K0ANISED
MARKETS
ORGANISED PRODUCE MARKETS
PREFACE
THIS volume, based on lectures delivered in the Faculty of
Commerce of the University of Birmingham, is intended
primarily for the use of students. The interest, however, of its
subject matter to business men and others, and the lack of a
recent work for English readers on the aspects of marketing
herein treated, suggest that it is likely to appeal to a wider
audience than that of the University classroom. Therefore,
references to conceptions likely to be familiar only to students
of economic theory have been omitted as far as possible ; but it
is not to be inferred from this that the book is entirely descriptive.
Discussion has not been avoided when it seemed likely to lead
to useful generalisations or suggestive conclusions.
It does not come within the scope of the book to treat of
wholesale markets generally in England. Much information has
been collected recently both by the Departmental Committee,
set up in 1919 by the Food Controller to report on the existing
wholesale markets for perishable food in London, and by the
Public Control Committee of the London County Council; but
furthur inquiry and research are necessary before this branch of
marketing can be advantageously summarised.
Naturally, in a work of this kind, the writer is largely
indebted to others for information concerning the market organ-
isations described. Secretaries of trade associations and ex-
changes have, in the majority of cases, courteously supplied all
the information requested. One important English exchange
authority, for reasons not readily apparent, declines to permit
non-members to examine its clearing-house forms, even when
unused. This, however, has proved to be less serious an obstacle
than at one time appeared probable.
It is believed that the facts and figures given concerning the
several exchanges described are correct up to the close of 1921,
and that no recent innovations of importance have been over-
looked. The establishment, however, in January, 1922, of a
new cotton exchange in Rotterdam, and the purchase, for forward
delivery, of the whole of the 1922 output of nineteen large tea
estates in Ceylon, by the London market, on behalf of blending
houses in this country, point to the continuance of fairly rapid
vi PREFACE
changes in marketing routine in Europe ; and the passing of the
Future Trading Act indicates the existence of a reforming spirit
also in the United States. As it is not easy for one who has no
direct contact with American conditions to forecast the effects
of this Act, it has been thought desirable to give it in extenso in
an appendix and leave the reader to form his own judgment upon
the provisions it embodies.
Among the published works on marketing found especially
useful have been Emery, Speculation on the Stock and Produce
Exchanges of the United States ; Annals of the American Academy
of Political and Social Science, vol. xxxviii. ; Sonndorfer, Die
Technik des Welthandels.
Sir William Ashley, Dean of the Faculty, has been good
enough to offer certain suggestions, most of which have gratefully
been adopted, but the author alone is to be held responsible for
all imperfections and omissions.
J. G. SMITH-
UNIVERSITY OF BIRMINGHAM,
February, 1922.
CONTENTS
CHAPTER I
ORGANISED PRODUCE MARKETS
PAGE
Characteristics of organised markets — Exchanges in the United Kingdom,
United States, and Europe — Conditions required in a commodity for
exchange dealings — Federations of exchanges ......... I
CHAPTER II
WARRANTS AND GRADING
General warrants and warehouse receipts — Grading of cotton and grain in
Liverpool, United States, and Canada — Governments and standard-
isation in marketing — Quality clauses in c.i.f. contracts — Coffee
grading in New York IO
CHAPTER III
THE INTERNAL ORGANISATION OF THE PRINCIPAL PRODUCE
EXCHANGES
Brokers and brokerage — Liverpool Corn Trade and Cotton Associations,
membership and privileges — Continental exchanges — Exchanges in
Chicago and New York — Winnipeg Grain Exchange 28
CHAPTER IV
SPOT TRANSACTIONS, FUTURES, PRIVILEGES
Growth of speculation and development of futures contracts — " Privileges "
— " Options " — " Puts and calls " — " Straddle " — " Arbitrage " —
Markets "in "and "out of line" 4°
CHAPTER V
SETTLEMENTS AND CLEARING HOUSES
Settlement rings — Clearing houses in Chicago, Minneapolis, Winnipeg, and
Liverpool — Caisse de liquidation — Futures as basis contracts — Com-
mercial versus fixed differences 51
viii CONTENTS
CHAPTER VI
CROP REPORTS AND MARKET PRICE QUOTATIONS
PAGE
Official and unofficial crop reporting organisations — Work of the De-
partments or Ministries of Agriculture in United States, Canada, Great
Britain — Price quotations, their purpose and services, how obtained —
Publication of prices by trade journals 64
CHAPTER VII
LEGITIMATE USES OF FUTURES
Farmers and futures — Hedging by exporters and importers, by spinners and
millers — Attitude of banks to hedging — Origin of hedging — Hedging
by elevator companies in the wheat trade 76
CHAPTER VIII
THE WORK OF THE EXPERT SPECULATOR
Professional speculation — Speculation and gambling — Services of the expert
speculator — Sources of his remuneration — Legislation against speculation 96
CHAPTER IX
SOME EVILS AND ABUSES OF SPECULATION
" Manipulation " on exchanges — Excessive speculation, pools, bucket-shops,
"wash sales," "matched orders" — "Corners" and " squeezes" in
wheat, cotton, and iron warrants — Legislation dealing with the evils of
speculation 108
CHAPTER X
THE INFLUENCE OF SPECULATION UPON PRICES
Short-selling and prices — Futures and price steadiness — Results of suppres-
sion of speculative dealings in Germany— Relation between spot prices
and prices of futures — Effect of speculation upon prices 126
CHAPTER XI
FUTURES IN COMMODITIES OTHER THAN COTTON AND GRAIN
Futures in pepper, sugar, and coffee in London — Coffee "valorisation " in
Brazil — Trade in iron warrants *47
CHAPTER XII
SPOT AND C.I.F. BUSINESS IN COTTON AND WHEAT
Cotton trade in United States — Liverpool methods of trading in spot and
c.i.f. cotton— Rivalry between Liverpool and Manchester Cotton
Associations — Cotton market in Japan — American export tride in
wheat — Liverpool Corn Trade Association's contracts . ... 154
CONTENTS ix
CHAPTER XIII
MARKETING BY AUCTION
PAGE
Auction sales— Conditions 01 success — British wool trade — United States
wool trade — London tea and coffee sales — Raw tobacco sales in
Carolina and Virginia — Auctions in municipal markets in United
States and Europe 167
APPENDIX I
The Capper-Tincher or Future Trading Act (U.S.A.) 183
APPENDIX II
Example of Market Report (Liverpool Cotton) 187
APPENDIX III
Examples of Warehouse Receipts and Warrants 190
APPENDIX IV
Some of the standardised Contract Forms in use in the Liverpool Grain Trade 192
APPENDIX V
Some ot the standardised Contract Forms in use in the Liverpool Cotton
Market 215
INDEX 233
ORGANISED PRODUCE
MARKETS
CHAPTER I
ORGANISED PRODUCE MARKETS
AT a time when communities were self-sufficing the problem of
the transfer of commodities from the producer to the consumer
was a simple one. As society developed and industry became
specialised the problem grew in complexity, until eventually the
necessary services came to be performed by middlemen, who are
remunerated partly by the producer and partly by the consumer.
Investigation into the nature of the services rendered by the
middleman shows that they may be classified under one or more
of several heads : 1
(1) The seeking out of commodities and buying them from
producers in all parts of the world.
(2) The holding of stocks of goods at convenient points,
warehousing, and storing.
(3) The assumption of risks due mainly to price fluctuations,
changes in quality, and possible loss by fire or accident.
(4) Financing (i.e. the providing of credit when and as re-
quired).
(5) Selling, including preparation therefor.
(6) Transport each time the commodity changes hands.
The more difficult these functions are to perform in any given
case the greater the need of specialisation and the greater the
variety of middlemen required for their fulfilment. In all
highly organised modern commercial communities the degree of
specialisation is great, and constantly increasing. Warehousing
and storing, for example, are becoming more and more the work
of special firms and special joint stock companies. The work of
1 See Shaw, " Some Problems in Market Distribution," Quarterly
Journal of Economics, vol. xxvi. pp. 703-65 ; and Weld, " Marketing
Functions and Mercantile Organisation," American Economic Review,
Fourth Series, vol. vii. pp. 306-18.
2 ORGANISED PRODUCE MARKETS
finance has, for some time, been entrusted to banks. Risk, due
to loss by fire or accident, is borne by insurance companies.
Transport, in its various forms, has long ago ceased to be wholly
provided by buyer or seller. Factors or agents specialise in
seeking out the producer ; and the professional " grader " is now
an established institution in the case of wheat, cotton, and those
other agricultural products for which the demand is wide-spread
and the sources of supply more or less localised.
The last, but by no means the least important, of the functions
of the middleman to become the work of specialists is the assump-
tion of risk due to price fluctuations.
Progress in this direction has hitherto been slow and difficult ;
and it is only in the case of comparatively few commodities that
success has been attained. This has been rendered possible by
the development of a very high degree of organisation. It is,
therefore, in the most highly organised markets alone that this
class of expert risk-taker is to be found ; and it is only in com-
paratively few even of these that it does not add other functions
to that one to which it primarily owes its existence.
The term " market " has more than one meaning, and is used
with several connotations ; but in every case there is implied the
existence of one group or several groups of people, some of
whom desire to obtain certain things, and some of whom are in
a position to satisfy that desire. It is also implied that the former
are in possession or can obtain control of sufficient purchasing
power to enable them to fulfil then: desires — i.e. that the demand
is effective,— Awhile the latter, at least in the larger produce
markets, are able within certain limits to withhold or increase
supply to an extent great enough to withstand unforeseen pressure
from the demand side.
Again, the word may be used to designate the collective feeling
of the group or groups as to prices ; and this collective feeling may
be personified, thus justifying the use of such adjectives as
" strong " and " weak/' and the attribution also of practically
every emotion ordinarily ascribable to a human being.
A market may consist of all the inhabitants of a village, town,
or district ; or it may be confined to those who are interested in one
commodity only, e.g. raw cotton or copper. In some cases
dealings in a particular product may be worked out in such
constant intercommunication over the whole globe as to justify
the use of the phrase " world market." The development of
cheap and rapid transport, and the invention of the telegraph
and telephone in the latter half of the nineteenth century have
resulted in a continuous if slow, increase in the number of
commodities whose market is thus world-wide. Moreover,
these same developments and inventions have had the effect
also of so distributing demand and supply in the modern market
ORGANISED PRODUCE MARKETS 3
that these latter are no longer transitory phenomena, definite
only at a particular moment in a particular place, but are streams
flowing at various rates during an appropriately selected period
of time. Supply as a rule is the more sluggish stream influenced
at every stage by constantly altering facilities for production,
and by optimistic or pessimistic anticipations concerning the
nature of the demand expected.
The proceedings of an organised market are governed by rules,
some of which are, in all cases, written or printed, and some of
which are, in the nature of conventions, unwritten, but none the
less binding on that account. These organised markets or
exchanges may be private voluntary associations of dealers in
one or more commodities. Such is the case in the United
Kingdom. They are of two kinds — one dealing in GovermSenTT
an3~Tndustrial securities, in stocks, shares, and bonds (stock
exchanges) ; the other dealing in commodities (produce exchanges).
Their members may be professional traders who buy and sell on
their own account, as well as dealers who buy and sell for others.
In this country exchanges had their origin, just like associations
for many other purposes, in informal, succeeded by more formal,
meetings of several persons to discuss mutual interests and to
advance their business. The desire to maintain uniformity in
the rates charged for services as agents for the general public
was a powerful impetus to the continuance of these meetings ;
but the growth of large-scale production causing, in industrial
areas, a concentration of population requiring a supply both of
food and of the raw materials of industry, which could be easily
adjusted to a demand fluctuating within a narrow range of
variation, rendered organised markets a necessity if society was
to run smoothly along the lines upon which it had entered.
In the United States of America stock exchanges are private
organisations, as in the United Kingdom. This is true also of
the American produce exchanges, with the qualification that
these, in most cases, exist under corporate charters obtained
from the States in whose territories they are situated. Many of
these are associations, organised originally for more general
purposes, which by accident or design have become the most
important markets in some one or more commodities, though
they include large numbers of merchants who never deal in
these leading commodities.
Very different is the position of the exchanges or bourses on
the Continent. In France the Paris Bourse (Stock Exchange) is
a private monopoly under strict Government control, with features
peculiar to itself which need not detain us here ; while the produce
exchanges (bourses de commerce) with their members (courtiers en
marchandises) have their organisation prescribed for them by the
Code de Commerce. Their general supervision is entrusted to the
4 ORGANISED PRODUCE MARKETS
local chambres de commerce, and as these are practically official
bodies with small powers of initiative, carrying out their duties
under the direction of the Ministre de Commerce, Government
control of markets (in France) is effectively complete.
In Germany there is no uniformity in the legal status of the
exchanges (Borsen1), but with the exception of a small stock
exchange in Dresden, which is a private body, there is external
control in every case. There may be somewhat strict Govern-
mental supervision, as in Prussia, or control by a semi-public
Handelskammer, as in Frankfort and in Leipzig.
In Holland the supervision of exchanges is entrusted to the
municipalities in whose areas they are situated. Actually, how-
ever, these powers of control are rarely exercised.
While it is true that organised markets are needed only when
people cease to be, or can no longer be, satisfied with the few
products produced mainly by themselves and their immediate
neighbours, or when they produce surplus stock exceeding local
demand, it is but a small number of commodities which can
with advantage be made the subject of dealings in such markets,
and a still smaller number which satisfy conditions requisite for
being dealt in at a number of such markets simultaneously. At
least five conditions must be fulfilled by any product before it
can be the subject of dealings in an organised market.
