The wealth of the world--at least up to the time of the Great War--was constantly increasing and while there is little likelihood that the demand for the coa.r.s.er grades of goods will fall off, the need for finer stuffs, not only in the United States, but abroad, is constantly growing.

The greatest development of the South is probably still to come.

The locations of the world's cotton markets have been dictated by the location of the growing fields and the manufacturing centers. Thus we find that the great raw cotton markets of the United States are in New York and New Orleans. In Europe they are at Liverpool, Bremen and Havre.

Because of conditions imposed by the German government, the Bremen market is largely dependent upon New York and Liverpool. The other great world market is that of Alexandria, which, although it handles but a comparatively small part of the world's crop, is important on account of the quality of the staple which makes up the Egyptian bale.

The two chief American markets, New York and New Orleans, are sharply differentiated. The New Orleans market is a true trader's market. The great bulk of the sales made on the New Orleans floor are bona-fide sales, in which cotton actually changes hands. The New York market on the other hand is a merchants' and manufacturers' market, in which business transactions are protected against loss by the purchase or sale of "futures", though, of course, there is always a large amount of speculating. Delivery is rarely demanded. The function of the exchange, therefore, is largely that of insurance. The intricacies of this market will be discussed later.

CHAPTER III

The Raw Cotton Market

Because of the ramifications of the cotton industry, the cotton itself, on its devious way from planter to consumer, is successively the concern of a series of individuals and corporations. The immense value of the product, the expense of growing, handling, manufacturing, and selling it all mean that great quant.i.ties of capital are utilized in bringing it at last to its final consumer. At any stage of the process, cotton represents no inconsiderable part of the nation's wealth, and to expedite its journey, merchandising and financial methods of a highly specialized technique have been developed. There are two very clearly marked stages in this process. The first has to do with the raw cotton, as it goes from planter to mill. The second has to do with the journey from mill to consumer. The first is usually called the Raw Cotton Market, and the second the Cloth Market.

The planter begins his work early in the spring. His crop is dependent upon his ability to secure and pay for the labor to work it, for the tools and machinery which are used, and his own expenses. Small planters are rarely sufficiently in funds to enable them to go through the growing season without financial a.s.sistance. They must borrow money, and they usually borrow it with the growing crop as a basis.

The Local Grower And the Charge Account

They may borrow from the country merchant in the town near which their plantations are located. Credit here is usually furnished through the "charge account" system, whereby the merchant supplies the planter's wants for the growing season, even to the extent of giving credit to his farm hands. Tenant farmers live almost entirely on credit furnished by the store-keepers of the vicinity. When the picking season begins, in July, August, or September, according to the region concerned, the merchant, in lieu of money, may take the cotton as it comes from the gins, crediting the grower thereof at the market price. The cotton thus acc.u.mulated is sold to local buyers, or, occasionally, to shippers or exporters. In the case of the larger plantations, or groups of plantations operated by syndicates or corporations, the cotton is frequently shipped direct to the mill or, more often, to a warehouse. The larger producers, instead of getting their credit from the local stores, as their tenant farmers do, are financed either by their banks, or by their buyers, who in turn are financed by their bankers.

The Street Buyers Of Texas Towns

In some districts, particularly in Texas, there is the small or local buyer, usually called a "street buyer," who operates in the smaller towns, buying his cotton at the gins in lots of from one to ten bales, either from the small planters, or from the country merchants. This buying gives a certain concentration to the crop, and enables the larger buyers to deal in lots of comparatively uniform quality from certain regions, the general type of whose product is known.

[Ill.u.s.tration: _Street buyer in a Southern town_]

Cotton bought from the planters or from the country merchants is almost invariably paid for in cash.

Cotton is frequently sold at the compress point, rather than at the gin, this course being pursued in the case of large producers, or when the original buyer is a mere local operator. One of the most important operations, commercially as well as industrially, is the grading of cotton, which takes place as a rule at the compress point under the supervision of the buyer, who employs experts for this purpose. Cotton mills as a rule operate on certain specified grades of cotton, and any deviation from this grade means either a readjustment of machinery or disgruntled and dissatisfied employes, or, perhaps, an inability to fill an order for cloth of certain types. The manufacturer will usually refuse to accept any grades save those he has specifically commissioned the buyer to obtain for him. The actual grades, and the terms describing them have been established by the United States Government, and are rigidly adhered to by the trade. Prices are established on the grade known as "middling" as a basis, and variation from this basis is taken up in the price.

