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.