Firstly, it must be sufficiently durable to enable stocks to be
what is termed " carried " for a reasonable length of time when
the market is unduly depressed. This rules out all quickly
perishable commodities such as meat, fruit, and fish ; but the
increased provision of cold storage facilities is making this
requirement capable of more ready fulfilment, and the markets
for foreign meat and fruit show a growing tendency towards
specialisation and organisation similar to that of the corn
markets.
Secondly, the product must be one that can be numbered,
weighed, or measured with accuracy obvious to all. The greater
the ease with which this can be done in the case of a given com-
modity the greater the probability of organised dealings taking
place in that commodity.
Thirdly, its quality or grade should be capable of a ready test
yielding the same results when applied by trustworthy officials
at different times and in different places. Otherwise expressed,
these second and third conditions amount to the requirement
that the commodity must be fungible, i.e. of such a kind that
one part or piece is as good as another, or at any rate that all
parts or pieces will serve the purpose of the purchaser for use
equally well. It is only in such cases that dealing by sample or
1 Effecteribdrsen, Fondsborsen, Geldborsen (stock exchanges) ; and
Warenborsen, Productenborsen (commodity and produce exchanges).
ORGANISED PRODUCE MARKETS 5
by reference to conventional representative qualities can occur.
This condition is perhaps the most essential of all.
Fourthly, the dealings in the commodity must be sufficiently
frequent to occupy large bodies of buyers and sellers.
Fifthly, there must be fluctuations in price, that is, the com-
modity must be one whose supply cannot be varied quickly by
rapid changes in the rate of production ; for otherwise there would
be no opportunity for professional dealers to make a living, and
all transactions would take place between producers, merchants,
and consumers, owing to the ease with which the supply could be
adapted to the demand.
Apart from securities, of the comparatively few material
things which satisfy all these conditions to the extent required
for large-scale organised dealing, a certain number of agricultural
products and, to a less degree, the metals complete the list, at
the head of which may be placed raw cotton and wheat, closely
followed by the other cereals and coffee. These products are
shipped from one country to another in very large quantities.
Exporters and importers would find it impossible to collect
readily from the scattered wheat and cotton growing areas
sufficient quantities to fulfil isolated orders for specific grades as
received. Moreover, cotton and wheat can be handled most
economically when in bulk and can be stored cheaply without
risk of deterioration for lengthy periods of time. Again, they
can be graded into standard qualities, and are collected from many
scattered sources and producers whose individual contributions
are small in comparison with the total output dealt with by the
market. Wool, at first sight, might appear adapted equally
with, if not better than, cotton for organised dealings ; but diffi-
culties in grading have hitherto prevented the growth of a market
in wool comparable in organisation to that in cotton.1 Each
fleece contains portions possessing widely different qualities,
which must be separated off before use. Moreover, each district
has its own special breed of sheep, while climate and soil differen-
tiate the product from place to place, even when the breeds are
the same. Some approach to uniformity is possible in the case
of wool from new countries like New Zealand, where breed, climate,
and soil are the same over very large areas ; but even this help to
the grader is counterbalanced by the rapid changes in fashion
which constantly alter the relative values of the different fibres, in
consequence of the alterations in texture imposed upon the
weaver to meet the constant new market demand. In the
cotton market the relative values of different staples are much
more permanent and the same trouble is not met with. Yet,
1 See Cherington, " Some Aspects of the Wool Trade of the United
States," Quarterly Journal of Economics, vol. xxv. pp. 337-56, for account
of an attempt to found a Wool Exchange in New York.
6 ORGANISED PRODUCE MARKETS
notwithstanding these difficulties, the wool market possesses a
considerable degree of organisation, and grading is performed by
the Bradford Conditioning House with extreme precision. More-
over, there are traces of speculative dealings in some Continental
centres of the trade, in Havre, for example, in raw wool, and in
Antwerp and Roubaix-Tourcoing in " tops." *
Somewhat similar difficulties of grading exist in the case also
of coal. This commodity is exceedingly varied in character over
the same coal field, and even when actually cut from adjacent
portions of the same seam. Again, although the actual deter-
mination of calorific value, which might serve as the basis of
grading, is not difficult, the question of size — whether " large " or
" small " or " fine "—is one equally important to consumers.
The reduction of even a small range of calorific values in com-
bination with size to their equivalents in a few standard sorts is
a task of great difficulty and has as yet been scarcely attempted ;
but the London Coal Exchange, which deals in almost every
variety, has had some success in introducing uniformity into the
movements of prices of different kinds. The local markets,
however, throughout the world, each with its own business terms
and customs, still dominate the coal trade. There is no trace of
the growth of anything approaching an organised world market
in this mineral.
The markets for certain of the metals are highly organised,
though for different reasons in the several cases. The circum-
stances attending the production and marketing of wheat, cotton,
coffee, and agricultural produce generally differ so markedly
from those in the case of the metals that the problems of dealers
in the two groups are extremely divergent. In the one case the
supply is not produced continuously, but depends each year upon
the results of harvests falling within assigned parts of the year,
while the demand by consumers is continuous and practically
uniform throughout the year. Dealers hi these commodities,
therefore, have to adjust a seasonal supply to a continuous
demand. With metals supply does not depend, except to a negli-
gible degree, on seasonal variation during the year ; whereas demand
is fluctuating and uncertain. In this case supply can be organised
so as to meet demand and can most easily adjust itself when the
latter is steady, whether it be of large or of small dimensions. In
the agricultural group, therefore, conditions on the demand side
tend to be the steadier and to be more easy of forecast and the
conditions of supply more uncertain ; but in the metal group the
reverse is true.
As regards iron and steel, it is only in certain exceptional cases,
r " Tops " are the coiled flat-ended balls of equal weight into which
wool is built up in the combing process. See Clapham, The Woollen and
Worsted Industries, pp. 40 and 46.
ORGANISED PRODUCE MARKETS 7
of great interest but of comparatively small importance in the
trade as a whole, that dealings comparable to those in an
organised market have sprung up. The tendency to further
development in this direction has been checked by the growth of
" vertical combination " in the iron and steel industries, which
enables the larger manufacturers to satisfy their requirements in
the way of raw material without recourse to markets. Copper
and tin afford greater scope for the development of organised
markets. This is mainly due to the great fluctuations that take
place in their prices, which offer to specialised dealers the
opportunities for profit that must exist to call such operators into
being. These fluctuations are due to the growing need of these
metals in the developments that are taking place in certain large
industries. For example, electrical engineering is making a con-
tinually increasing demand for copper, a scarcity of which would
considerably hinder progress in that industry, and thus react in
turn on many other allied industries. Again, the present sources
of supply of these metals are in places remote from the chief
industries and are liable to interruption from causes, both physical
and political, over which dealers have no control. In this respect
these two metals resemble to some extent the agricultural products.
Other commodities may, on occasion, admit of being handled
in the organised produce exchanges and may be even, for a time,
the subject of a very great number of transactions. This is often
a consequence of fluctuations in an otherwise regular supply —
fluctuations temporary but sufficiently long sustained to offer an
opportunity of profit to expert dealers. Occasionally the transi-
tory importance of the commodity is due to sudden changes in
demand which were not foreseen by suppliers ; but in each case
the cessation of the disturbing cause results in the commodity
disappearing again from the list of those in which alone specula-
tion affords a fair prospect of profit.
It is obvious that wholly or partly manufactured articles do
not even in a remote degree come within the category of com-
modities which can be handled in an organised market.1 Apart
from the ease and speed with which demand and supply are
ordinarily adjusted in this case, the fact that no one purchaser
wants many articles, and buys only after personal inspection,
makes it more economical to transact business at a large number
of small distributing points than to attempt large-scale dealings
in an exchange.
About 1886 an attempt was made to develop a branch of the
Berlin Bourse for dealings in this class of goods. The venture met
with little success, and was abandoned in 1888. No attempt has
since been made on any other exchange to extend its operations
in this direction.
1 In this connection, see pp. 153 and 172 sq.
8 ORGANISED PRODUCE MARKETS
It is in the organised markets or exchanges that the middle-
man performs those two functions which producers and con-
sumers are very willing to depute to him, viz. the holding of stocks
of goods at convenient points and the assumption of risks due to
price fluctuations. For the efficient performance of these duties
convenience and promptness in buying and selling are essential.
Uniformity of usage, and strict adherence to conventional
standards of conduct in business are scarcely less desirable ; and
the rules of all bourses, exchanges, boards of trade, or chambers
of commerce, as these markets are variously termed, endeavour
to make full provision in this respect.
In recent years further steps have been taken in the standardisa-
tion of trade customs, and in the still greater simplification of the
conditions under which produce is exchanged, by the formation in
each country of associations embracing all the exchanges dealing
in the chief commodities. For example, in 1909 the Council of
the North American Grain Exchanges was formed to consist of
delegates representing the organised grain centres (at least thirteen
in number) of the United States. The object of this body is :
" To increase the efficiency and extent of the usefulness of
exchanges trading in agricultural products ; to promote uniformity
in customs and usages ; to facilitate the adjustment of business
controversies and differences that might arise between members
of the various exchanges ; to render enforceable the principles of
justice and equity ; to encourage the enactment of wise and helpful
legislation ; to erflighten the general public as to the important
service rendered by exchanges in handling agricultural products ;
to cultivate reciprocal relations between the trade of North America
and that of other countries ; to obtain by affiliation those greater
legitimate conditions unattainable by separate and local effort ;
and, generally, to advance the welfare of the grain trade, its allied
interests, and the interests of all those engaged in the production,
handling, marketing, and consumption of agricultural products."
For facilitating export business in the same way, there is the
North American Export Grain Association, which works in co-
operation with the Liverpool Corn Trade Association, Ltd., and
other bodies in the importing countries ; and the National
Federation of Corn Trade Associations in the United Kingdom is
another organisation representative of market authorities which
acts in the name of the whole of the corn trade associations of
Great Britain and Ireland.
By no means the least important of the objects of the organised
markets is the dissemination of information of every kind bearing
on the supply or demand of the commodity dealt in. The im-
portance of correct and trustworthy news of the conditions of
growing crops and of reliable estimates of their probable yields
has become so great, not only for dealers but for consumers
ORGANISED PRODUCE MARKETS 9
as well, that Governments have taken it upon themselves
4;o help the markets in this respect and have, in most of
the large agricultural countries, set up elaborate machinery for
reporting crop conditions at every stage of growth. In some
countries like Canada and the United States private agencies
supplement the official reports concerning crop conditions ; but
every exchange provides its own arrangements for the collection
of less striking, but equally important, items of news bearing on
weather conditions, movements in other markets, price quotations,
rumours of political change — in fact, anything that may, even
remotely, influence demand and supply in any part of the world.
An exchange is not an organisation for the making of money,
but it may collect from members and others who make use of the
facilities it provides fees and dues with which to pay necessary
expenses. It does not fix prices or make transactions in ordinary
business as an organised body, although it may sometimes accept
full legal responsibility on behalf of each party to any contract
made under its rules, notwithstanding the fact that as an institu-
tion it never initiates business itself. It is primarily instrumental
in affording a convenient market place, in regulating trade, and
in controlling the conduct of business of its members; but the
latter act upon their own responsibility, and may trade as much
or as little as they please, provided they conform to the standards
which the rules of the exchange prescribe for the regulation of
business.1
1 See Report on the Winnipeg Grain Exchange, September 10, 1921
(being a statement submitted to the Royal Grain Inquiry Commission by
the secretary in response to a questionnaire received from the Commission,
May 1 6, 1921), pp. 16-18 inclusive.
CHAPTER II
WARRANTS AND GRADING
BEFORE speculative dealings in organised markets could attain
their present degree of development, systems had to be devised
whereby commodities could be classified in grades and certified
as in accordance with sample or standard generally recognised
by dealers. The adoption of grades or of classification by
qualities did not take place immediately the need was felt. Yet
a space of little more than a quarter of a century was sufficient
to perfect the very efficient methods now in use in the case of
the main staple commodities of international trade. The desire
of a merchant to take advantage of a favourable price before his
goods were ready caused him often to make offers of " forward
delivery " of particular lots on the basis of samples supplied, and
then later on the basis of a fairly generally recognised standard.
Gradually the custom sprang up of the buyer accepting goods
purchased on the latter basis which were not of the specified
standard, provided allowances were made in payment for any
variations in quality. This was the case particularly in the
cotton trade. English importers began selling cotton to the
spinners before their cargoes arrived — selling it "to arrive " or
" in transit." The next step was to sell even before it left the
American ports, in which case it was said to be sold " for ship-
ment." In the grain trade the development at first was different,
owing to the much wider area over which that commodity had to
be distributed. Here the cargo was shipped to a port of call
" for orders," and before the arrival of the vessel the importer
sold for delivery in the market best at the moment. On arrival
of the ship at the port of call it was then directed to proceed to
the place where the cargo had been sold. In this way ports like
Queenstown, Falmouth, Gibraltar, and Aden became important ;
but with the growing use of wireless telegraphy by merchant
vessels ports of call become less essential and ships' charter
parties are being altered accordingly. All these methods of
trading are still regular and in common use.
Further development took place when the warrant system
and official grading came into general use. Warrants are not of
recent introduction ; they date back to 1733, in connection with
10
WARRANTS AND GRADING n
the business of the East India Company. Their function is to
transfer ownership without actual transfer of goods. They also
serve as security, by means of which advances from bankers can
be obtained. By endorsement they pass from hand to hand,
and can at any time be presented for the goods they represent.
