Moving the harvest to the ports.
In the days of slave-grown cotton, the American planters, being men of
wealth farming on a large scale, consigned the bulk of their produce as
a rule direct to the ports. Now, however, a large proportion of the crop
is sold to local store-keepers who transfer it to exporting firms in
neighbouring cities. The cultivators, whether owners of the plantations,
as is usual in some districts, or tenants, as is customary in others,
are financed as a rule by commission agents. The decline of "spot" sales
at the ports, partly but not entirely in consequence of the appearance
of the small cultivator, has proceeded steadily. Hammond[4] has
constructed a table from information supplied by the secretaries of the
cotton exchanges at New York, Charleston, Savannah, Mobile, New Orleans
and Galveston, showing the sales of "spot" cotton at those ports for the
twenty-two years between 1874-1875 and 1895-1896, and in all cases an
absolute decline is evident. The receipts of cotton in the season
1904-1905 at the leading interior towns and ports of the United States
are given below.
_Receipts of Cotton at 28 Interior Towns._
(In Thousand Statistical Bales of 500 lb. each.)
Brenham, Tex. 17 | Memphis, Tenn. 984
Dallas, Tex. 96 | Nashville, Tenn. 19
Shreveport, La. 256 | Selma, Ala. 126
Little Rock, Ark. 219 | Montgomery, Ala. 211
Helena, Ark. 91 | Eufaula, Ala. 29
Vicksburg, Miss. 100 | Columbus, Ga. 74
Columbus, Miss. 57 | Macon, Ga. 87
Natchez, Miss. 76 | Albany, Ga. 35
Atlanta, Ga. 134 | Houston, Tex. 2,423
Rome, Ga. 72 | Meridian, Miss. 133
Augusta, Ga 446 | Cincinnati, Ohio 167
Columbia, S.C. 68 | Yazoo City, Miss. 65
Newberry, S.C. 17 | ----
Charlotte, N.C. 21 | Total 6712
Raleigh, N. C. 19 | -----
St Louis, Mo. 672 | Crop. 13,565
_Receipts of Cotton at American Ports._
(In Thousand Statistical Bales of 500 lb. each.)
Galveston, Tex. 2,879 | Boston, Mass. 84
New Orleans, La. 2,690 | Philadelphia, Pa. 14
Mobile, Ala. 330 | Brunswick, Ga. 200
Savannah, Ga. 1,877 | Pensacola, Fla. 187
Charleston, S.C. 225 | Minor Ports 518
Wilmington, N.C. 375 | ------
Norfolk, Va. 820 | Total 10,295
Baltimore, Md. 62 | ------
New York 34 | Crop 13,565
Galveston and Savannah have risen considerably in relative importance of
late years.
Ginning and packing.
Before the Civil War each planter would have his own gin-house. Now,
however, ginning is a distinct business, and one gin will serve on an
average about thirty farmers. Moveable gins were tried for a time in
some places; they were dragged by traction engines from farm to farm,
like threshing machines in parts of England, but the plan proved
uneconomical because, among other reasons, farmers were not prepared to
meet the cost of providing facilities for storing their cotton. In
addition to the small country ginneries, large modern ginneries have now
been set up in all the leading Southern market towns. The cotton is
pressed locally and afterwards "compressed" into a very small compass.
The bales are usually square, but cylindrical bales are becoming more
common, though their cost is greater. In the latter, the cotton is
arranged in the form of a rolled sheet or "lap." Owing to complaints of
the careless packing of American cotton, attention has been devoted of
late to the improvement of the square bale.
English ports of entry.
London used to be the chief cotton port of England, but Liverpool had
assumed undisputed leadership before the 19th century began. Some
arrivals have been diverted to Manchester since the opening of the
Manchester ship canal; shipments through the canal from the 1st of
September to the 30th of August in each year for the decade 1894-1895 to
1904-1905 are appended--six to eight times as much is still unloaded at
Liverpool.
A Manchester cotton-importing company was recently formed for increasing
deliveries direct to Manchester, and establishing a "spot" market there,
an end to which the Manchester Cotton Association had directed its
efforts for some time past. The latter association was established at
the end of 1894, with a membership of 265, in the interests of those
spinners who desired importations direct to Manchester. The objects of
the association are officially stated to be: (1) to frame suitable and
authoritative forms of contract, and to make rules and regulations for
the proper conduct of the trade; (2) to supervise and facilitate the
delivery of the importations of cotton at the Manchester docks to the
various consignees; (3) to provide and maintain trustworthy standards of
classification; (4) to procure and disseminate useful information on all
subjects pertaining to the trade; (5) to act in concert with chambers of
commerce and other bodies throughout the world for mutual protection;
(6) to establish a market for cotton at Manchester. Spinning members
preponderate, but almost all the Manchester cotton merchants and cotton
brokers have also joined the association. The importance of the original
spinners' representation on the association is shown by the fact that
they worked over 14,000,000 spindles: in December 1905 the spindles
represented by members had risen to nearly 20,000,000. Some 73,000 looms
are also represented. As most of the Lancashire cotton mills lie far
from Manchester, direct importations to that city do not usually
dispense with a "handling," and frequently save little or nothing in
freight rates, though in some cases the economy derived from direct
importation is considerable. One gain accruing to Lancashire from the
Canal, however, is that its competition has brought down railway
rates.
