The Washington herald., 1910-02-06

tons engaged in by spectators In cotton.
Mr.. Knox prepared his memorandum at
the request Of the President, and II is IN
tended to give a brief description Of the
forms Of transactions commonly made
upon produce exchanges. The statement
is OF special interest at this time in its
bearing upon the operations of the cotton
exchanges in New York and New Or
leans. The memorandum follows:
There are practically FIVE classes Of
transactions in farm commodities;
spot" transactions. Where the COM
modify is delivered at the time of sale.
Intended delivery" future transactions:
! Where the contract is for future delivery
but where delivery Of the goods is in
tended and expected.
Bucket shop" transactions; Where
there is no obligation compelling either
| delivery or receipt, and where delivery Is
neither intended nor expected.
Hedging transactions: An obligatory
contract for future delivery, the main
purpose Of which is 70 relieve the hedger
of speculative risk. AS a rule neither
PARTY expects delivery or receipt
! Speculation. Where neither party in
tends to deliver or receive, but where the
contract IS made on a regular exchange
the rules Of which make delivery and re-
oeipt obligatory If demanded
spot transactions Proper.
The first three classes need little dis
cussion. Spot transactions are, of course
proper. Contracts for future delivery
with intent 10 deliver C1ntended deliv-
cry" futures are extremely common and
/ necessary. The government in its large
supply contracts regularly agrees TO buy
articles not then existing. Bucket shop
transactions are PROFESSIONALLY evil and
lindefensible.
This leaves hedging and speculation 10
he considered more fully. 1t is important
10 note in passing that the only difference
between intended delivery" future con-
tracts on the one hand admittedly meri-
torious and necessary and hedging and
speculation on the other is a difference
Of intent, a state Of mind. Certain diff
culues are obviously involved in applying
practically such a distinction.
Hedging IS a common future transac-
ton in certain farm products. Cotton
mills sell their cloth many months in ad-
vance. They must. therefore. assure
themselves Of a supply OF raw cotton.
This necessitates hedging. For example,
a cotton merchant agrees IN February to
furnish next October TO a spinner 1000
bales Of cotton at 10 cents a pound The
merchant believes he can buy this cotton
IL
which viii enable him % make a profit.
! But crop conditions may intervene. great
|ly increasing the price Of actual cotton.
Therefore, when the merchant makes this
agreement he hedges It by also buying on
the cotton exchange future contracts, de-
liverable next October. for 1000 bales.
Now suppose actual cotton does 90 up.
so that next October this merchant Will
have TO pay the farmer = cents for the
cotton which he must furnish the spin
ner for 10 cents. He loses, roughly speak
ing, . cents a pound on the actual cotton,
Hedge balances Loss.
But his hedge balances this. II the
price Of future contracts has moved in
parity" with the price Of actual cotton,
/
ne also holds for 1000 bales have similar
ly risen . cents a pound, thus offsetting
his loss on the actual cotton.
The cotton merchant, who is simply a
distributor, has risks enough IN his bust
ness Of ordinary distribution. Hedging
allows him to throw the additional heavy
| speculative risks upon the Spectator
who accepts them in the hope Of specu-
lative profit. There is now large mum
: Der of small cotton merchants scattered
over the South. If they could not hedge
and were obliged TO carry the heavy
| speculative risks involved In their trans
actions. it is probable that many Of them
would be forced out and the business con
centrated in the hands Of a few large
operators, leaving the farmer more OF
less at the mercy Of these few.
Again. hedging benefits both farmer
and spinner by reducing costs-that IS
hedging has to some degree relieved the
merchant of a risk. It therefore enables
and forces, him to reduce his charges
While the spinner does not often hedge
he buys OF merchants who do. The mer-
chants hedge practically all their trans
. actions. In short. I regard hedging IS
necessary and proper. Il IS not specula-
ton; it is the avoidance OF speculation.
Speculation Presents Problem.
This class presents a difficult problem
It's practice probably involves the exist
ence OF the future exchanges themselves
For example, an attempt was made IN
1904 to establish a future market on the
Galveston Cotton Exchange but without
success. An officer Of the exchange ex.
planned the failure as follows:
The trades were restricted to legiti.
mate business. I don't believe there was
I a speculative trade made during the
whole time. For some reason the specu.
lator and gambler did not operate in this
: market This made il a very narrow
market. The brokers feared that in such
a narrow market they would become en-
tangled in obligations upon contracts that
would embarrass them. Holders Of cot.
ton did not utilize this market to any
considerable extent for hedging purposes
and 1t resolved itself practically into 6
purely spot business You have got Il
J have speculation. I think speculation /;
absolutely necessary 1t was in our case
/ and think it is everywhere"
Therefore. the question Of speculation
brings up the whole question OF the mer
/ its OF future exchanges.
| A future exchange has two prime func
} tions-to facilitate hedging, as described
= above, and to establish future price quo
: tations, which are the resultant Of al
the best information and expert knowl
: edge available brought together at th'
central market In the hope of profit, anC
, thus TO discount in advance future condi
: tons of supply and demand and proven
: disastrous fluctuations.
Prof. Henry c. Emery, in Speculation
4