Such warrants, representing specific lots of goods, are merely
special receipts ; and transactions in them are precisely the same
as dealings in the goods themselves. In the case of iron, there
sprang up about the middle of the nineteenth century a system
of general warrants, united with carefully conducted grading,
which helped markedly in the organisation of the Glasgow and
Middlesbrough iron markets. A general warrant is a receipt
for no particular lot, but merely a transferable order for an equal
amount of the given commodity of the same grade. The English
law courts always upheld the special characteristics of these
warrants in case of dispute, and in this connection the dicta of the
Master of the Rolls (Jessel), in delivering judgment in 1877 in
the case Merchant Banking Co. v. Phcenix Bessemer Steel Co.,
are of importance :
" The form (of iron warrant) was invented about 1846 and the
practice grew general about 1866, and, I think, from that time till
now we must consider it, on the evidence, as an established custom,
that any man who gives this warrant understands that it shall pass
from hand to hand for value by indorsement, and that the indorsee
is to have the goods free from any vendor's claim for purchase
money. He is not to be asked whether he has a claim or not ; if he
chooses to issue it in this shape, he tells all the trade that they may
safely deal on the faith of that warrant, and whether or not it
becomes a negotiable instrument at common law as distinct from
equity is, to my mind, utterly immaterial. That is the custom;
and as the man who issues such a warrant knows that custom, it
appears to me that the Phoenix Bessemer Co. have issued those
exactly as if they had said they were to be deliverable according to
the custom of the iron trade, that is, to be deliverable ' free from
any vendor's lien' to Messrs. Smith & Co. or their assigns by
indorsement. If these words had been inserted, as I think it will
be desirable in future they should be inserted, can anybody doubt
that the company, by issuing the warrant in that form, would be
precluded in equity from afterwards alleging that they were unpaid
vendors ? "
But apart from the fact that the Courts uphold reasonable trade
customs when satisfactory proof of their existence is supplied,
Section 25 of the Sale of Goods Act, 1893, places the question
of transferability of warrants beyond all doubt :
(i) " Where a person having sold goods continues or is in posses*
sion of the goods, or of the documents of title to the goods, the
deliver}' or transfer by that person, or by a mercantile agent acting
for him, of the goods'or documents of title, under any sale, pledge.
12 ORGANISED PRODUCE MARKETS
or other disposition thereof, to any person receiving the same in
good faith and without notice of the previous sale, shall have the
same effect as if the person making the delivery or transfer were
expressly authorised by the owner of the goods to make the same.
(2) " Where a person having bought or agreed to buy goods
obtains, with the consent of the seller, possession of the goods or
the documents of title to the goods, the delivery or transfer by
that person, or by a mercantile agent acting for him, of the goods or
documents of title, under any sale, pledge, or other disposition
thereof to any person receiving the same in good faith and without
notice of any lien or other right of the original seller in respect of
the goods, shall have the same effect as if the person making the
delivery or transfer were a mercantile agent in possession of the
goods or documents of title with the consent of the owner." 1
About the same time general warrants and grading developed
independently in the United States for wheat and other grains.
The collection at export centres of these commodities from a
large number of small producers and the mixing of all the con-
tributors' shares in one consignment made it impossible to give
receipts for specific lots. Moreover, it became increasingly
difficult to sell by sample under these circumstances, and so during
the 'fifties of last century the system of grading was fully adopted.
Large warehouses and grain elevators sprang up at export points,
and the railways as they extended west set up similar stores there..
As wheat was presented for storage it was inspected and classified!
in established grades. The receipts issued by the warehouse or
elevator became the equivalent, for market purposes, of the
given amount of a specified grade, and were thus warrants en-
titling the holder to possession on presentation. At first they
were specific orders for actual lots deposited, notwithstanding
the fixed grades, but they became general receipts (general
warrants) when the growth of the amount of wheat stored in
bulk rendered it difficult, if not almost impossible, to deliver at
any moment on a warrant presented for redemption the actual
grain previously deposited. Therefore all grain of the same grade
was stored in bulk as received by warehouse and elevator, without
regard to particular lots ; and contracts were fulfilled by mere
delivery of the general warrants.
By 1860 most of the wheat handled in Chicago was duly
graded and dealt in by means of general warrant, but it was not
until 1874 that this system reached New York. As the classifica-
tion of cotton is not, and probably can never be, the exact process
that the grading of wheat has become, the practice of issuing
general receipts never became established in the American cotton
trade. Cotton is not stored in vast quantities in terminal ware-
houses, and the method of warehousing it in New York (placing
1 See also The Bankers' Magazine, October, 1921, p. 473, for discussion^
concerning negotiability of warrants and warehouse receipts.
WARRANTS AND GRADING 13
it in high tiers with bales of different grades in juxtaposition)
renders bale by bale identification with grade difficult. Moreover,
it is more expensive to " load in " and " load out " of store ;
for it cannot be handled in that continuous flow that makes
wheat so pre-eminently transportable among the commodities
dealt in on the organised markets.
Early grading was of an untrustworthy kind until the produce
exchanges for their own protection began to adopt rules to control
it ; because the efficiency of the inspection and grading system
in a market determines, to a very great extent, the size and
prosperity of that market. In some cases, in England especially,
the exchanges still maintain control, but many States of the
American Union, for the protection of the public, perhaps, rather
than to help the produce merchants, have made the inspection
of the great staple commodities (grain amongst them) a State
function. In Illinois the State Board of Railroad and Warehouse
Commissions supervises the grading of wheat. In Minnesota and
Missouri there are similar commissions. Thus the important
wheat markets of Chicago, Minneapolis, St. Louis, and Duluth
are specifically under State regulation in this one respect of
grading. It is important that this should be so in the case of
Duluth ; for its standard for wheat is higher than that of the
Atlantic seaboard. This ensures that all grain leaving Duluth
for Buffalo by lake is what it purports to be, but it puts purchasers
for the European markets to the trouble of seeing that a poorer
grade is not substituted between the time the grain leaves Buffalo
and the time that it is loaded on the trans-Atlantic steamer. In
the case, however, of live stock, lard, and pork in Chicago, the
Chicago Board of Trade still controls the grading ; and the New
York Produce and Cotton Exchanges provide for the inspection
and grading of the commodities they handle by duly authorised
sworn inspectors and gaugers.
There is a lack of uniformity in the grading of grain in different
States and exchanges in America which is a considerable hindrance
to trade. Each market has its own standards, and attempts to
establish uniform grades, in the case of wheat, for instance,
applicable to all have not hitherto met with much success. The
law of 1916, giving the Federal Department of Agriculture
authority to establish grades for cereals in transport in interstate
commerce, may accomplish what private agreement has hitherto
failed to do. It has already established grades for wheat and
maize for use in interstate trade, but had not done so for oats
and the other cereals in the autumn of 1919.
The later development of the Canadian wheat fields and the
greater centralisation of power in the hands of the Dominion
Government enabled the latter to move more quickly than the
Federal Government in the United States in the matter of the
14 ORGANISED PRODUCE MARKETS
storage, inspection, and grading of cereals. Under the Canada
Grain Act of 1912, which is administered by the Board of Grain
Commissioners for Canada, all wheat grown in Canada and
despatched in railway car-load lots or cargoes from elevators
must be inspected and graded by Government officials. It is
then dealt in, both for the home and foreign markets, entirely on
the basis of the inspection certificate and grade.1 At the terminal
elevators (many of which are owned by the Dominion Govern-
ment) it is weighed, cleaned, and binned according to grade under
the direct supervision of inspectors ; and a warehouse receipt
(which is a general warrant) is issued by the elevator operator to
the owner. When the wheat is being sent forward from a terminal
elevator it is again weighed and inspected, but it must be graded
out as graded in ; that is, grain of equal quality must be delivered.
Thus, through every stage of movement, identity of grade is
maintained, though identity of lot is completely obliterated.
Similar arrangements hold good for oats, barley, and flax.
In Liverpool wheat sought to be tendered on " Future
Delivery Contract " 2 must be one of eight grades (" Liverpool
grade "), and must be certified as such by the Grading Committee
of the Liverpool Corn Trade Association, Ltd. Samples are placed
before this committee, who pass the wheat submitted as one or
other of the grades allowed or reject it, as the case may be. If
the certificate is issued, it is conclusive evidence of standard and
quality. Only American Red, Australian, and Argentine wheat
are graded for this purpose. East Indian wheat is sold subject to
analysis, and River Plate wheat subject to its being a particular
weight per bushel at time of discharge. This analysis and weight
determination are performed by the association, and appropriate
certificates are issued which greatly facilitate dealings in these
varieties. In the rules of the Liverpool Cotton Association, Ltd.,
elaborate provision is made for the classification and standardisa-
tion of the various growths of cotton that reach that market.
Firstly, standard grades have been agreed on which cannot
readily be altered, but to which additions may be made from time
to time in a manner carefully prescribed by rule. Samples in
duplicate of the various grades have been made up by three
appeal committees, dealing respectively with the American, the
East Indian, and the Egyptian growths. Of these samples one
set (the reserve standards) is kept for the exclusive use of the
appeal committee concerned, while the other (working standards)
1 For many years trading in wheat by sample was prohibited by law
in Western Canada, but although it is now permitted and the Winnipeg
Grain Exchange provides all the facilities needed, there has hitherto been
no business done on this basis.
8 For description of such contracts, usually called "futures," see
Chapter IV.
WARRANTS AND GRADING 15
is open to the inspection of members on condition of not being
touched. Frequent comparison of the two sets is made, and the
certified standards in use by the classification committees of the
association are compared with the working standards at least
once every three months. Samples of cotton for grading are
submitted to the appropriate Classification Committee, from
whose decisions appeals may be made to an arbitration or an
appeal committee. Thus every effort is made to obtain accuracy
in what is by no means a simple or straightforward process.
As an illustration of the difficulties to be surmounted in the
grading of cotton, and of the possible unfairness to growers as a
result of incorrect classification, reference may be made to an
investigation conducted by the United States Department of
Agriculture in the autumn of 1912. A collection of samples was
secured from twenty-one bales sold by a number of different
farmers at one of the larger primary markets in Oklahoma. The
bales showed a wide variation in grade but a marked similarity
in price. They were not sold as one lot, and no two bales were
accepted as of equal grade, although the differences allowed for
were small. The extreme variation in price was i cent per lb.,
which was not sufficient when the actual range of quality was
taken into account. But the most interesting fact was that the
lowest price in the group per lb. was paid for that particular bale
of the group which was of the highest grade. The difficulties of
accurate grading at a stage sufficiently early to enable the grower
to get due credit for better quality are enormous. In this case
the original grading was rough and ready, with the result that good
produce obtained an even smaller price than the more average
output of the district.
Coffee is classified and graded according to the quality and
place of origin. A special staff for this sole purpose is employed
by the New York Coffee Exchange.
The fact that grading is becoming essential in the organisation
of trade, even in the case of commodities the market for which
is not, and cannot be, highly organised, is illustrated by the
growth of systems of grading in the lumber industry, particularly
in the Pacific north-western section of the American continent.
In this industry it was the lumber mill owners who first felt the
need of the protection that careful grading alone can afford.
Their output, loaded often for conveyance by sea in an un-
seasoned condition, was sometimes rejected on arrival at its
destination on the grounds that it had deteriorated in transit and
was not of the quality contracted for. This they discovered was
particularly the case when market changes went against the
purchaser before the ship reached its destination. They, therefore,
formed an inspection bureau, to the expenses of which lumber
mills using its services agreed to contribute. Sworn certificates
16 ORGANISED PRODUCE MARKETS
of grade are issued ; and in case of complaint provision is made
for re-inspection on arrival of the cargo. For this latter purpose
a staff is maintained, scattered widely at important distributing
centres of the timber trade in North America. The fact that the
territory which is the seat of this industry includes British
Columbia as well as two states of the American Union renders
the plan of government inspection impracticable, notwithstanding
the fact that it is now the policy of both the Dominion and
Federal Governments to assume control in all matters of
trade and industry affecting more than one of their component
members.1
The superior economy of buying by grade and " reputation,"
as compared with buying on inspection or by sample, is apparent
not only in the organised produce markets but in ordinary retail
trade as well. The growing tendency to put more and more
articles into standardised packages, and to regard the shop-
keeper as a mere agent of transfer satisfying demands guided
largely by widespread advertising methods, helps to save in-
dividual buyers the trouble of becoming expert judges of all the
commodities they wish to consume. Moreover, this standardisa-
tion may in some cases reduce the cost of getting the products to
the consumer. The reduction is greater the earlier the stage at
which the standardisation takes place ; for every inspection at a
change of hands involves increasing expense which is passed on
to the consumer. The difference, therefore, between the price
paid by the consumer and the price received by the producer is
greater for commodities which cannot be standardised than for
those which are. California oranges, which are graded and
standardised as soon as plucked, are a case in point. The cost of
getting them from producer to consumer is now very little greater
than the transport companies' actual freight charges. Before
grading it was a considerable item in the price paid by the
consumer.
Where no system of grading is adopted for a commodity
which varies considerably in quality, the seller at any stage (if
competition is keen) finds himself pressed to supply an article of
a somewhat better quality than he has strictly promised. This
is the case particularly at the start of new firms which establish
a reputation they cannot afterwards maintain, to the injury of
older houses and the general public. If, on the other hand,
competition is negligible, sellers are enabled to supply inferior
qualities ; but the monopolistic or quasi-monopolistic conditions
necessary for these circumstances are in most cases the results of
combination and large-scale manufacture which is compatible
only with an output of standardised goods. Consumers, therefore,
1 Custis, " Timber Grading in the Pacific North-West," Quarterly
Journal of Economics, vol. xxvi. pp. 538-44.
WARRANTS AND GRADING 17
may still have the advantages of standardisation, though the
prices they may be required to pay are quite another matter.
It has been argued 1 that as the State fixes the standards of
weights and measures, and issues coins, or otherwise guarantees
standards of quality in the case of money, it might logically pro-
ceed a step further and guarantee the quality of the commodities
themselves, for whose purchase and sale the money is required.