Cotton market methods.
Fundamental alterations have been made in the structure of the leading
cotton markets, and in methods of buying and selling cotton, in the last
hundred years. We shall not attempt to trace the changes as they
appeared in every market of importance, but shall confine our attention
to one only, and that perhaps the most important of all, namely, the
market at Liverpool. This selection of one market for detailed
examination does not rob our sketch of generality, as might at first be
thought, since broadly the history of the development of one market is
the history of the development of all, and on the whole the economic
explanation of the evolution that has taken place may be universalized.
_Cotton landed at the Port of Manchester since the Canal was opened._
(In thousand Bales.)
The season is from the 1st of September to the 31st of August each year.
+----------------------------+---------+----------------------------------+
| |Jan. 1894| Season |
| | +------+------+------+------+------+
| |to Aug. | 1894-| 1895-| 1896-| 1897-| 1898-|
| |31, 1894.| 1895.| 1896.| 1897.| 1898.| 1899.|
+----------------------------+---------+------+------+------+------+------+
|American | 21 | 32 | 121 | 211 | 245 | 311 |
|Egyptian | 1.4 | 34 | 68 | 88 | 98 | 84 |
|East Indian | .. | .. | .. | .. | .. | .. |
|West African | .. | .. | .. | .. | .. | .. |
| +---------+------+------+------+------+------+
| Total | 22 | 66 | 189 | 299 | 344| 395 |
| +---------+------+------+------+------+------+
|Total American Crop* | 7,549 | 9,901| 7,157| 8,757|11,199|11,274|
|Total Egyptian Crop (in | | | | | | |
| bales of 7-1/2 cantars)** | 657 | 615| 703| 783| 872| 745|
+----------------------------+---------+------+------+------+------+------+
| | Season |
| +---------+------+------+------+------+------+
| | 1899- | 1900-| 1901-| 1902-| 1903-| 1904-|
| | 1900. | 1901.| 1902.| 1903.| 1904.| 1905.|
+----------------------------+---------+------+------+------+------+------+
|American | 415 | 442 | 421 | 478 | 365 | 552 |
|Egyptian | 136 | 107 | 125 | 145 | 148 | 183 |
|East Indian | .. | .. | .. | 2.5| 6 | 1.3|
|West African | .. | .. | .. | .. | .. | .1|
| +---------+------+------+------+------+------+
| Total | 551 | 549 | 546 | 626 | 519 | 736 |
| +---------+------+------+------+------+------+
|Total American Crop* | 9,436 |10,383|10,680|11,011|13,565|10,727|
|Total Egyptian Crop (in | | | | | | |
| bales of 7-1/2 cantars)** | 868 | 723| 849| 867| 846| 778|
-----------------------------+---------+------+------+------+------+------+
* Commercial crop.
** A cantar is 99.05 lb. avoirdupois.
Evolution of broking.
Originally cotton was imported by the Liverpool dealer as an agent for
American firms or at his own risk, and then sold by private treaty,
auction, or through brokers, to Manchester dealers, who retailed it to
the spinners. This statement is, of course, only roughly correct. Some
Manchester dealers imported themselves, and some spinners bought direct
from Liverpool importers, but the rule was the arrangement first
described. Early in the 19th century it became customary for Manchester
dealers and Liverpool importers to carry on business with one another
through representatives known as "buying" and "selling" brokers. About
this time the broker of cotton only began to specialize from the ranks
of the brokers who dealt in all kinds of colonial produce. Previously
there had not been enough business done in cotton to make it worth any
person's while to devote himself to the buying and selling on commission
of cotton only. The evolution of the distinct business of cotton broking
is readily comprehensible when we remind ourselves that the
requirements, as regards raw material, of all spinners are much alike
generally, and that no spinner could afford to pay an expert to devote
himself entirely to purchasing cotton for his mill.
