The Dawson news. (Dawson, Ga.) 1889-current, 1914-09-18
COTTON PROBLEM IS
DUE TO STRADDLES
INABILITY OF THE TRADERS TO
AGREE KEEPS THE EN-
CHANGES CLOSED.
TECHNICALS IN COTTON TANGLE
System by Which the Dealers in Cot
ton Protect Spot Trades With Flu
ture Contracts. Hedging Is EX-
planned Fully.


| planned Fully.
Technicalities have played such a
large part in the existing cotton tan
gle that it has been impossible for
those who have not an expert knowl-
edge of cotton market machinery to
gain an idea of the problems inVoly-
ed. The intricacies of hedge sales
and purchases and such arbitrage
transactions as straddles between
New York and Liverpool mean little
or nothing even to the man who has
been accustomed to take an occa-
sional flier in cotton speculation.
These technicalities, however, fur
nish the very essence of the import
ant transactions, and an attempt will
be made to set them forth in their
relation to the present cotton situa-
ton.
When the cotton exchanges of the
world closed on July 81 an immedi-
ate attempt was made to reduce COM
mitments in order that brokers
might draw down margins that had
been deposited on these trades in
banks and trust companies. This
work has made satisfactory progress,
and for all practical purposes, at
situation, it may be assumed that
most of the speculative longs and
shorts have been closed out except
where these trades became involved
in the straddle between New York
and Liverpool.
What is a straddle and why is it
made? The New York Sun thus ex-
plains:
Suppose, for instance, that an Eng
lish cotton firm imports 10000 bales
of cotton to Liverpool. In order to
insure themselves against loss the
importers sell 10000 bales of Janu-
ary-February contracts in Liverpool
and at the time they sell these con-
tracts they presumably have a profit
in their spot cotton. By the sale of
futures they guard themselves
against any loss resulting from a de-
cline, for the profits of their short
sales will Offset the loss on the act
ual cotton. This transaction is mere
ly hedge.
Here is where the straddle comes
in: At the time the importer sells
his 900 bales in January-February
contracts certain Liverpool operators
take the view that the New York
market is a better sale than Liver
pool at the existing differences be-
tween the two markets. January
February in Liverpool, for instance,
may be only 90 points over January
in New York, and the Liverpool oper-
ators feel that when the weight of
cotton comes on the New York mar
ket, particularly in low grades, prices
in New York will sink 1870 points
and perhaps more under Liverpool.
Therefore when the importer sells
10000 bales of cotton contracts in
Liverpool the English operators take
these offerings and sell 1000 bales
of January cotton in New York at
the existing difference in the hope of
undOing this operation later-cOver-
ing shorts in New York and selling
out longs in Liverpool-at profit of
20 points or so in addition to COM
missions. These transfers of hedge
sales originally made in Liverpool
to New York constitute an important,
in fact, the most important, part of
the business between New York and
Liverpool. They are known as strad-
dies. In the working out of the diff
ferences between the two markets
some very complex questions are in
volved and only an expert market OPP
orator cares to attempt them,
Through the medium OF these
straddle operations the Liverpool
stock exchange is frequently hedged
to a large extent in New York.
The present cotton tangle is con-
cerned almost entirely with the strad-
die interest between New York and
Liverpool. This is estimated to con-
sist of about 347, 600 bales of cotton
sold by Liverpool in New York and
about $50, 900 bales in Liverpool sold
by English operators to New York
firms. In this latter instance the
New OIh UuSSIS lOOh LiIC ACuSC
sales directly instead of through the
medium of straddle sales in New
York. This makes a total of about
100000 bales virtually hedge sales
of which New York firms are long.
Since the exchanges closed on the
last day CT July the Liverpool stock
has shrunk in value about 3 cents
per pound, provided it were possible
to import cotton from the South and
replace the Liverpool stock. In 9th
er words, the exchanges closed when
cotton was about on a basis of II
cents for New York contract prices
and that basis, if exchanges were
opened tomorrow. would be about
cents On the 100000 bales hedged
! by sales to New York operators there
| has been a loss on the above basis of
! $500, 900. These, of course, are
only approximate figures, but they
will answer for the purpose of ex-
planning the tangle.
! There is no way of escaping this
| loss. If these straddles were to be
! declared off" the Liverpool import
ers would have a presumptive loss of
$7,50O,00O. This need not be an act
ual loss. however, in spite of the low