Standardization of American Cotton Grades

The grades, for white cotton, as established by usage and confirmed by Governmental standardization are:

Middling Fair Strict Low Middling Strict Good Middling Low Middling Good Middling Strict Good Ordinary Strict Middling Good Ordinary Middling

For yellow tinged stock the grades are:

Strict Good Middling Middling Good Middling Strict Low Middling Strict Middling Low Middling

For yellow stained and blue stained there are only three grades quoted, good middling, strict middling, and middling, the inference here being that stained cotton below the basic grade, is unsuited for most commercial purposes.

With cotton selling around thirty cents a pound, the difference between the cost per pound of middling fair, the highest market grade of white cotton, and good ordinary, the lowest market grade, may amount to twelve or thirteen cents. The value of the shipment, and its use as a basis for credit, is dependent upon its proper cla.s.sification.

The large cotton buyers purchase for the account of mills, for exporters, or for clients abroad. They are usually firms of strong financial standing, and as we have seen, they are bankers or factors themselves, financing growers or small buyers during the growing of the crop, and the first concentration of the cotton. But when the large movement of cotton is on, it is frequently necessary that they, like the local banks, must be financed in order that they may execute their orders, or, as is frequently the case, accept cotton sent to them on consignment. Cotton sent on consignment must be stored until a market is found for it, and in order that proper storage facilities may be supplied, the provision of suitable warehouse facilities is an important matter.

Warehousing as Industry's Great Need

Until recently, warehousing in its relations to the textile trade, had not been developed to the extent which might have been expected in those methods which would make it of the greatest use and advantage to textile interests. By means of the facilities which could properly be afforded by warehouses, manufacturers, or merchants should be able, at times of favorable markets, to lay in large stocks of materials, and to finance them safely and easily.

Today, this need is being met in constantly increasing measure by the Independent Warehouses, Inc., affiliated with the Textile Banking Co., and having, like the latter, the support of the Guaranty Trust Company of New York, and the Liberty National Bank of New York.

Modern warehouses of approved type, with all requisite facilities, will be established by this company at various ports of entry throughout the country, as well as at the important concentration points in the cotton belt, and also in the great textile manufacturing centers.

[Ill.u.s.tration: _Weighing cotton on the compress platform_]

Thus it is seen that the cotton merchant has an important economic function to perform. His is the duty of gathering up the great aggregate of cotton, from all parts of the cotton belt, and distributing it in exactly the quant.i.ty and grade needed to the cotton manufacturers of the world. In the performance of this function, and in order that the supply of cotton may be fed out exactly as it is needed by the manufacturers, the cotton merchants have found it convenient, and even necessary to establish great common markets where they may meet and enter into the transactions with each other and the whole world which are necessary to bring the cotton into the channels of commerce and keep it moving to its mult.i.tudinous destinations. These markets are in addition to the numerous local markets where the preliminary concentration takes place, and to some extent they are subsidiary to the latter, where the cotton of the actual quant.i.ty and quality they are seeking is to be had in the first instance. Yet it is the great markets which establish the prices, for it is they which are in close and immediate touch with all the other markets of the world, and it is on their floors that the merchants and brokers meet who deal in great quant.i.ties. It is their connection with the numerous sources of information which gives these great markets their importance, for it is they which register immediately and most accurately the resultant of the sum total of all the economic forces which determine the price.

[Ill.u.s.tration: _The New York Cotton Exchange_]

The great cotton markets of the world are those of New York and New Orleans, in the United States; Liverpool, in England; Bremen, in Germany; Havre, in France; Alexandria, in Egypt; and Bombay, in India. There are differences between these markets which give a greater importance to some of them. Bremen, which serves a large territory, operates under governmental restrictions which make it necessary for Bremen merchants to deal in other markets as well. Havre serves chiefly the needs of France, which is not one of the large cotton consuming countries. Alexandria deals only in Egyptian cottons, and Bombay, whose dealings are confined mostly to the native staples, has neither the responsiveness nor the completeness of the remaining markets. Thus, by elimination, the three great markets of the world, wherein cotton of all kinds is dealt in, and all forms of transactions in it are common are those of New York, New Orleans, and Liverpool. To these, the cotton world looks for guidance from day to day. The prices established on their several floors are the prices of the world.