In some cases quality is as readily determined as quantity ; but
in the majority of cases this is not so, and it would not be a simple
matter for the State to impose from above grades and methods of
standardisation that did not arise naturally in the evolution of
the trades concerned. Yet, omitting exceptional and temporary
governmental interference, rendered necessary (in all countries)
by the war of 1914-18, the Governments of Canada and the
United States have definitely assumed the function of fixing
standards of quality,2 but in most other countries the State
confines itself to protecting consumers against adulteration 3 and
the grosser acts of fraud.
The difficulties attendant on government interference in
grading are increased when the commodity is one for which the
most important markets happen to be outside the jurisdiction of the
official grading authority. Liverpool standard grades of American
cotton differ from those in use on the American exchanges which
use the standards fixed by an American law of 1915 under the
supervision of the Federal Department of Agriculture. Before
this Act was passed, the chief of the Office of Markets of the
United States Department of Agriculture complained of a con-
stantly increasing tendency to lower the standards in grain under
the systems of grading and inspection then in force, and to give
the benefit of the doubt to the seller. The result of this practice,
which at first glance gives apparent advantage to the grower,
was to give the careless producer or the dealer in lower grades
better prices for these lower grades, and thus gradually to depress
prices on all grades. Purchasers attempted to defend themselves
1 See Carver, " Standardisation in Marketing," Quarterly Journal of
Economics," vol. xxxi. p. 341.
1 In, for example, the Canada Grain Act, 1912 ; U.S.A. Grain
Standards Act, 1916 ; Cotton Futures Act, 1915 ; Grain Grading Laws in
Illinois, Minnesota, and other States ; Apple Grading Law in Four New
England States ; and the Apple Laws, 1915, 1917, and Fresh Fruit Laws,
1915, 1917, 1919, of the State of California ; etc.
8 Reference may be made to two important cases in which govern-
ments endeavour to maintain abroad the reputation of the characteristic
products of their respective countries : the Government of Denmark, in
the case of exported butter, has instituted a compulsory trade mark to
be applied, at the time of testing, by State officials ; and wine exported
from South Australia for sale as guaranteed South Australian Wine is, in
every case, examined before shipment by government experts in viti-
culture.
i8 ORGANISED PRODUCE MARKETS
by buying on a safe margin, with resulting hardship to the better
class of growers who were the very people deserving of discrimina-
tion in their favour. " The greatest use of grades at present/' he
goes on to report, "is in dealings between buyers and between
merchants and manufacturers. They are rarely of direct benefit
in most crops to the farmer, but serve a useful purpose in settling
squabbles between middlemen. This is a condition which
deserves early correction. The farmer should be paid for the
grade which he produces. Its quality, whether good or bad, is
due to his care or indifference. In the former case he deserves
encouragement, and in the latter such discrimination as will
force him to produce a better product." 1 The most serious
abuses arose in cases in which the same grade names were applied
to different qualities by different exchanges or associations ; for it
was then possible for a dealer to buy on one set of grades that
exacted high quality and to sell at correspondingly higher prices
under less exacting standards. Probably in no other com-
modity is it so important as in cotton to have a single set of
standards generally acceptable throughout the world.2
Under present arrangements, when American cargoes arrive at
Liverpool, considerable time is wasted on arbitration and sampling,
much of which might be saved if the standards of the two countries
were uniform. Yet probably the much-desired general agreement
is being delayed by the very haste of the American Government
in settling its standards before adequately considering the needs
of international trade.
International uniformity of grade, however attained, would,
in the case of all commodities, ensure a higher standard of busi-
ness morality ; for exporters and importers, knowing exactly what
was required from them, would be less likely then than they are
now to attempt to supply inferior grades. Moreover, the greater
certainty that the best grades would be everywhere recognised as
such could not fail to encourage producers in their efforts to grow
and market only the very highest qualities.
It may be of interest at this stage to consider some details of
the methods and underlying principles adopted in the classifica-
tion of cotton, wheat, and a few other products that are dealt
in on the organised markets.
In general the classification of cotton depends on three
factors :
(i) Colour, whether the cotton is white, tinged, or stained.
1 Annals of the American Academy of Political and Social Science,
vol. 1. p. 254.
* A joint committee of Liverpool and American experts was appointed
in June, 1921, to make recommendations on this point: Report of World
Cotton Conference, Liverpool and Manchester, June, 1921.
WARRANTS AND GRADING 19
(2) Cleanliness, whether free or otherwise from leaf, and
comparative absence of extraneous substances.
(3) Staple, or " the average length of the bulk of the fibres/'
White is the normal colour of cotton when picked before the
frost sets in and affects the plant. The " tinged " colour is caused
by the light frosting of the bolls before opening or by exposure to
rain ; while " stained " colour is the result of severe frosts and heavy
rains. It is to a great extent a matter of individual judgment as
to when tinged cotton passes over into stained. The former is a
yellowish or golden-orange hue, while the latter is a deep orange or
tawny shade. In New Orleans there are very detailed differences
recognised in this respect ; and distinction is drawn between
" spotted," " light tinged/1 " medium tinged," " light stained," etc.
The staple is found by taking a tuft of cotton and removing
the short fibres by drawing it out between finger and thumb.
The average length of the remaining fibres expressed in inches
gives the result sought. The staple of American cotton runs
from f in. to ij in. That of Egyptian cotton is longer. As a
rule, the longer the staple the greater the value attached to the
class. If a good strong yarn is required for bleaching, staple is
all important ; but in other cases colour and cleanliness may be
the deciding factors so far as a manufacturer is concerned. One
half of the American crop is of staple f to I in., and is known as
" Upland/' It is grown in the States on or near the Atlantic sea-
board, the Carolinas, Georgia, Alabama, and Florida. The longer
stapled cottons, from I in. to ij\ in., are grown in the greater part
of the Mississippi Valley States and in Texas and Oklahoma.
They are named " Gulf " and <c Texas " cottons in the trade.
Nearly all the longer stapled cotton from i^ in. to i J in. is grown
in the part of the State of Mississippi called the Delta and in part
of Arkansas. Being raised on the rich alluvial soils in the bends
of rivers, it is known as " Rivers " or " Benders." It comprises
about 5 per cent, of the total output of an average year. Thus
Uplands 50 per cent., Gulf and Texas 45 per cent., and the extra
staples (rivers and benders) 5 per cent, are the relative proportions.
Therefore, in trading on the cotton exchanges, upland cotton
must be given the foremost place and made the basis for all the
trading rules, but always with special provision for the more
valuable longer stapled varieties. The most valuable cotton of
all, the Sea Island variety, grown in islands round the south-
eastern coast of the United States, is of a rich cream colour with
staple if in. It is always classified separately from rivers and
benders and kept distinct from the rest of the American crop.1
1 Owing to ravages by the boll Weevil " the Sea Island industry has
virtually been destroyed " : Report of World Cotton Conference, Liverpool
and Manchester, June, 1921, p. 107.
20
ORGANISED PRODUCE MARKETS
The term " grade " or " class " in cotton is used solely with
reference to its colour and comparative freedom from extraneous
matter. From the point of view of the spinner, the dry leaf,
specks of dust, bits of husk and so forth, detract from the value ;
for they have to be removed before he can use it. Cleanliness,
therefore, is the predominating factor in settling price and
consequently the most important consideration in fixing grade.
The American classification scheme starts from the standard
that is regarded as representing a fair average of quality and is
called " Middling/' Grades better (i.e. cleaner) than ''Middling "
are called " Good Middling/' " Middling Fair," and " Fair " ;
those poorer (i.e. dirtier) are called " Low Middling " and " Good
Ordinary/' The refinement of sub-division of grade is carried
further, and " half -grades " and even "quarter-grades" are
interpolated between these "full grades." The " half -grades "
above "Middling " are "Strict Middling," "Strict Good Middling,"
and " Strict Middling Fair " ; below " Middling " they are
" Strict Low Middling " and " Strict Good Ordinary." The
" quarter-grades " (the value of which must be the mean of the
adjacent full and half-grades) are " Fully Middling," " Barely
Good Middling," and " Fully Good Middling " on the ascending
scale; and " Barely Middling " and " Fully Low Middling " on
the descending scale. The range of grading accepted for ' ' tinged "
cotton is smaller than for white ; while all merchantable " stained "
cotton is called " Middling stained." The scheme then runs as
follows : —
Full Grades.
Fair
Middling Fair
Good Middling
Middling
Low Middling
Good Ordinary
I. WHITE COTTON
Half-Grades.
Strict Middling Fair
Strict Good Middling
Strict Middling
Strict Low Middling
Strict Good Ordinary
Quarter-Grades.
Fully Good Middling
Barely Good Middling
Fully Middling
Barely Middling
Fully Low Middling
WARRANTS AND GRADING 21
II. TINGED COTTON
Full Grades. Half-Grades.
Strict Good Middling tinged
Good Middling tinged
Strict Middling tinged
Middling tinged
Strict Low Middling tinged
Low Middling tinged
III. STAINED COTTON
Middling stained
(The grade " Fair " is not often used.)
In Liverpool the half -grades are designated " fully " instead
of " strict " as in New York, and there are no quarter-grades.
Moreover, the distinction between white, tinged, and stained is
made within the one broad classification. The Liverpool list
therefore reads —
Full Grades. Half-Grades.
Middling Fair
Fully Good Middling
Good Middling
Fully Middling
Middling
Fully Low Middling
Low Middling
Fully Good Ordinary
Good Ordinary
Ordinary
contracted usually into Ord., G.O., F.G.O., L.M., F.L.M., Mid.,
F.M., G.M., F.G.M., M.F., in ascending order of excellence.
It is the custom of the trade in America to arrive at the values
of the different grades by reference to the current value of
Middling white cotton, and price quotations read so many
points on or off Middling, i.e. so many hundredths of a cent,
per Ib. above or below the price of Midciling.
In Liverpool the Fully Middling grade is the basis taken,
and prices are quoted not with reference to its cash price, but
with reference to the price of futures of the current month.1 So
many points on or off there mean so many hundredths of a penny
per Ib. above or below that price. The classification list for
Egyptian cotton in Liverpool reads : Fair, Good Fair, Fully Good
Fair, Good, Fine, Extra Fine (contracted into Fair, G.F., F.G.F.,
1 See p. 157 sq.
22 ORGANISED PRODUCE MARKETS
Good, Fine, Ex. Fine). Further, refinement of grade is obtained
by division into the varieties : Upper, Sakellaridis,1 and Brown.
East Indian, Brazilian, Peruvian, and West African cottons are
dealt with in a similar manner to Egyptian, but as they are com-
paratively unimportant details need not be given.
Wheat in Canada is divided, for grading purposes, into five
general classes, viz. " No grade/' " Condemned," " Rejected/1
"Commercial grade," and "Statutory grade." By "No
grade " is meant all good wheat that is excessively moist and is
therefore unfit for warehousing. " Condemned grain " is grain
in a heating condition or badly bin-burnt, regardless of the grade
it might otherwise be. " Rejected grain " includes all wheat that
is unsound, musty, dirty, smutty, or sprouted ; or that contains a
large admixture of other kinds of grain, seeds, or wild oats ; or
that for any other cause is not fit to be classed under one of the
recognised grades. " Commercial grade " means wheat which
cannot be included in the statutory grades provided for in the
Canada Grain Act, 1912. Owing to climatic and other reasons,
the wheat of one year may vary from that of the preceding year ;
and some of the crop cannot, therefore, be classified in the same
way every season. A standards board has consequently been
established by the Act, to define certain grades which may vary
from year to year. On the other hand, the statutory grades
are fixed and unalterable, , and refer to wheat of the highest
quality. There are four of these grades for Manitoba Spring
Wheat : No. I hard, and Nos. i, 2, and 3 Northern ; three each
for Alberta Red and White Winter Wheat, and two for Alberta
Mixed Winter Wheat. The standards board has defined three
additional grades of Western Spring Wheat, viz. Nos. 4, 5, and 6,
Northern ; but wheat of any of the six grades of Northern
may fall under the general categories of no grade, condemned,
or rejected. During one recent season, for example, there
were five divisions of No. i Northern : No. i Northern, No. i
Northern damp, No. i Northern smutty, No. i Northern,
rejected on account of seeds, No. i Northern, rejected on account
of heat. A similar sub-division applied to the other five classes
of Northern, giving 31 grades of Western Spring Wheat alone.2
In the same way there were 30 grades of Western Winter Wheat.
The Grain Act applies also to oats, barley, rye, and flax-seed,
and in an average normal year there are about 30 grades of oats,
15 of barley, and 15 of flax-seed.
1 Usually referred to as " Sakel." A new variety, Pelion, is about to
be added.
8 On futures contracts in Winnipeg in 1921, No. i, Manitoba
Northern and higher grade wheats were deliverable without premiums or
discounts for quality, No. 2 Manitoba Northern at a discount of 3 cents
per bushel, and No. 3 Manitoba Northern at a discount of 7 cents.
WARRANTS AND GRADING 23
As an example of wheat grading in the United States the
" Official Grain Standards of the State of Illinois " may be quoted.
The list contains six classes —
I. Hard Red Spring.
II. Durum.
III. Hard Red Winter.
IV. Soft Red Winter.
V. Common White.
VI. White Club.
Five of these are further sub-divided —
I. Into Dark Northern Spring, Northern Spring, and Red
Spring ;
II. Into Amber Durum, Durum, and Red Durum ;
III. Into Dark Hard Winter, Hard Winter, and Yellow Hard
Winter ;
IV. Into Red Winter and Red Walla ;
V. Into Hard White and Soft White.
Each of these sub-divisions in turn may embrace two or more
grades. Thus there is No. i or 2 or 3 Dark Hard Winter, and so on.
