Chapter 3

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.

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 shipping documents, 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 shipping agent. They are, therefore, an absolute guarantee on the part of the ship, 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 shipping 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 ship.

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 document, 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 documentary 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 constitutes 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 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.

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 participate in it, which, of course, spoils the best chance. For the common welfare, competition 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 competition in the trade of the world.

MARKET ACTIVITY IN BREMEN.

Future transactions, of course, entail certain expenses, which constitute 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 assist 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 surpassed. 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.

THE WAR.

The Bremen Cotton Exchange has never occupied itself with politics, but, of course, the members could not help taking serious notice of occurrences which shook the world's foundation. Together, with the expansion of business, grew also a political apprehension. France was lending milliards upon milliards to the Russian Czardom, with the express condition, that the money had to be expended in preparation for a war against Germany. One saw, that France gave Egypt to England, although it did not own it, on the other hand, England ceded Marocco to France, without having any sovereign right over that country. That Germany had interests in both places, was overlooked. The English newspapers, so widely read in Bremen for their business news, brought articles upon articles, picturing the dangers of a German Invasion. In the most lurid of colors, the cruelties of the war were painted, that was supposed to threaten England, and all this, for no other purpose, than to inflame the passions of the English people.

What did the commerce do in face of these threatening symptoms?--Nothing! Without an anxious thought, people looked after their business, and showed an optimism, which to-day, is inexplicable.

On the 25th of July in 1914--after the Austria-Serbian ultimatum--careful merchants insured their afloat cotton against war risks. The big German Insurance Companies took this risk for 1/8%, let us repeat it, one eighth per cent! How was it that the insurance companies were so unconcerned? At the same time in Bremen, and at other places in Germany, many insurances were covered with English companies. Did nobody see danger ahead?

All political misgivings of those days were silenced by the feeling, that to think of war was monstrous and to believe in war, an impossibility, on account of the highly developed economic relations which connected all countries.

Yet the war came! At the outbreak, many cargoes of cotton owned by Bremen merchants were afloat, and many "future" contracts were open in the Liverpool market. Later on, the cargoes were taken by the enemy, and the Liverpool contracts were liquidated, in accordance with a certain system, but without the consent of the other parties to the contract, and without reservation of their rights. Bremen had a considerable stock of cotton at the commencement of the war, consequently was in a position to supply the German cotton mills for a long time. If proof had been needed to show the advantage of having an important cotton market in Bremen, the war would have furnished it. The cotton trade was not satisfied to deal only with the existing supply, but did its very utmost to secure fresh imports, and was successful, by means and ways hitherto unknown, to bring considerable quantities of cotton into Germany, where it was of great service.

The Cotton Exchange does not trade, but under the war-conditions and in the knowledge of being the centre of commerce and industry, a courageous attempt was made. At the instigation of the Exchange, commerce and the spinners of Germany and Austria-Hungaria united, to give a bid for one million bales of cotton to the Americans. Cotton was no contraband of war, and America was neutral, so no difficulties seemed to be in the way of executing this plan. The buyer was prepared to pay the price which the Americans might demand, and the goods were to be paid in hard cash dollars. Yet the offer was not accepted, although America had sufficient reason to seek an outlet for the big crop it had grown, and that nobody wanted under the war conditions. Politics were too mighty for the reasons of commerce!

After a while, all connections ceased with America. The Bremen Cotton Exchange and the cotton trade were at a stand-still. Now and then, the Exchange tried to place their establishment at the disposal of the trade in substitutes, but only with moderate success. To build up a lasting trade in substitutes was as impossible as it was to find a market for the substitutes, when once cotton began to appear again.

THE RE-OPENING OF THE MARKET.

After the armistice, the possibility presented itself again, of supplying the German cotton industry with raw material. The government, however, made certain stipulations under which the import might be carried on, but no hymn of praise can be sung about them. Notwithstanding all difficulties, cotton found its way into the country, and when, finally, all government measures were cancelled, the legitimate business was restarted. All round the Bremen market, competition had grown. Rotterdam made great exertions to push Bremen aside, even Copenhagen made similar endeavours. A few American firms, which were hostile to Germany, did their best to circumvent Bremen. These efforts, however, were not crowned with success, Bremen regained its position. It has been shown that the natural development through many years, cannot be killed and artificially replaced. The manifold relations, started in peace-time, of personal or business character, showed their value. The economic life flows through a great network of channels, should these be artificially closed, they will re-open again of their own accord, as soon as the barriers have been removed. During the war, the German cotton industry either stood still, or worked only with a small percentage of its machinery. The government had husbanded the supply of cotton most carefully, so that, after an unexpectedly long war, a little was still left over. The mills which were running, displayed great assiduity in procuring and utilizing substitutes for cotton. Paper, wood, cellulose, reed and nettle fibres, and other materials were tried, some were manufactured quite extensively. During the war they did good service, but in normal times, they cannot usurp the place of cotton. After surmounting many difficulties, the German cotton industry is once more in full swing, and with it, Bremen is again the important continental cotton market. The surrounding countries buy in Bremen as of old, though some outlets are still closed, owing to political and economic reasons.

During the last three years, before the war, the import of North American cotton to Bremen averaged 2 500 000 bales, during the season 1920/21, it reached 1 200 000 bales, and in 1921/22, 1 500 000 bales, the decline, against the former years, is caused, partly, by the disappearance of some outlets, and partly, by the shorter working day.

AMERICAN CROPS AND CONSUMPTION.

The activity of the "Bremen Cotton Exchange" depends, to a large extent, upon the import figures, and these again are under the influence of the various crops. In America, big crops alternate with small ones, the cause for this diversity is to be found in the climate conditions, and also in the ruling range of price. High prices stimulate an extensive planting and a careful cultivation of the ground, while low prices have the contrary effect. The crop figures from 1872-1914, were ascending, an occasional decline was made good later on.

The following figures will make this clear.

American crops:

1872 3 650 000 bales 1875 4 302 000 " 1878 4 745 050 " 1881 5 136 000 " 1884 5 477 000 " 1887 6 884 000 " 1891 8 940 000 " 1894 10 025 000 " 1898 10 985 000 " 1901 9 749 000 " 1904 13 697 000 " 1907 11 326 000 " 1910 11 966 000 " 1913 14 614 000 " 1914 16 738 000 " 1915 12 013 000 " 1916 12 664 000 " 1917 12 345 000 " 1918 12 817 000 " 1919 11 921 000 " 1920 13 711 000 " 1921 8 000 000[1]"

[1] estimated.

The reverse, which the production suffered since 1914, is remarkable, it is largely accounted for, by the want of artificial manure. German potash could not be obtained, and this was largely used by all cotton states, with the exception of Texas, Louisiana, Mississippi, Arkansas, which do not require that kind of fertilizer. In addition, the boll weevil has become a dreaded enemy of the cotton plant. The insect world produces quite an army of little fiends, that viciously attack and reduce the crop, many have disappeared, but the boll weevil is, at present, the arch-enemy; it is a small beetle which bores into the bolls to deposit its eggs there.

The following figures give the distribution of the American crops.