Bremen Cotton Exchange Part 3

BUSINESS IN FUTURES.

Cotton is sold to a large extent for distant delivery, but "future"

transactions are only those which are concluded on a specified "future"

exchange, under the rules and regulations of that particular exchange.

Here be it mentioned, that the Bremen Cotton Exchange is no exchange within the meaning of the law. It has no regular hours of attendance, nor has it special rules regulating the business in "futures". The important "future" exchanges are Liverpool and New-York, and in a lesser degree, Havre, Alexandria and New Orleans. Within the specified hours of the "future" markets, large quant.i.ties of cotton contracts change hands. There, buyers and sellers are constantly in attendance, and it requires only a nod of the head to conclude a contract for thousands of bales. The Rules, referring to "futures", do not differ essentially from those governing the general trade, for it must be borne in mind, that all "future" contracts demand the delivery of actual cotton. n.o.body can escape this duty, if he has sold futures, he must deliver, unless he buys the contract back before it falls due, or vice versa, which, of course, refers also to any ordinary delivery contract. In fact, all transactions for delivery are settled either by previous transfer or by fulfilment. It is noticeable how the stocks in New-York increase or decline, in accordance with the tenders, against "futures". No doubt, the great majority of the dealers intend to close their contracts before they fall due, and the opportunity to do this, presents itself every minute. In this, the "future" markets offer a great advantage, or, if you like, a great temptation. In former days, the dealing in "futures" had no legal protection in Germany, and nowadays only under certain a.s.sumptions. Dealing in futures came within the gaming act, and claims arising therefrom, were not actionable. The Bremen Cotton Exchange has never accepted this view, but has constantly fought against it, for very good reasons. The following explanation will make it clear, that, as far as cotton is concerned, the trading in futures is of great economic importance, and not practised for s.n.a.t.c.hing easily earned profits.

HEDGES.

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 quant.i.ty 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 a.s.sistance.

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 s.n.a.t.c.h a profit, and who, on having to face a loss, plead the gaming act. Experience and force of circ.u.mstances 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.

TECHNICALITIES.

For those who wish to obtain information concerning the cotton trade from this pamphlet, certain subjects are here elaborated, which were, so far, only indicated in connection with other explanations.

Of first importance are the s.h.i.+pping doc.u.ments, which consist of bills of lading and insurance certificates. There are three kinds of bills of lading: Port Bills of Lading, Custody Bills of Lading, and Through Bills of Lading. The first must be signed by the captain of the steamer, who has undertaken to carry the goods, or by a duly authorized s.h.i.+pping agent. They are, therefore, an absolute guarantee on the part of the s.h.i.+p, to deliver the goods to the holder of the bill of lading.

Unfortunately, this obligation is frequently restricted by the insertion of certain inconspicuous clauses. The "custody bills of lading" are signed by a s.h.i.+pping agent, they acknowledge receipt of the goods, and promise the forwarding in due course. In order to obtain equal value with the "port bill of lading," they should, later on, be supplemented by a so-called "master's receipt", which is an acknowledgment by the captain, that he has actually accepted the goods for forwarding, in accordance with the conditions of the custody bill of lading. They are used when the goods have arrived at the port, previous to the s.h.i.+p.

The "through or railway" bills of lading, oblige the railway companies to forward the goods from a place in the interior of America, to their destination. A master's receipt is not necessary, but desirable, as it is an easy means of ascertaining by which steamer the goods are coming forward. At one time, "through or railway bills of lading" were not a properly valid doc.u.ment, as the railway companies were not in duty bound to forward the goods. Now, however, a change in the American Law binds the companies to this duty.

The "Insurance certificate" confirms, that the goods have been insured on the terms of an insurance policy, which remains in America, and in case of claims, it has the same doc.u.mentary value as the policy itself.

When "total loss", "general average" or "particular average" occur, claims on the insurer can be made, which must be substantiated in the port of discharge.

Any claim, referring to difference in quality or loss in weight, has to be made on receiving the goods, and the complaint has to be lodged within a certain specified time. On these points, the Bremen Cotton Exchange has specific rules which are easily understood.

