The Birmingham age-herald., 1908-05-04
LENGTHY REPORT ON
 COTTON EXCHANGES
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 by the time ne is ready to sell out his hedge contract. the discount In the contract price has been increased. IT the buyer had the option of demanding on his future contract grades which h required for his engagements with spinners. he would, of course, be pro tected. But as repeatedly stated, that option lies entirely with the seller
 If is clear, therefore, that the fixed difference system, which is bound to result in variations between the dlt- ferences applicable on future contracts and the commercial dlfferences, mus. almost inevitably cause injury to cer- tain holders of contracts, either by compelling them to accept grades of cotton on delivery at a relative over valuation or by increasing the discount in the contract price as compared with the spot price. The second of these conditions is a result of the attempt of operators to evade the first.
 Some defenders of the fixed differen g system have contended that discount ing the contract price is really rem edy for any injury arising from the oyervaluation of grades. In other words. they contend that the effect of errors in differences can readily be off set by simply varying the contract price. and that nobody is injured there bv The argument is that such errors are therefore largely immaterial. The situation has been pronounced by some advocates of the New York system as being similar to the purchase Of goods for 10 cents less 10 per cent, or for cents cash.
 | If future contracts were in all cases very short time contracts, or if the error in the differences were a con- stant error, this argument would hold good; but in normal course of business d vast number of contracts are entered into many months in advance of matur- ity, and the buyer has then, of course, no opportunity to revise his Did ia order to counterbalance the effect or unforeseen disparities between contrac7 and commercial diffences which may and usually do occur later.
 | In case such disparities occur be- l tween the arbitrary and the commer-' l cial differences, the holder Of future l contracts must eith CT take the cotton at the improper arbitrary differences and of course at a loss, or-what IS 1 more frequently done-sell out his con- tracts; but when he comes to sell out his contracts he must do so at loss, i since the new buyer is now informed l of this disparity in the differences, and will, therefore, to protect himself of- 1 fer only a reduced price.
 FalIacious Argument.
 | An especially fallacious selement in l this argument that errors in differences l can be automatically corrected is that | it assumes that the buyer knows, ap- l proximately, at the time he buys the | contract what grades are to be de- ] liyered to him months later. The tn e- 1 ory is that the surplus grades of the crop will be rendered on Contract and that the buyer will reduce his bids for | contracts sufficiently to offset the eff feet of any errors in differences for such surplus grades As matter Of fact. although the surplus grades gen erally constitute the bulk of deliverie-. these surplus grades comprise a rathe' wide range while odd lots of other grades are often delivered. A more important point is that contracts are purchased in great numbers before the crop is gathered, and that on account of changes in weather the general character of a cnop, and consequently of the surplus grades, may prove en- tirely different from what was expected at the time contracts were purchased. While buyers of future contracts are thus very likely to suffer loss through errors in contract differences, sellers of contracts, on the other hand, often profit by just such errors. Although errors may be such as relatively to un- dervalue certain grades, the option Of the seller as to the grades which he will deliver generally enables him to avoid delivery of such undervalued grades.
 A striking instance of the effect of the
 difference system of the New York Cotton exchange upon certain classes of operators occurred in the season of 19O6-7. This instance Illustrates the evils which may occur under periodic differences. Near the close of September, 1906, there was terrific gulf storm which caused immense damage to cotton over a large area of the cotton belt. The result was an abnormal proportion of low grades. Commercial differences widened sharply; that is, the price of the low grades He'll relatively to that of middling and the price of high grades advanced relatively to middlng, The cotton trade looked to the revision committee of the New York