The Birmingham age-herald., 1908-05-04

grade of cotton the seller may select, mol | at the commercial differences, but at fixed differences not corresponding to the com 1 mercia differences. Here a multiplied risk is thrown upon him In addition to the risk of a decline in the value of | middling, he must take the risk tRat some one or more grades may decline more than middlng. Suppose. for ex- ample. that the buyer of a basis con- tract receives. instead of middling cot ton good ordinary cotton at a difference of l cent off the price of middling at a time when he can dispose of that grade in the spot market at the same differ ence Obviously he has suffered no in- justice. Suppose, however that he Is compelled to receive good ordinary cotton at a difference of 1 cent off-this differ ence perhaps having been established months in advance-when the commercial difference in the spot market is cents off It Is clear that if he resells this cotton he will suffer a loss
 Owing to the option of the seller under a basis contract to deliver any grade or grades he Sees fit, the buyer will, of course, ordinarily be compelled to re- ceive, under a xed-difference system, those grades for which differences are most favorable to the seller; that is, those which under the established differences are most overvalued as compared with
 
 buyer has to take the risk of the most unfavorable change in price which can oe- cur in any one among large number Of different grades of cotton.
 The seller of a contract will. of course. be injured if. in making a delivery, he is forced to deliver cotton at differences which undervalue it; that is, at unduly wide differences for low grades or at un- duly narrow differences for high grades. as matter of fact, as will appear later, the seller of contract, because of his privilege of selecting what grades he will tender, Is able either to avoid loss or materially to limit the boss arising from such errors in differences.
 The danger to the buyer of future contract that he may be compelled to &C., cept cotton at false differences naturally results in the second condition above mentioned, namely. in a depression of the price of future contracts as compared with the spot price of middling cotton; that is to say. buyers. confronted with the danger of having to accept cotton on contract at an overvaluation, attempt to offset that loss by offering less for such contracts.
 Grades Overvalued.
 The chances are very strong under a system of fixed or periodic differences that at least some grades will be relative- ly overvalued It does not matter that some grades may be relatively under valued at the same time, since these grades will not be rendered on contract. The seller, having the option of deliver ing whatever grades he may find 1t most advantageous to deliver will of course tender those which are overvalued.
 It follows that errors in grade differ ences in nearly all instances tend to depress the price of future contracts as compared with the spot price of middllng cotton; that is, they tend to increase the discount in the contract price beyond the normal. Since, as stated above, dellV- cries on future contracts are likely to con- sist of a mixed assortment of grades which are less convenient to dispose of than as equal quantity of even-runnihg cotton, there is normally, even in mar ket using the mercial-difference sys- tenn, margin of from 15 to p points between the spot price of middling cotton and the contract price for delivery in the current or spot month.
 Of course, after the contract price has thus been sent to an unusual discount, a revision of fixed contract differences, or a change in the commercial differences while the contract differences remain un- changed, may, by reducing the disparity between the two sets of differences, tend to restore this discount more nearly to normal point. But, starting with the as- sumption that conditions are normal, 1t IS clear that the result of errors in differ ences is almost invariably to send the contract price to discount, since sellers will naturally deliver grades which are overvalued, thus forcing buyers to re- duce their bids for future contracts.
 It is obvious that an abnormal depres- sion of the price of future contracts as compared with the spot price of middllnS cotton. such as results from errors m con- tract differences. must cause loss to large number of holde of contracts. The number of persons affected by such losses is vastly greater than the number who actually receive the cotton on contract at oyervalued differences; for, as is well known vast numbers of contracts are purchased not with the intention of talk ing I'D cotton, but with the idea or re- selling them. Of course, the losses or one class of operators through such rel ative depression of the contract are at least partly balanced by gains of other onerators This. however, does not justify a system which will permit such ab- normal depression of the contract price.
 Parity Disturbed.
 Such disturbances in the normal parity between the spot middling price ana the contract price therefore increase the risks attending future operations. Any increase of risk which can be prevented is clearly an evil Abnormal disturbances Of the parity between the two prices increase the difficulty of forecasting the course of the price of future contracts Oper- ators in futures base their transactions in the main upon a study of conditions of the spot market Under a proper and normal difference system they can as sume that conditions which tend to ad- vance or depress the price of middllng cotton in the spot market will likewise