If one party to a purchase or sale contract goes by default, the other party is obliged to send in their claim within the time stipulated by the rules of the Bremen Cotton Exchange, this is most important, as the non-observance may mean the loss of any right to claim. The method in which these claims are made up, is easily seen from the Rules of the Bremen Cotton Exchange.

If one party suspends payment, all unfulfilled contracts are immediately settled, without any action of the other party. The obligation to take or make delivery ceases, and, instead of this, the difference in price is fixed which exists between the date of contract, and the time when payment was suspended. These differences in price are put to account between the parties concerned. It can thus easily happen, that the solvent concern has to pay a considerable amount to the other party, through whose fault the contract was not carried out, and yet, this const.i.tutes no loss to the paying party, as they can at once cover themselves at the existing prices. The advantage of this procedure lies in the fact, that the solvent concern is not left in uncertainty, whether their contracts will be fulfilled or not, while, otherwise, this decision would rest with the liquidators, who, according to Common Law, are not obliged to declare themselves, until the stipulated time for delivery has been reached.

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 s.h.i.+pment at 200 points "on" December, or lowmiddling at 200 points "off". At any period up to the time of s.h.i.+pment, 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.

The merchant requires for advantageous buying, far reaching connections and a wide spread organisation, he has to survey the entire field of cotton production, he must watch for every opportunity where cotton is pressed for sale, he must know which district has grown the qualities mostly preferred, in short, he has to keep himself extremely well posted. The consumer has to work with the same tension, to find the devious ways which lead to a profitable result in his business. Hardly ever do big profits stare one in the face, and should a particular good opportunity arise, it never lasts long, as everybody wishes to partic.i.p.ate in it, which, of course, spoils the best chance. For the common welfare, compet.i.tion tends to reduce the prices of everything to the lowest possible level, that is the natural course of events.

Occasional deviations are simply exceptions, that, according to the old proverb: "prove the rule".

What is the technical value of a market?

The most pressing requirement for a spinner is a big supply, and this, naturally, collects in a big market. The manifold demands which a spinner places upon the quality, can only be satisfied by a great selection. Given a good supply, one of the main conditions of the industry has been fulfilled. An active market has a further calling, it regulates the prices, and, thereby, enables the industry to buy the raw material at a figure, warranting a successful compet.i.tion in the trade of the world.

MARKET ACTIVITY IN BREMEN.

Future transactions, of course, entail certain expenses, which const.i.tute something of a burden on the running business, while economy is a necessity for every mercantile enterprise. Out of this, originated the desire to establish a "future" market in Bremen. People felt sure that it would greatly a.s.sist the development of the market, to be able to trade in "futures" within their own portals. A certain amount of ambition may also have lent its weight. The establishment took place, though, not under the auspices of the Bremen Cotton Exchange, but in the form of an independent society. Early in 1914, the market commenced its activities, and it was soon found, that all expectations were realised, and even surpa.s.sed. The clearing house, which was started simultaneously, fulfilled all requirements. The business with the spinners had now a foundation, which answered all demands of modern times. Covering transactions, which previously were cabled to New-York and Liverpool, could be executed here every minute within business hours. Where orders from spinners were concerned, the whole transaction could be done by telephone. The "future" market blossomed out in such a way, that no fears were entertained for its successful future.

The coping stone had been set on the edifice of the Bremen Cotton Market.

With the growth of the industry in Germany, the Bremen cotton trade expanded, and the business with the surrounding countries grew in proportion. Russia, Poland, Austria-Hungary, Switzerland, Italy, Holland and Belgium, all became faithful customers, and the Bremen Cotton Exchange hummed with activity. Here, was the centre of all the efforts to provide the consumer with the desired material at the lowest prices. Every evening, at a late hour, when the last news from America had arrived, a flood of telegrams carried advantageous offers down to the smallest and most distant places on the Continent. Not only the cotton spinner, but also the weaver, the printer and the wholesale dealer took an interest in the Bremen offers, like clockwork operated the business intercourse between the cotton factor and the cotton consumer.