On futures contracts in Chicago the seller has a choice of
seven (really fourteen) grades, which he may deliver without
discount for quality, viz. No. i or 2 of the following : —
Dark Hard Winter, Hard Winter, Yellow Hard Winter, Red
Winter, Dark Northern Spring, Northern Spring, Red Spring.
The buyer need only accept certain No. 3'$ at a discount, viz.
No. 3 of Dark Hard Winter, Hard Winter, and Red Winter, at
3 cents per bushel under contract price, and No. 3 Dark Northern
Spring, Northern Spring, and Red Spring, at a discount of 8 cents.
In the actual work of grading wheat the result turns mainly
on three points — the " quality " of the grain, the " condition,"
and the " admixtures." 1 The factors determining " quality "
for this purpose are soundness, colour, weight, and the percentage
of hard wheat. The " condition " depends upon moisture content
(which is tested by an ingenious mechanical device) and upon the
presence or absence of heat. The " admixtures " are tested by a
process of sieving and weighing, called in Canada " setting the
dockage," and either the cleaned grain or the resulting screenings
may be weighed in the determination of the allowance to be made.
The Liverpool and London Corn Trade Associations, which often
have to grade East Indian and other wheats arriving in this
country in a very dirty state, employ girls to handpick over the
samples and to remove the pieces of clay and other foreign matter
that have found their way in while the grain was in store in holes
1 See Magill, Grain Inspection in Canada. (Publications of the Depart-
ment of Trade and Commerce, Ottawa, 1914.)
24 ORGANISED PRODUCE MARKETS
underground just after it was harvested by the small cultivators
of the East. Weight per bushel may be determined in several
obvious ways ; but extreme accuracy and uniformity is secured by
the use of a specially constructed machine, the operation of which
is a matter of very simple movements requiring little skill or
concentration of attention.
British importers of wheat are, of course, familiar with the
recognised standard grades of such countries as Canada and the
United States, where grading is systematic and the work of
impartial experts. They, therefore, purchase largely by grade
alone in these countries, and accept " the official certificate of
inspection to be final as to quality" ; and this condition is embodied
in the contract . For trade with other countries, however, and even
with the smaller American ports, where the grading arrangements
are not so well developed as at the larger ports, other methods of
determining quality have to be adopted. Taking, for example, the
American Parcel Contract, c.i.f . terms of the Liverpool Corn Trade
Association, Ltd., the clauses guaranteeing the quality are —
Official certificate of inspection to be final as to quality ;
Of fair average quality of the season's shipments at time and
place of shipment ;
About as per sample ;
one clause to be applicable in each case. The first, as has just
been mentioned, has reference to the official grading certificate
of the American authorities at the port of loading. In connection
with the second, " Of fair average quality of the season's shipment
at time and place of shipment/' the Liverpool Corn Trade
Association (and likewise the London Corn Trade Association)
determines standards by taking samples at the port of discharge
of all gram which purports to be of the particular standard shipped
during the month in question from the particular port. In the
third method, " About as per sample," the sample may be one sent
in advance and kept sealed after examination by the importer or
broker until the arrival of the cargo ; or it may be one already in
possession of the Corn Trade Association sent from abroad some
time previously. The clause in a Liverpool contract for East
India wheat specifies the crop and requires it to be " of fair
average quality of the season's shipment at time and place of
shipment crop . . . " ; but the extraordinarily dirty condition of
this wheat on arrival in England necessitates an analysis in every
case, and this is carried out by officials of the Corn Trade Associa-
tion, who clean samples and determine the percentage of foreign
matter contained therein. River Plate wheat is sold either
" about as per sample . . . due allowance being made for
handling and smallnessof same " ; or as "of fair average quality
of the season's shipments at time of shipment of the under-
WARRANTS AND GRADING 25
mentioned weight. ..." The phrase " of the undermentioned
weight " has reference to the fact that the several varieties of
wheat vary in weight per unit of volume. For milling purposes
heavy wheats have certain advantages and lighter wheats are
required for mixing with them in order to obtain the best results.
In the absence of other aids to the determination of quality, weight
per bushel is quite a satisfactory index. Chilian wheat, of which
small quantities still occasionally reach this country, is guaranteed
" about equal to the official standard No. . . . adopted by and
in force with the Liverpool (or London) Corn Trade Association,
Ltd., at this date." These standards are based upon the previous
crop. Wheat from the Pacific coast of North America is bought
" about equal to the official standard No. ... of (such and such
an exchange) of the crop. ..." In this case the standards are
made up at the primary markets of the place of origin, and samples
are forwarded to the corn trade associations in this country.
A similar method is adopted hi the case of Australian wheat, which
is sold of quality " about equal to the official standard of ...
Chamber of Commerce of the crop. . . ."
It is obvious that of these methods of grading some are likely
in practice to be more advantageous to the buyer and some to the
seller, according as the final decision concerning quality is made
in this country or abroad. The sample method does not lend
itself readily to free market dealings, but is very useful to the
expert buyer who requires a high class of definite quality for
milling or other special purposes. It also has the merit of enabling
the foreign holder of the highest class varieties to reap for the
producers the advantage of their special skill in cultivation.
For this reason it is sometimes preferred to the " official certifi-
cate " guarantee by those American shippers who have wheat of
extra fine quality to dispose of. Where there are standards readily
accessible in the importing country, free market dealings are facili-
tated by purchase with reference to them ; but there is often a
considerable amount of arbitration work arising out of disputes con-
cerning the interpretation of the phrase " of fair average quality."
American exporters complain considerably from time to time
of the fact that their foreign buyers desire, whenever possible,
to purchase from them on terms which leave the final decision,
whether the wheat is of the quality contracted for or not,
in the hands of a committee in the importing country on which
the buyer's interests are predominantly represented. The buyer,
they state, never gets the worst of the bargain hi such cases ; and
the seller can never know the final outcome of the transaction
until the arrival of the wheat and the verdict of the committee.
Therefore, American sellers refuse, whenever possible, to sell on
foreign terms and endeavour to impose their own terms, which are
" Loading inspection certificate final " as to quality. Moreover
26 ORGANISED PRODUCE MARKETS
they declare that the foreign buyer is a buyer of the lower priced
article. If he is offered standard quality wheat, with a representa-
tion that it will undoubtedly arrive in safe condition, and at the
same time is offered an "oft grade " at a little lower price, not-
withstanding warnings of the extra risk involved, he, almost
without exception, buys the cheaper article. Moreover, he is as
likely as not to decline the offer to insure for proper condition on
arrival at, say, half a cent per bushel, and to assume the risk him-
self. Then if things go wrong his customer, to whom perhaps he
has sold " to arrive/' blames " American certificates " and tends
to discount the value of the careful American grading.
This kind of complaint on the part of American exporters is
probably more justified in the case of maize than in the case of
wheat. Before maize can be shipped with safety it must be
dried and cured. This takes time, and is not complete, as a rule,
before the beginning of the summer following the harvest. If,
then, the previous year's crop is exhausted by December I, as
often happens, orders have to be met from the new moist uncured
crop. Foreign buyers, though warned and recommended to buy
only artificially-dried maize of high grade, often take the lower
priced grades and suffer accordingly. Hence there would seem to
be good reason for American indignation at the complaints that
inevitably follow, especially as every help is given to enable buyers
to avoid mistakes. Moisture content certificates are obtainable
in all markets. The United States Government maintains
laboratories at all important centres of the trade, and nearly all
exchanges do the same. For safe shipment in the winter months
the specified moisture content must not be above 17 per cent., and
in the spring months 14 per cent. Grain kiln dried to a safe
shipping condition may always be had at any season of the year,
though as summer approaches it dries naturally as it rests in
store unshelled.
Coffee is graded with extreme care in all the wholesale markets
in which it is the subject of dealings. It is, however, differently
classified by the various interests handling it in its course from
grower to user. In Brazil, where by far the greater part of the
world's supply is produced, it is classed as " Rio " and " Santos "
coffee ; and these are again sub-divided into " Highland " and
" Lowland." These terms are merely geographical designations,
without reference to quality. For the latter, each of these four
classes is further sub-divided into first, good first, regular first,
ordinary first, second, good second, and ordinary second. Non-
Brazilian coffee is generally described by reference to its source
of origin. There is, therefore, Mocha, Java, Maracaibo, La Guaira,
Blue Mountain Jamaica, etc. ; but it is not uncommon to classify
merely by the size of bean, its colour, uniformity, and cleanliness.
The most widely used classification is that of the Coffee
WARRANTS AND GRADING 27
Exchange of the City of New York, which divides the green
coffee as it is imported into nine grades known as Standard
Grades, Numbers i to 9. Only licensed graders, of whom there
are less than thirty, are permitted to grade coffee dealt in on that
exchange. To one of them is assigned the duty of providing
fresh standards annually, with instructions to " maintain them
as nearly as possible on an equality " from year to year. When
coffee reaches a licensed warehouse the buyer and seller each
selects one grader from the list . If these two graders cannot agree,
the case is referred to a board of arbitration consisting of ten
experts, three of whom are selected by lot. After comparison
has been made with the standard samples kept by the exchange a
decision by majority is final. If agreement cannot be reached at
this stage, the samples come before the entire board. As soon
as the coffee is graded a certificate is issued, which is conclusive
evidence of grade for the subsequent six months. The buyer is
handed the original, and the seller receives a duplicate. No. 7 is
the basis grade for dealings in futures in New York.1
In Minneapolis, which is a large market for barley, little
attention is paid to the grades established by the State of Minne-
sota for this particular cereal. Barley does not lend itself to
standardisation so completely as wheat and maize. Consumers
have their individual preferences with regard to colour and con-
dition, so that different buyers often bid different prices on the
same sample. Therefore the larger merchants have adopted their
own private standards, and, as a rule, sell to the same regular
customers year after year. Knowing the needs of their customers,
the Minneapolis firms establish certain " types " of barley at the
beginning of each crop season. By careful buying and skilful
blending they maintain these throughout the season, and sell
on the basis of samples supplied to agents and correspondents
in other centres. This requires a high degree of skill in buying as
well as a large amount of capital tied up in grain and in elevators.
Moreover, when business is done in this manner the risk of
handling has to be borne entirely by the merchant ; for the lack
of generally recognised grades always prevents the growth of those
fully organised market dealings which are necessary for the work
of the expert risk taker.
Oats occupy a middle position between wheat and barley
in respect of grading. Large quantities are sold in grain markets
in England and America on the basis of official grades ; but in
both countries there are merchants who establish their own types
and who sell them to regular customers on the basis of samples
which are altered every season.
1 Coffee grading in London, in connection with future delivery business
in Santos coffee through the medium of the London Produce Clearing
House, Ltd., is described on p. 148.
CHAPTER III
THE INTERNAL ORGANISATION OF THE PRINCIPAL
PRODUCE EXCHANGES
ON the more highly organised exchanges dealings do not, as a rule,
take place directly between original suppliers of produce and
purchasers for use. Indeed, one of the reasons for the foundation
of such institutions was the attaining of a division of the work of
the middleman through whose hands produce passes on its way
from producer to consumer. Therefore, among the members of
all exchanges there are a number who do not directly belong to
either of those categories in the trading acceptation of those
terms, but who are specialists in the performance of some or all of
the six kinds of services previously discussed.
The position and the privileges of members vary considerably
from one exchange to another. In some continental exchanges
certain classes of dealers have to give an undertaking not to trans-
act any business, either directly or indirectly, for their own
account ; and the case of the London Stock Exchange, with its
special class of " jobbers/' who are forbidden to deal directly
with the outside public, is also worthy of note, although in the
majority of cases no restrictions of this nature are imposed.
Membership of the more important exchanges is a valuable
privilege which is often purchased at a high price. This is par-
ticularly the case where there is limitation of numbers ; and, as
might naturally be expected, the price of membership varies with
the state of trade.
Many exchanges refuse non-members access to the scene of
actual business ; and the rules of some of those which permit the
presence of outsiders expressly stipulate that the privilege is
granted merely in order that clients may advise and consult with
the members employed by them to transact their business.
Members when acting as agents on behalf of others in trans-
actions on an exchange are termed brokers ; and the remuneration
received by them for their services in this capacity is called
brokerage.
The question of the exact capacity in which a member puts
through a transaction is one of importance, not only from the
point of view of brokerage fees, but also from the point of view of
28
INTERNAL ORGANISATION 29
legal liability on the contracts. Some exchanges, in their efforts
to discourage gambling on the part of outsiders, insist that all
transactions in futures shall be entered into in the names of
members only, even if the latter are in reality acting on behalf of
others. Such, for instance, is the rule in the Liverpool Corn
Trade Association, which, however, in the case of its c.i.f.
contracts, permits the name of the principal to be disclosed and
to be declared on the form, without requiring that this shall be
necessarily done in every case. In this latter respect practice varies
from one exchange to another ; but obviously the committees of
management cannot concern themselves with questions about
the solvency and good faith of any chance outsider who may
happen to employ their members as agents. Therefore, the general
rule is that members are liable on all the contracts put through by
them in their exchange, whether on their own behalf or on behalf
of others. As guarantee in this respect, security is exacted on
admission to membership ; and margins, as explained later, are
required in most cases in respect of contracts concluded on the
exchange. Moreover, further protection is obtained by the system
of frequent periodic settlements, as will be seen later.
In the American produce markets, especially on the grain
exchanges, the work of introducing the commodity, as it were, to
the market is done in either of two ways. A member (firm or
individual) of the exchange may simply receive consignments
from country elevators to dispose of in the market at a stipulated
rate of commission on the selling price, or, as is more usual, at a fee
of so much per bushel. Such people are known as commission men.