[Ill.u.s.tration: _Cotton train going from gin to compress_]

The Liverpool Exchange, under different names, has existed since 1841, having taken approximately its present form in 1870, in the attempts to stabilize conditions after the great speculative period which resulted from the American Civil War. The New York and New Orleans Exchanges were both organized the following year. The uniformity of rules and practices in the trade which resulted from the establishment of the exchanges have been of inestimable benefit to the industry and to the world, and this despite occasional abuses, which have usually been corrected as methods for correction have been evolved.

Spot Markets and Those Which Deal in "Futures"

The New Orleans Cotton Market, and those of lesser cities, are largely spot markets, that is, the dealings which takes place in the Exchanges at those points involve the actual transferring of cotton which is on hand, or, at least, contracted for. The New York market deals preponderantly in what are known as contracts for future delivery, or, in the language of the Exchange, "futures." The Liverpool Cotton Market is both a great "spot" cotton market, and a great "futures" market. The striking thing about these "futures" contracts is that but few of them are fulfilled by actual delivery.

The question then arises, what function is fulfilled by the New York Exchange that it should have such an important place in the cotton market? To the uninitiated the speculative features of the market have often served to condemn it, and at times of speculative fever, or of manipulation such as has occurred on one or two occasions, there has been public agitation calling for legislation against dealing in futures. Yet the New York Exchange performs a very definite and valuable service, and its trading methods have served to stabilize the whole industry, and to remove from it much of that very speculation which is frequently charged against the Exchange itself.

The justification of the Exchange is found in the fact that the futures contracts common on its floor afford the cotton merchant and manufacturer a chance to insure themselves against losses occasioned by fluctuations in the market. The method by which this is done is called hedging.

Why the Merchant Must Hedge His Sales

For the cotton merchant, the situation as it develops is approximately this: buying, as he must, all grades and quant.i.ties of cotton, he may have an immediate market with the spinners whom he serves for only certain of these grades, and thus may have left on his hands a large supply of cotton of other grades which came to him in his purchases which he has no call for at the time. These "overs" are subject to the risk of a decline in value unless the merchant can find some way to protect himself. Nor is this risk the only one run by the cotton merchant. The spinners frequently contract for months ahead for the output of their mills, and it is part of the merchant's task to see that the cotton is available at a contract price when the spinners are in need of it. Such contracts for future deliveries are not only common but customary. If it were impossible for the spinner to make such contracts, it would, of course, be impossible for the weaver to make future contracts for the delivery of cloth. Such a condition unsettling the distributing markets, would be intolerable. Hence, the necessity of future contracts between merchants and spinners. The situation would otherwise be a very difficult one for the merchant whose supply of cotton, and the price he must pay for it, are subject to the vagaries of nature, which may grant a bountiful crop one year, and a short and inferior one the next, with consequent fluctuations in price sufficient not alone to wipe out his profit but his capital as well.

The Hedge As a Credit Transaction

Hedging, as has been said, affords the protection, against serious loss which these varying conditions make probable.

"It may almost be said," observes Arthur R. Marsh, former President of the New York Cotton Exchange, "that as the main business of banks today is not dealing in money, but in credits, so the main business of the cotton exchanges is now in credit transactions in cotton, toward which the actual cotton 'on the spot' stands in much the same relation as the money in the banks to the sum total of their transactions in credit. It serves as a reserve at once for the satisfaction of unliquidated credit balances and for the maintenance of sound credit values in all the credit operations."

Elsewhere, Mr. Marsh describes the hedging process in these words: "A hedge is the purchase or sale of contracts for one hundred or more bales of cotton for future delivery, made not for the purpose of receiving or delivering the actual cotton, but as an insurance against fluctuations in the market that might unfavorably affect other ventures in which the buyer or seller of the hedge is actually engaged."

[Ill.u.s.tration: _The floor of the New York Cotton Exchange_]