So far change had been gradual, but the success of the Manchester and
Liverpool railway undermined beyond repair the old system of doing
business. Spinners could easily run over to Liverpool and buy their
cotton from the large stocks displayed at that port. Before the railway
was opened some spinners had been in the habit of making their purchases
of raw material in Liverpool, but the great inconveniences of the
journey, combined with less easy terms for payment than were usual in
Manchester, prevented any great numbers from departing from the beaten
track. Cotton dealers up to this time had regularly financed the
spinners, who were frequently men of little capital, by allowing long
credit, and had even employed them to spin on commission. As men of
substance increased among the ranks of the spinners, the Manchester
cotton dealers found it impossible to retard a movement set on foot by
the prospects of such appreciable advantages. Ultimately many of the old
Manchester cotton dealers became brokers for their old customers. In
1875 there were said to be upwards of 100 cotton dealers in Manchester,
but from that time onward their members steadily declined. It is
interesting to observe that a later development of transport between
Manchester and Liverpool, namely, the Manchester Ship Canal, has drawn
back into Manchester a part of the cotton market which was attracted
from Manchester into Liverpool by the famous improvement in transport
opened to the public three-quarters of a century ago.
The centralization of the cotton market in Liverpool fixed firmly the
system of buying through brokers, for the Liverpool importer, or his
broker, was in no sense a professional adviser to the spinners,
informally pledged to advance the latter's interests, as the old
Manchester dealers had been. The system was rendered comparatively
inexpensive by the drop in commissions from 1 to 1/2% which had followed
the adoption of selling by sample. This custom of buying and selling
through brokers continued unshaken until the laying of the Atlantic
cable tempted selling brokers occasionally, and even some buying
brokers, to buy direct from American factors by telegraph and thus
transform themselves into quasi-importers. The temptation was made the
more difficult to resist by the development of "future" dealings. When
the agents of the spinners, that is, the buying brokers, by becoming
principals in some transactions, had acquired interests diametrically
opposed to those of their customers, the consequent feeling of distrust
among spinners gave birth to the Cotton Buying Company, which,
constituted originally of twenty to thirty limited cotton-spinning
companies, represents to-day nearly 6,000,000 spindles distributed among
nearly one hundred firms. Its object was to squeeze out some middlemen
and economize for its members on brokerage. This company, it is said,
helped to attract the brokers back to the spinners, and an informal
understanding was arrived at that the buying broker should not figure
both as agent and principal in the same transaction.
Cotton-Clearing house, Cotton Bank and periodic settlement of
"differences."
By 1876 "forward" operations had become so vast and complicated that a
cotton-clearing house had to be established to deal with the confusing
networks of debits and credits created by them. Its principle was
exactly that of the clearing houses used by the railways and the banks,
the cancellation of indebtedness and discharge simply of balances. The
final settlement of a "future" contract involved usually a crowd of
persons, and the passage of large sums of money backwards and forwards,
so that the amount of cash required for circulation on the exchange
became unreasonably excessive and an annoying waste of time was
entailed. The cotton-clearing house substituted book-keeping for the
bulk of these payments. The establishment of the Cotton Bank naturally
followed. Now debts are discharged in the first instance by vouchers.
Dealers pass their debit and credit vouchers into the Cotton Bank and
pay or receive the balances which they owe or are entitled to. In order
to protect dealers against the losses due to the insolvency of those
with whom they have had transactions, weekly settlements on the exchange
have been made compulsory; between brokers and their clients they are
also usual. At the settlement, every member of the exchange receives the
"differences" owing to him and pays those which he has incurred. Thus if
a person holds futures for 10,000 bales which stood at 5.20 on the last
settlement day and now stand at 5.30, and in the course of the previous
week has sold 5000 bales of "futures" at 5.10, he receives 10,000 X
(10/100)d. on his old holding, and has to pay 5000 X (20/100)d. on his
sales, and therefore on balance neither receives nor pays. Differences
may be very large sums. The unit of a "future" being 100 bales, an
alteration in the price of cotton of .01d. causes a difference on each
unit of L2. Periodic settlements are obviously periodic tests of the
solvency of dealers. If the test of the settlement were not frequently
applied, speculators who were unfortunate would be tempted to plunge
deeper until finally some became insolvent for large sums. As it is, the
speculator who has incurred losses beyond his means tends to be
discovered before his creditors are heavily involved. Settlement days
fall on Thursday, and the closing prices on the preceding Monday are
taken as the basis of the settlement. From all differences interest at
5% is deducted for the time between settlement day and the tenth day of
the second month on which the "future" elapses, since settlement terms
mean that money is paid in instalments before it is actually due. To the
admission of periodic settlements there was for a time vehement
opposition on the ground that the door would be opened to gambling on
"differences." Hence at first, in 1882, they were used only by a section
of the market constituted of members who had voluntarily agreed to do
business with one another upon these terms alone. By 1884, however, the
advantages of "settlement terms" became so evident that they were
adopted by the Cotton Association, at first for fortnightly periods,
with the saving clause originally that they should not be compulsory.
Origin of Liverpool Cotton Association.