On the other hand, a dealer on the exchange may buy outright
from consigners at a distance, and look for his profit to the
enhanced price he expects to receive when he sells again on the
exchange. These two classes are not necessarily distinct. Cir-
cumstances determine in each case what the exact relationship
shall be between the exchange member and his customer.
The Liverpool Corn Trade Association (with membership of
about 300) dates from 1853, and in its present form is an amalga-
mation of several organisations having objects similar to those of
the combined body. It was incorporated as a company in 1886
and 1897, and now controls the whole of the great wheat trade of
the important port where it is situated. Its futures market
for wheat and maize is at present the only one of its kind in
Europe. Membership is open (a) to any person aged twenty-one or
over who is a principal in the corn trade and has a place of business
in the United Kingdom ; and (b) to any person residing in the
United Kingdom who, although not himself a principal, has full
authority to conduct or manage there the business of a principal
engaged in the corn trade in, or with, the United Kingdom. An
incorporated company is not permitted as such to be a member,
30 ORGANISED PRODUCE MARKETS
but is allowed to nominate at least two representatives who may
trade only on behalf of the company, but who are otherwise on
the same footing as private members. All candidates for admis-
sion must be approved of by the directors, and must pay an
entrance fee of £250, in addition to acquiring a share in the
association on election. Ample security is exacted from all new
members, and from the representatives of corporations. In
addition to the wholesale and speculative business conducted by
its members it provides a spot market for the purchase and sale
of flour, meal, and cereals in general. Stands are let on hire, and
purchases may be made by any person by sample on the two days
(Tuesday and Friday) that this special market is in session. It
has the usual committees for grading and for arbitration in case
of disputes.
In London, as may naturally be expected from its antiquity as
a trading centre, produce exchanges have developed differently
from those in all the other large markets of the world. From the
meetings of a group of merchants engaged in trade with the
Baltic ports of Russia there sprang up about 1740 or 1745 a
regular association known as the " Baltic," which gradually
widened its sphere of operations, until now, as the Baltic Mer-
cantile and Shipping Exchange, Ltd., it handles most of the
London business in grain, shipping, oil, and other less important
products. Its membership is unlimited in number, and at present
amounts to more than 3,000. There is an entrance fee of 50
guineas, and an annual subscription of 20 guineas. No serious
obstacle is offered to the admission of any honest merchant or
dealer.
Closely bound up with the Baltic, but entirely different as
regards membership and management, is the London Corn Trade
Association, Ltd., a body dating from 1878 (incorporated as a
company in 1886), with objects similar to those of the Liverpool
body of the same name. Practically all the London dealers in
grain belong to both the Baltic and the Corn Trade Association.
Thus import business is facilitated ; for shipping can be chartered
immediately a deal in grain is concluded, without leaving the
building. The large cargo business in wheat which has recently
sprung up, owing to the importation by middle Europe of corn
which it was prevented by war conditions from producing for
itself, is handled mainly on the Baltic Exchange in London.
In addition to the Baltic, there is the Mark Lane Exchange,
officially known as the Corn Exchange, London. This is also an
old institution, dating back some 170 years, and may be compared
to the spot markets and exchanges existing in many of the
provincial towns in the kingdom. The standholders are often
members of the Baltic as well ; and " parcels " l are occasionally
1 See p. 165.
INTERNAL ORGANISATION 31
purchased on the latter to be split up into smaller lots for sale in
Mark Lane. Samples of flour, meal, and other cereal products
are displayed on the stands in this exchange ; whereas the Baltic
does not handle flour and does not exhibit samples of grain, this
part of the work being performed for the larger wholesale market
by the London Corn Trade Association, Ltd., to whose safe-
keeping the specimen standards of foreign grains are in all cases
entrusted.
Although most of the London import and foreign business in
grain is transacted on the floor of the Baltic, it is carried on by
means of the official contract forms of the London Corn Trade
Association, Ltd. This association, which has an average
membership of between 400 and 500, is managed by an executive
committee of 25 members, who elect annually a president and two
vice-presidents. One-sixth of the committee retire each year,
and may not be re-elected before the next annual meeting.
Arbitration in case of trade disputes is provided for by an arbitra-
tion appeal committee consisting of 35 members divided into
five sections, one of which retires annually, but the members of
which are eligible for re-election immediately. If a dispute
arises under one of the association's contracts it must be referred
for settlement to two arbitrators, one appointed by each party to
the dispute. The two arbitrators, who must be principals engaged
in the corn trade resident in the United Kingdom, and members
either of the association or of the Baltic or of the London Corn
Exchange, may appoint a third, and the award of any two of
these is final, subject only to the right of either party to
appeal.
The Liverpool Cotton Association, Ltd., under whose super-
vision practically all the cotton reaching England is handled,
dates f ron 1882 in its present form, and is the central world market
for raw cotton of all growths. Membership is obtainable by
election and payment of entrance fees, together with the acquisi-
tion of a share in the association, and also one in the Liverpool
Cotton Bank, Ltd. Firms and partnerships are qualified for all
privileges if one of their number is a member. In addition to full
members, who now amount to about 570, there is also a class of
associate members, for election to which any person over twenty-
one years of age, engaged as a principal in the cotton trade in the
United Kingdom, is eligible. This class may also admit members
(resident in the United States) of the New York or of the New
Orleans or other cotton exchanges in the United States, as well
as members of The Syndicat du Commerce des Cotons du Havre,
resident in Havre, and (up to April, 1916) members of the Bremer
Baumwollborse, resident in Bremen. Thus all the dealers in
cotton in all the important centres of the trade can keep in close
touch with Liverpool ; and transactions can be carried out between
32 ORGANISED PRODUCE MARKETS
them, with Liverpool as headquarters, precisely as if there was at
any moment just the one cotton centre in the world. The associa-
tion has appeal committees, arbitration and classification com-
mittees, an American quotation committee, a trade supervision
committee, and a benevolent fund. Moreover, a clearing
house (in conjunction with which is the Liverpool Cotton Bank,
Ltd.) is maintained for the purpose of facilitating the transmission
of documents, payments, and settlements between members.
This somewhat elaborate organisation is necessary, in view of the
vast amount of both spot and speculative business carried through,
and ensures the smooth working of what is the most perfect market
in the world.1
In the year 1908, with the help of some members of the
Liverpool Corn Trade Association, arrangements were made for
the establishment of a grain future delivery market at Buenos
Aires to handle the large surplus of cereals usually available for
export from Argentina. The grain traders there had already
formed an association with substantial backing, and it was this
body that was utilised for the purpose of organising the new
market. Every transaction between members of its own body
is recorded by the association, which, upon payment by each party
of the requisite margin, takes up the contract and assumes all
responsibility for its fulfilment. Therefore no member is
responsible to any other after the contract is duly recorded, but
only to the association itself. This simplifies dealing very
greatly, and dispenses with the need of complicated " clearing "
arrangements. Buenos Aires is remote from the wheat, maize,
and linseed areas in Argentina ; therefore the custom on the
whole is to retain produce at the up-country stores (afuera), and
inform the grain association that it is available for disposal.
As the business is entirely an export one a buyer, on being notified,
requests delivery alongside the ocean steamer as provided by the
contract. The seller may deliver from warehouse in Buenos
Aires if he likes, but the outward movement from the afuera
provides material during the greater part of the year for the
fulfilment of contracts. The advantages to growers resulting
from these new arrangements are numerous. They have a definite
market to deal with, and can sell for delivery when transport can
be provided. They are freed from dependence on itinerant
agents and middlemen, and have full and reliable information
concerning every movement in the world market for their pro-
ducts. Poor harvests, and the prohibition of exports during
part of the war period, have restricted rapid expansion ; but
the revival of international trade will doubtlessly soon restore the
prestige of this newly organised centre. A similar market has
1 There is a small cotton exchange at Alexandria, Egypt, which is very
closely allied to the Liverpool market.
INTERNAL ORGANISATION 33
been set up at Rosario Santa Fe in the chief maize-growing
district of Argentina.
In Germany the majority of the exchanges (Borsen) are
modelled on the pattern of that in Berlin, whose organisation was
prescribed by Government decree dated 1885. In accordance
with this ordinance there is but a single exchange in Berlin
divided into two sections, one for securities (Fondsborse), one for
produce (Produktenborse) . A third section for manufactured
goods (Warenborse) was originally contemplated, but proved
unworkable after a short trial, and was abandoned in 1888. The
corporate body of merchants of the city (Kaufmannschaft) , acting
through its committee (Aeltestenkollegium), appoints the
governing body (Borsenkommissariat) , part of which is always
selected from the Aeltestenkollegium and part from the ordinary
members of the Kaufmannschaft. This governing body has the
usual disciplinary powers and full responsibility for the conduct
of the exchange. It sits in two parts, corresponding to the
division into a Fonds- and a Produktenborse.
Admission cards to meetings of the exchange, for which a
regular subscription of moderate amount is required, are granted
only by the Aeltestenkollegium. As a general rule no difficulty
is experienced by persons of standing in obtaining cards, but non-
members of the Kaufmannschaft must be recommended in writing
by three members of that corporation. Two arbitration com-
mittees are provided, one for each section, with power to ad-
judicate in all disputes arising out of business transactions in the
exchange. They are selected from panels composed partly of
members of the Borsenkommissariat, partly of general members of
the Kaufmannschaft. The chairmen are always selected from the
first group, and the constitution of the committees, which consist
of three members each, is altered every month. Of the brokers,
some are official and some private, but both classes can transact
all kinds of business. The official brokers are appointed by the
Borsenkommissariat t but State ratification is required in every
case. They enjoy certain privileges, and at the same time are
subject to certain limitations. Their book entries and contract
notes are legal evidence of their transactions ; they possess the
right to put up for public auction the articles enumerated in their
authorisation certificates ; and they can claim a share in the com-
pilation of the official price lists for which the Borsenkommissariat
is responsible. On the other hand, they are forbidden to transact
business on their own account or on behalf of absent clients.
They cannot do business on behalf of others in their own names,
or accept any responsibility for the fulfilment of bargains in which
they are intermediaries. In practice, however, these restrictions
tend to be disregarded, owing to the very serious hindrance they
would impose on legitimate business. Next in importance to
JO
34 ORGANISED PRODUCE MARKETS
Berlin are the exchanges in Hamburg, Bremen, and Frankfort -
on-Main, that in Hamburg being mainly a Produktenborse, and in
Frankfort-on-Main a Fondsborse.
Except in the case of the Prussian exchanges, State ratification
of the appointment of official brokers is not required, but restric-
tions on this special class seem in practice to be relaxed in Berlin
to a greater degree than elsewhere.
The produce exchanges of France and Holland present no
special features as regards internal organisation. Brokers on the
French exchanges have the privilege of sharing in the compilation
of official price lists and of holding public auctions. They are
attached to their local chambers of commerce, and are subject to
the discipline imposed on them by committees elected from their
own body. In Holland the municipalities exercise a nominal
supervision over the exchanges and make appointments to the
position of broker, but otherwise the markets are free to all for
the transaction of every kind of business.
Foremost among the important produce exchanges of the
North American continent is the Chicago Board of Trade.
Organised in 1848, it received a charter from the State of Illinois
in 1859, and has grown in importance and prestige with the
development of the city and the Middle West. Its objects, as
expressed at the time of its foundation, were " to maintain a
commercial exchange ; to promote uniformity in the customs and
usages of the merchants ; to inculcate principles of justice and an
equity in trade ; to facilitate the speedy adjustment of business
disputes ; to acquire and to disseminate valuable commercial and
economic information ; and generally to secure to its members
the benefits of co-operation in the furtherance of their legitimate
pursuits." Its charter grants the usual rights of corporations,
and permits its members " to establish such rules, regulations, and
by-laws for the management of their business and the mode in
which it shall be transacted as they may think proper."
The right was also granted to appoint inspectors to " examine,
measure, weigh, gauge, or inspect " such articles of produce as the
members may deal in, the certificates of such inspectors to be
binding as to quality and quantity upon the members of the cor-
poration. This provision has, however, since been partly super-
seded by the law which places the inspection and grading of
wheat in the hands of officials appointed by the State, some of
whom now, under the provisions of the Federal Grain Inspection
Law of 1916, receive Federal licenses from the United States De-
partment of Agriculture, and are public officials entirely indepen-
dent of the exchange.
Perhaps the most interesting, and at the same time most
important, portion of the charter is the provision made for an
arbitration committee.
INTERNAL ORGANISATION 35
" Said corporation may constitute and appoint Committees of
Reference and Arbitration and Committees of Appeals, who shall be
governed by such rules and regulations as may be prescribed in the
Rules, Regulations, and By-laws for the settlement of such matters
of difference as may be voluntarily submitted for arbitration by
members of the Association, or by other persons not members
thereof ; the acting Chairman of either of said committees, when
sitting as arbitrators, may administer oaths to the parties and
witnesses, and issue subpoenas and attachments, compelling the
attendance of witnesses, the same as justices of the peace, and in
like manner directed to any constable to execute.
" When any submission shall be made in writing, and a final
award shall be rendered, and no appeal taken within the time fixed
by the Rules or By-laws, then, on filing such award and submission
with the Clerk of the Circuit Court, an execution may issue upon
such award as if it were a judgment rendered in the Circuit Court,
and such award shall thenceforth have the force and effect of such
a judgment, and shall be entered upon the judgment docket of said
court." l
The business of the exchange is done between 9.30 a.m. and
1.15 p.m., and membership runs to between 1,700 and 1,800. It
is, next to Liverpool, the foremost speculative market in the world
for wheat, but much business is done also in maize, oats, live stock,
lard, and pork.
It is governed by a president, two vice-presidents, and fifteen
other members, constituting a board of directors eighteen in
number, who have the power of electing new members. Seats by
transfer sold for 500 dollars to 1,000 dollars in 1896, and rose to
4,700 dollars in 1919.
