotton business.
What are the forces which put life into the "future" market? The
world's trade is large, and every minute will find people, who, in the
pursuance of legitimate interests, buy or sell. When both groups are
fairly equal, the market is steady, while a decline or an advance is
caused by a preponderance of one over the other; finally, this adjusts
itself again, by the fact, that a rapid advance will produce sellers
and vice versa. A further element in the market, is the "jobber", whose
main object is to take advantage of the small fluctuation caused by
chance, but we must not forget the big speculators. By these, we do not
mean those despicable people who aim to snatch a profit, and who, on
having to face a loss, plead the gaming act. Experience and force of
circumstances have, luckily, driven these parasites almost out of the
market. But we do mean those big operators, who having weighed
carefully "the pros and cons" of the situation, cause the great "bull"
or bear movements.