As soon as the clearing house was set up it became evident that
"futures" were an impossibility away from it. At the same time "futures"
were becoming an increasing necessity to importers, because through
"futures" alone could they hedge on their purchases of cotton, or buy
when the market seemed favourable, and they were not prepared to assume
heavy risks. Now from the clearing house importers were rigorously
excluded, and on invoking the aid of "futures," therefore, they were
penalized to the extent of double broker's commission, one commission
being charged on the sale of the "futures" and one on their purchase
back. The importers, therefore, found it necessary to establish a club
of their own, the Liverpool Cotton Exchange, which they as rigorously
guarded against brokers. The split in the market so caused was so
damaging to both parties that a satisfactory arrangement was eventually
agreed upon, and both institutions were absorbed in the Liverpool Cotton
Association.
Publication of information relating to demand and supply.
A condition of specialist dealers working to the public service is that
they should not act in the dark. They must watch demand, be able to form
reasonable anticipations of its movements, and at the same time know
the existing stocks of cotton, the sales taking place from day to day,
and the best forecasts of the coming supplies. A man accustomed to
devote the whole of his time to the study of demand and supply in
relation to cotton, after some years of experience, will be qualified
ordinarily to form fairly accurate judgments of the prices to be
expected. His success depends upon his ability to interpret rightly the
facts and intangible signs with which he is brought in contact. The
information at the disposal of dealers has steadily enlarged in volume
and improved in trustworthiness, though some of it is not yet invariably
above suspicion, and the time elapsing between an event and the
knowledge of it becoming common property has been reduced to a fraction
of what it used to be, in consequence chiefly of the telegraph and
cables. All sales that take place on the Exchange must be returned.
Estimates are published of the area under cotton cultivation, and
conditions of the American crop are issued by the American agricultural
bureau at the beginning of the months of June, July, August, September
and October of each year. To represent the standard of perfect
healthiness and exemption from injury due to insects, or drought, or any
other causes, one hundred is taken. The estimates for 1901 to 1905 are
given, to illustrate their variations:--
+-------+----------+----------+----------+-----------+----------+
| Year. | June 1st.| July 1st.| Aug. 1st.| Sept. 1st.| Oct. 1st.|
+-------+----------+----------+----------+-----------+----------+
| 1901 | 81.5 | 81.1 | 77.2 | 71.4 | 61.4 |
| 1902 | 95.1 | 84.7 | 81.9 | 64.0 | 58.3 |
| 1903 | 74.1 | 77.1 | 79.7 | 81.2 | 65.1 |
| 1904 | 83 | 88 | 91.6 | 84.1 | 75.8 |
| 1905 | 77.2 | 77 | 74.9 | 72.1 | 71.2 |
+-------+----------+----------+----------+-----------+----------+
These estimates are the averages of separate estimates which are
published for the states of North Carolina, South Carolina, Georgia,
Florida, Alabama, Mississippi, Louisiana, Texas, Arkansas, Tennessee.
The official figures are supplemented from time to time by numerous
private forecasts, for instance those in "Neild's circular." Ellison, in
his work on the cotton trade of Great Britain, traces in detail the
increase in the volume of information collected and made public. At the
close of the 18th century there was a tacit understanding among brokers
to supply one another with information. There were no printed circulars,
except the monthly prices current of all kinds of produce, but brokers
used to send particulars of business done to their customers in letters.
These letters were the origin of circulars. Messrs Ewart and Rutson
pioneered in 1805 by issuing a weekly account of the sales and imports
of cotton, and three years later three such circulars were on the
market, though Hope's alone was confined to cotton. For the first
associated circular of any importance, the market had to wait until
1832. The issue of this circular by subscribing firms, on the basis of
particulars collected by brokers appointed at a weekly meeting, gave
rise in 1841 to the Cotton Brokers' Association, to which the
development of the market by the systematizing of procedure is largely
due. The rest of the tale may be told in Mr Ellison's own words:--
"Down to 1864 the leading firms continued to issue weekly market
reports, but in that year the association commenced the publication of
an associated circular. This was followed in the same year by the
_Daily Table_ of sales and imports, which in 1874 was succeeded by the
present more complete _Daily Circular_. To these publications were at
various times added the annual report, issued in December, the
American crop report, issued in September, and the daily advices by
cable from America, issued every morning."[5]
Futures.
We shall now enter upon a detailed analysis of "forward" operations. The
term "futures" is used broadly and narrowly: broadly it is a generic
term denoting "futures" in the narrow sense, and also "options" and
"straddles"; narrowly it implies merely contracts for future delivery at
a price fixed in the present. Again we must distinguish between the
"future" contracts for the delivery of a particular kind of cotton,
which may be entered into by spinners and their brokers, and are real
purchases in the sense that the spinners want delivery of the cotton
referred to, and the "futures," which always relate 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."
The spinner's risks.
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.
Method of distributing risks.
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 3/4 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.