The New York Produce Exchange is a body of somewhat
similar constitution, with a membership limited to 3,000. It has
existed under different names since 1850, but it was not in-
corporated until 1862. Its objects are similar to those of the
Chicago Board of Trade, with the not unimportant addition — to
make provision for the widows and families of deceased members.
It is managed by a board of managers, consisting of a president,
vice-president, and treasurer, elected annually, with twelve other
members who sit for two years, one-half retiring each year.
Standing committees, one for each of the commodities dealt in,
are appointed for conducting the ordinary general affairs of the
exchange. Membership is obtainable by purchase of a certificate
of membership at a price varying with the demand, and by the
payment of a small transfer fee after ratification by the board of
managers, the only qualification specified being that the candidate
is a " respectable person." The powers conferred by charter on
the arbitration committee of this exchange are unique, and
have won for it a position of great influence and dignity in the
1 Sections 7 and 8 of Charter, reprinted in Annual Report, March, 1921.
36 ORGANISED PRODUCE MARKETS
commercial world. The practical result is the substitution of the
arbitration committee for the ordinary law courts in the case of
business disputes between members ; and awards, when filed
according to legal procedure with the Clerk of the Supreme Court
of the City and County of New York, may be acted upon just as
if they were judgments of the Supreme Court.
The present membership is close on 1,900. Wheat, flour,
lard, linseed, petroleum, hops, butter, cheese, and cotton-seed
oil, are dealt in ; and the exchange takes a leading part in further-
ing New York's commercial interests. In this way, with its
committees on canals, exports, railroads, etc., it resembles the
chambers of commerce in British commercial centres, but its
activities in this respect must be distinguished from those of the
New York Chamber of Commerce, which is a body dating from
the old colonial times.
Each of the various trades, such as the wheat trade, cotton-
oil trade, and so on, is to all intents and purposes an exchange
by itself. It has a recognised meeting place on the floor, and its
committee interprets its rules and decides all disputes under its
rules, which are made by the particular trade section itself,
subject to the approval of the whole board of managers.
Side by side with the Produce Exchange in New York there
are a Cotton and a Coffee Exchange, dealing each in its one
special commodity only.
The very great importance of the cotton crop in the trade of
the United States is indicated by the high price of seats on the New
York Cotton Exchange, a price above that for seats on all the
other American produce exchanges and most of the American
stock exchanges. Second only to the Liverpool Cotton Associa-
tion in importance in the world's cotton market, it was incor-
porated and granted its charter in 1870, the year in which a
smaller but similar exchange doing business in a practically
identical manner (the New Orleans Cotton Exchange) was
established in the south. It is managed much in the same way
as the other American exchanges, but instead of several grading
committees, one for each of the different commodities dealt in,
it of course requires but one classification committee. Provision
is made also for a " Quotation Committee," a body not found in
many of the other exchanges, whose duties will be discussed later.1
The governing body is called the board of managers. Membership
is limited to 450, with initiation fee of 10,000 dollars. Seats have
been sold for as high as 25,000 dollars, but the average price runs
to between 10,000 and 15,000 dollars.
The " Coffee Exchange of the City of New York " was incor-
porated in 1887, and derives its importance from the fact that the
1 It used to be the body entrusted with the duty of " fixing differ-
ences " in connection with transactions in futures, see p. 60.
INTERNAL ORGANISATION 37
United States is one of the largest annual consumers of coffee per
head of population among the civilised countries of the world.
Her share in a recent year (1919) amounted to 13 lb., being
exceeded only by Holland with 15*2, whereas the figure for
Germany was 5'2, for France 4*3, and for the United Kingdom
as little as § lb. This exchange is managed similarly to the New
York Cotton Exchange. Its membership is limited to 500, but
the price of seats is small, except when, as was the case in 1920,
there is abnormal speculative activity in coffee. The initiation
fee is 1,000 dollars.
Owing to the readiness with which wheat and other cereals
lend themselves to organised dealings, organised grain markets
have sprung up in several other centres in the United States,
those at Minneapolis, Kansas City, Duluth, Toledo, and St. Louis
being the most important.1 To facilitate communication with one
another and with New York and Chicago, and thus to obtain one
single market for wheat in the United States, all the American
wheat exchanges are in session simultaneously, so that the New
York Produce Exchange is open from 10.30 a.m. to 2.15 p.m.,
allowing for the difference in time between New York and the
other remaining centres, which are all further west, and are open
from 9.30 a.m. to 1.15 p.m. This results in wheat prices in any
two centres differing only by cost of transport from one to the
other, and accounts for the fact that New York normally quotes
standard grades 6 cents a bushel higher than Chicago. Each of
these minor centres has its speciality, e.g. Toledo — red winter
wheat ; Kansas City — hard winter wheat ; St. Louis — winter
wheat ; and Minneapolis — barley. At the same time the latter
exchange is in wheat second only to Chicago in the United States.
It has 550 members, and seats are sold for upwards of 3,000
dollars.
For its diagram representing wheat price statistics the United
States Department of Agriculture, in its weekly Market Reporter,
averages the quotations of Minneapolis for No. i Northern Spring
Wheat, and Chicago, Kansas City, and St. Louis for No. 2 Red
Winter Wheat. It is evident, therefore, that these are the four
most representative of the American primary grain markets ; but
in addition to Duluth and Toledo, already referred to, the Omaha
Grain Exchange and the Buffalo Corn Exchange are worthy of
mention. The exceptional position of Buffalo as a distributing
centre, and the large transhipment business in wheat conducted
there encouraged the grain merchants in 1906 to establish an
organisation exclusively devoted to their own special interests.
An entirely cash trade is conducted, with considerable advantage
1 Toledo Produce Exchange ; Chamber of Commerce, Minneapolis ;
Duluth Board of Trade ; Merchants' Exchange of St. Louis ; Kansas City
Board of Trade.
38 ORGANISED PRODUCE MARKETS
to the flour-milling industry, of which Buffalo is a centre second
only in importance to Minneapolis.
In 1883, the year in which the first cargo of wheat was shipped
across Lake Superior from Western Canada, an unsuccessful
attempt was made to establish a grain exchange in Winnipeg,
and it was not until 1887 that the Winnipeg Grain and Produce
Exchange finally succeeded in beginning business in a small way.
This organisation was incorporated in 1891 by Act of the Manitoba
Legislature, but its charter was subject to amendment from time
to time by provincial legislation. In 1907 the grain trade got
into trouble with the Manitoba Government, and in the following
year, as a result of the passing of an amending act, the exchange
was dissolved as an incorporated body and reconstituted as a
voluntary non-incorporated association under the title of " The
Winnipeg Grain Exchange." Under these new conditions it
became " a self-governing institution founded on the consent of
its members based upon a mutual contract set forth in its con-
stitution and independent of any charter. As such it has remained
from 1908 until now." J
In 1921 its 355 members held between them 402 membership
certificates, and of the 317 members who were actively engaged
in the grain trade 267 were primarily engaged in the handling and
marketing of " cash grain " 2 and 50 in futures trading. The
remaining 38 members comprised 8 bankers, 3 officials, 10 vessel
and insurance agents, and 17 non-active members. The vessel
and insurance agents represent transport interests which provide
lake tonnage and marine insurance. Membership is obtained by
purchase either from a member who is selling out or from the
association itself. The latter at present charges 7,500 dollars,
but 5,000 or 6,000 dollars as a rule is the price received by a
retiring member for his place. In every case an applicant must
appear before a committee and be elected by ballot at a meeting
of the council of management of the exchange. Annual dues of
80 dollars from each member constitute the main source of revenue
of the association.
As a market for futures the Winnipeg Grain Exchange is
insignificant compared with the Chicago Board of Trade ; but
owing to the fact that most of the very large quantity of wheat
grown in Western Canada is marketed in Winnipeg, it is probable
that the latter is now one of the largest spot wheat markets
in North America.
Commission rates are fixed by the rules of all exchanges. In
1 Report on the Winnipeg Grain Exchange, September 10, 1921.
8 " Cash grain " in Canada is wheat actually in store at the head of
the Lakes finally graded and ready for immediate shipment to the con-
sumer. It is also termed " spot " wheat, and its price is the " cash " price
quoted on the Winnipeg Grain Exchange.
INTERNAL ORGANISATION 39
the Chicago Board of Trade, for example, J cent per bushel is
usual in wheat transactions, but the rate is reduced by one half
for corporations with one director or shareholder who is a member
of the board, a privilege granted also to members themselves or
firms with one member on the board. In the New York Cotton
Exchange there is an elaborate scale dependent on the price of
cotton, and on whether the name of the principal on whose behalf
the broker acts is disclosed or not. An addition is made for
residents outside Canada and the United States, while members
pay only half fees for their own transactions.
Five dollars per unit of coffee, i.e. 250 bags, each weighing
132 lb., is the commission charged by members of the New York
Coffee Exchange.
In the Liverpool Cotton Association, when a member is
employed as a broker, the minimum rate of brokerage for buying
or selling cotton in voiced on spot terms is | per cent., which is
also the rate payable by non-members, in the case of cotton
bought or sold for future delivery. Members and associate
members in the latter case are entitled to half -rate, and there are
other minimum scales for the different combinations that may
occur of member, associate member, non-member, resident in the
United Kingdom, resident outside the United Kingdom, and
future delivery. The general principle underlying the scheme
is that members are entitled to lower rates than non-members,
residents in the United Kingdom to better terms than residents
outside, while transactions in Egyptian cotton and spot dealings
are usually put through at double the rates for American cotton
and future delivery respectively.
Somewhat similar rules hold good on all the other exchanges
respecting their brokerage charges ; and most of them have
exceedingly strict provisions against fraud or dishonest practices
on the part of their members. They all require that orders must
be executed in the open market, and that no business belonging
to customers shall be taken over by brokers for their own account.
Expulsion is the penalty for making or reporting any false or
fictitious purchase, or sale, or for attempted extortion. No
member is permitted, under any circumstances whatever, to
be both principal and agent in any transaction. Moreover, no
member may, by his own act or by the act of another member or
broker, become agent for both seller and buyer.
Thus a standard of commercial honour is maintained very
much higher than would be the case were there no such bodies to
keep sharp practices in check.
CHAPTER IV
SPOT TRANSACTIONS, FUTURES, PRIVILEGES
BUSINESS in all the more highly organised exchanges is con-
ducted in two ways; firstly, through dealings for immediate
delivery of recognised grades of commodities or of produce
actually inspected or sampled — " Spot transactions " 1 ; and
secondly, through dealings in which neither immediate payment
nor immediate delivery is contemplated — contracts for deferred
delivery and so-called " futures."
Spot transactions, by their very nature, imply the present
existence of the commodity in question and necessarily represent
goods actually on hand or instantly available at the time the
contract is made. Moreover, they invariably contemplate an
immediate or an approximately immediate delivery.
The system of futures trading is based on contracts on the
part of the seller to deliver and consequently on the part of the
buyer to receive, at a time subsequent to the making of the
contract, a certain quantity of the produce at a stipulated price.
The fact that the seller, by means of a spot transaction at the time
of delivery, may find himself able to purchase produce at a lower
price, and thus fulfil his contract at a considerable and possibly
unforeseen profit to himself, renders his transaction speculative.
This is, therefore, the concept to be attached to the word specula-
tion, when it is used in reference to dealings in these organised
markets. Dealings in things, the future prices of which are
highly uncertain, are only possible on a large scale when compe-
tition is keen and demand is both extensive and fairly " in-
elastic/' 2 Consequently it is in the case of products such as
wheat, cotton, and maize that speculation has reached its greatest
development and that market organisation has attained its
highest perfection. Such speculation is always associated with
futures, and is conducted under certain fixed conditions on all the
exchanges where it is permitted.
1 French, marches au cotnpfant ; German, Comptantgeschiifte or Loco-
geschdfte.
* The demand for a commodity is said to be inelastic when quite a
considerable change in price does not cause much alteration in the quantity
sold.
40
SPOT TRANSACTIONS, FUTURES, PRIVILEGES 41
It is not every bargain, the fulfilment of which is contracted
to take place at some future date, that can be regarded as con-
structively speculative in the technical economic sense above
described. Such bargains are regularly made every day in all
departments of human activity and call for no special considera-
tion, merely because, from the nature of the case, they are
incapable oi instant fulfilment. The dealing in a cargo of wheat
actually on passage which may be sold in anticipation of its
arrival does not constitute a transaction in futures. A builder
who signs a contract to erect a house for an agreed sum under-
takes a future delivery of goods, but he is not a speculator in this
special sense ; whereas the builder who erects houses with careful
forecasts of the cost, intending to sell them when finished for what
he can get, is properly referred to as a speculative builder.
Speculation takes place when an anticipated difference in the
present and future prices of any commodity afford an opportunity
of a possible profit. It is the fact that the price in the future
cannot be accurately forecasted, while at the same time an
agreement is entered into in the present as to its amount, that
forms the essential basis of all speculative contracts. No business
is properly speculative in this special sense unless there is involved
the necessity of estimating in the present the probable amount at
some future date of a price which is subject to frequent fluctuations.
Speculation in the non-technical sense, buying property out-
right and holding it for a rise, has been universal since civilisation
attained a stable foundation. Something like speculation hi the
narrower sense is thought to have existed at Rome under the
Empire; but it is not until the early part of the seventeenth
century that futures of the modern pattern first make their
appearance, and that was in connection with the Dutch Whale
Fisheries, when the products of voyages were sold long before the
ships returned. Speculation in bulbs was common in the third
decade of that century, and towards its close time dealings in
corn were forbidden in Antwerp. A speculative market in coffee,
grain, and a number of other commodities existed in Amsterdam
in the early part of the eighteenth century, but it was quite the
middle of the nineteenth century, the period of great expansion
in foreign trade, before dealing in futures assumed the importance
it now possesses. In this it was helped by the introduction of the
telegraph and fast mail steamers, by which news was enabled to
travel more quickly than the commodities themselves from place
of origin to place of sale. Thus, not only the existence of produce
became known, but fairly accurate estimates of its amount were
available months before it could arrive. To solve the problem of
distributing, at a fair price, a world supply, whose amount was
approximately known beforehand, required dealings at places of
greatest demand in stocks not present at the moment. It was
42 ORGANISED PRODUCE MARKETS
inevitable, therefore, that at such centres there should take place
great numbers of transactions of a kind other than spot trans-
actions. The growth of futures was the natural consequence of
such a combination of circumstances. A further contributing
cause was the need for produce importers to have quick returns,
and their consequent inclination to welcome a system which can
be worked so as to exclude credit altogether.
Futures dealing in a small way existed in European markets
as early as the thirties of last century ; but it is, as a matter of fact,
to an early form of contract in the grain trade of the United States
that the modern system owes its origin, although an exactly
analogous transaction was common in iron warrants in Glasgow
at the same time. When large quantities of wheat or iron had
been stored in the elevators or the railway yards, and receipts for
them had been issued, the holders endeavoured from time to time
to raise money on their stocks. At first this borrowing was from
necessity, particularly in the case of the Scottish ironmasters, who
were not always able to market the whole of their output. After
some tune it came to be seen in the grain trade that any one
looking for a fall in price could sell wheat which he could deliver
by means of borrowed warrants endorsed by the holder, expecting
to be able to replace them, when it was necessary to return them,
by purchases of warrants at the anticipated lower price. This
was possible, for there was never any obligation to return the
identical warrants loaned, but merely warrants for the same
amount and same grade of wheat. It is obvious that in such a
system the extension of transactions of this kind was limited by
the number of warrants available for borrowing, even though it
was possible for a single warrant to serve for the satisfaction of
an indefinite number of contracts. This form of transaction is
the normal " short " sale on the American stock exchanges, and
is the one usually suggested as substitute for the present form of
futures on the produce exchanges by those who wish to reform
the abuses that have recently appeared in the latter. A " short "
sale is one made by a person who, in anticipation of falling prices,
sells for forward delivery what he has not got, intending to make
delivery with goods bought later at a lower price. On the New
York Stock Exchange the procedure is as follows : —
(a) X sells securities he does not own to Y. (b) X borrows
securities from Z and hands them to Y, who is quite unaware of
their origin and is not concerned with it once he actually gets
possession, (c) X goes into the open market, buys securities of
the same kind of equal amount from any broker W, and hands
them over to Z, thus closing the transaction.
The possibility of combination on the part of the W's is
always present to act as a restraint on the X's, and it is maintained
SPOT TRANSACTIONS, FUTURES, PRIVILEGES 43
that it was the hardship of this restraint on trade that hastened
the adoption of the futures system on the produce exchanges,
in which it is no longer necessary for an X to make immediate
delivery of warrants, warehouse receipts, or other titles to the
goods, but rely merely on finding a W, or (what is far more
frequent) another X at the moment he needs them.
Failure of the X's to find W's when required, or rather, suc-
cessful combination on the part of the W's and refusal to accom-
modate the X's except on prohibitive terms, constitutes a "corner."
Therefore the narrower the range of grades or qualities constituting
good delivery on a futures contract the greater the danger of
corners. All contracts on the produce exchanges specify the
grade as well as the quantity, and, as a rule, only a delivery of
that grade or some grade very near in quality is accepted in settle-
ment. This specified grade, known as " contract " or " standard "
grade, must therefore be thoroughly representative of the com-
modity, be widely distributed, and readily obtainable when
required. When it is necessary to tender another grade within
the range permitted, allowances are made to the buyer or to the
seller according as the quality is inferior to or better than the
standard. The basis on which these allowances are calculated is
of considerable importance, and has been the subject of legisla-
tion even in countries where there is otherwise no tradition of
governmental interference with trade.
In addition to specification of grades, there are, on all the
exchanges, recognised amounts deliverable on futures contracts.
Fixed units of amounts constitute one lot, which, except in very
rare cases, cannot be sub-divided on the particular exchanges
concerned. For example, the unit in cotton in Liverpool is 100
bales=48,ooo Ib. in the case of American cotton, 50- bales=
36,000 Ib. in the case of Egyptian ; in wheat, 5,000 centals ; for
wheat in Chicago and New York, 5,000 quarters is the unit ; for
coffee in New York, 250 bags=32,50O Ib., and so on. Slight
variation from correct weight does not vitiate delivery, and is
usually allowed for at the closing price on the day of tender of
delivery.
For the time of fulfilment of a futures contract certain limits
are rigidly fixed in all cases. Since produce comes to the markets
somewhat irregularly, though on the whole continuously, it
cannot usually be promised for delivery on any specific date.
In America the practice is to classify futures according to months,
that is, to allow the seller the option of delivering on any day of
a month agreed on after due notice to the buyer. Delivery
cannot be made before the first day of the month, but on the
other hand, it must be made on or before the last day of the
month. The choice of date rests invariably with the seller. So
44 ORGANISED PRODUCE MARKETS
universal has this practice become of specifying futures in the
United States by means of the delivery month that phrases such
as " December wheat," " September delivery," " June option,"
meaning futures to be fulfilled in those months, are in common
everyday use.
European practice is not so stereotyped in this respect. In
Liverpool the delivery period in the case of cotton futures used
to be two months, and thus there were May- June options, June-
July options. In Paris the period for wheat may be two, four,
or six months — for example, the four premiers mois, January to
March, or the four chauds mois, May to August ; while in Germany,
when dealing in futures was permitted, two specially fixed
periods, March-April (the Fruhjahr-Termin) and September-
October (the Herbst-Termin) were commonly employed. In all
these cases, except for the differences in the length of the period,
delivery is effected just as in America. Having regard to these
characteristics, shared by all agreements concerning future
delivery in the chief exchanges of the world, a definition may be
given which is sufficiently precise for the purposes of discrimination
between mere contracts for forward delivery and futures proper.
A futures contract * is a contract in an organised market drawn
up in a form standardised by the controlling authority of that
market, referring never to specific lots of produce, but prescribing
the unit of amount and quality, while leaving to the contracting
parties the determination of total amount, price, and time of
delivery, it being understood that the choice in the latter case
has reference only to a definite period of time stated in the con-
tract, and that these periods are prescribed by custom or the
market authority and not arbitrarily selected by either of the
parties to the bargain.
The volume of dealing in futures on the exchanges is enormous
compared with the actual amount of the commodity marketed.2
This is a natural consequence of the facilities offered by the system,
whereby a buyer who does not wish actually to accept delivery
may sell an equal amount long before the delivery period and then
1 Also called a terminal contract, a contract for future (not " forward "
or " deferred ") delivery, a future, and (in the North American grain
markets especially) a trade. French, Operation & terme or marchi a terme.
German, Termingeschaft, " Das Termingeschaft ist also ausserlich nur ein
genauer formuliertes, durch Borsenusancen reglementiertes, Zeit- oder
Lieferungsgeschaft." Fuchs, Der War enter minhandel, p. 4. See also
Sonndorfer, Die Technik des Welthandels, pp. 16-19.
But a Termingeschaft may be either a Fixgeschdft, a futures contract
proper, or a Prcimiegeschdft, a privilege ; and a marche A terme may be either
a marche ferme or a marchi a prime in the same way.
z E.g. on the Winnipeg Grain Exchange between September i, 1920,
and April 21, 1921, the total volume of futures dealing in allgrain was about
6 \ times the volume of the actual grain that reached a marketable position ;
and the Winnipeg market for futures is far from being an active one.
SPOT TRANSACTIONS, FUTURES, PRIVILEGES 45
offset one transaction against the other. Indeed, a contract may
change hands on some exchanges a score of times before final
settlement is made, and every " passing on " involves another
addition to the total number recorded of dealings in futures. It
is asserted that the larger the volume of futures dealing in any
particular market, the better that market fulfils its real purpose ;
for the more frequent the bids and offers of traders, the keener is
competition and the more delicate is the adjustment of price to
genuine supply and demand.
Closely allied to futures proper (which, as explained, are
bargains for delivery at a definite price within a definite future
period of time) is the contract which confers the right to demand
that such a bargain shall be entered upon under circumstances
which may be, but usually are not, set forth. This type of con-
tract is called a " privilege " or " option," because what is pur-
chased by one of the parties to the bargain is the privilege or
option of buying from, or selling to, the other party a certain
amount of a certain commodity at a certain price The fact that in
a futures contract proper the seller has the option of selecting the
day of delivery within the period agreed on has caused the word
" option " to be applied indiscriminately to both types of contract
— " December option " having come to mean an ordinary trans-
action in futures for which December is the month of completion.
To avoid confusion, therefore, a distinction not always made in
practice will here be adopted. Privilege or option will be taken to
mean the second type ; but where the term " option " is qualified
adjectively by the name of a month, the reference will be to
futures proper, whose time of delivery is that particular month.
This, though not in strict accordance with commercial usage, will
at any rate be unambiguous. A privilegej_pr option, then^is^a
jDf theparties_acjpikSlhe right jrjthmit7
dbligaliQn^loJbuy from or sell to the other
3t a
Suclf contracts are obviously of two kinds according as the rigKf ~~~
acquired is one to buy from or one to sell to. The former are
termed " Calls," the latter " Puts." A call, therefore, is an agree-
ment giving the buyer the right to call upon the other party to
deliver a certain amount of produce at a fixed price within a
specified time. Calls are used by those who have sold what they
do not own (short sellers or bears). Suppose a dealer has sold
certain produce at a certain number of points (say 50) per unit (in
cotton, e.g. at so many hundredths of a penny per Ib.) which he
expects to be able to buy later on at a lower price, thereby making
a profit. Desiring to protect himself against a sudden rise or
against a possible corner, he finds that, for a certain sum, he can
buy a call enabling him to get produce at 52. If the price rises to
1 French, marche ^ prime ; German, Pramiegeschaft.
46 ORGANISED PRODUCE MARKETS
56, he requires the seller of the call to deliver to him at 52. Thus
his loss is limited ; for he cannot lose more than two points per
unit however much the price rises, plus, of course, the sum he
paid for the call. In such a transaction the cost of the call is
largely in the nature of a premium for insurance against heavy
loss (in this particular case against a loss of more than two points
per unit). Calls are also used by dealers who think that the price
of produce will rise above the price named in the call. They are
not at the moment in a position to take advantage of their superior
knowledge of the market. Therefore, rather than miss this chance
of profit altogether, such speculators purchase a call whereby they
obtain the right of demanding delivery at a price lower than the
new market price. Thus when they sell the produce delivered to
them they realise their anticipated profit, less the price paid for
the call.
EXAMPLE OF A CALL
Chicago,
July i, 1921.
FOR VALUE RECEIVED the bearer may CALL ON me for ten
thousand (10,000) bushels of WHEAT (Contract grade) at 98 cents
per bushel any time within fifteen (15) days from date.
JONATHAN JONES.
Expires July 15, 1921.
1.15 p.m.
A put, on the other hand, is an agreement giving the buyer
the right to deliver to, or put on to, the other party a certain
amount of produce at a fixed price within a specified time. It is
a contract made always with a view to a fall in price. Suppose
a dealer anticipates that the price of a commodity will fall, and
that he desires to profit by this decline in price. He purchases a
put, therefore, from some one else entitling him to demand that
the latter shall accept delivery of a stated quantity of the com-
modity within a given time at a price which is named. If his
expectation is realised and the price falls, he can purchase in
open market the quantity mentioned in the put at a price below
that at which the seller of the put has undertaken to buy it. Thus,
by exercising his privilege, he will make the difference between
the price at which he bought the produce and the price at which
he sold it under the put agreement, minus, of course, commission
charges and the cost of the put.
A combination of a put and a call is termed a " straddle " on
the American exchanges. It gives the purchaser the privilege of
either putting or calling the produce at the named price within a
given period. If different prices are named for the put and for
the call, the privilege becomes a " spread," but this term " spread "
is also used in another connection to describe arbitrage operations
SPOT TRANSACTIONS, FUTURES, PRIVILEGES 47
in commodities when there is more than the normal difference in
prices between the two markets. These double privileges are
used by dealers who wish to profit by a change either up or down
in the market price. They are not so common in the produce
markets as on the stock exchanges in America, but their use in
the grain markets seems to be growing. The spread is the more
usual of the two. Double privileges can only be purchased when
those who sell them anticipate a stagnant market in which the
price will not move sufficiently to induce the buyers to exercise
their options. If the market moves only within the limits named
in the contract, the buyer does not exercise his option and loses
what he paid for the privilege, while the seller has the sum paid
as compensation for the risk he has taken ; since it is not always
possible to purchase double privileges, the price to be paid is high
when they are available, for the risk to the seller is very great.
It is exceedingly unlikely that prices in an active market will
remain stationary for any length of time.
The use of privileges is confined almost exclusively to highly
speculative transactions of a gambling nature. These contracts
are merely bets upon anticipated changes in the price of the com-
modity, and in the majority of cases are never carried out, settle-
ments being made by the payment of the difference in price to
the winner of the gamble. Most of the produce exchanges in
America forbid them in their rules, but dealing takes place after
hours in the corridors and side rooms of the buildings. It is
difficult to suppress them altogether, because in some cases they
serve a useful purpose for the genuine trader. They are not
countenanced as such officially on the English exchanges either,
where some of the terms are used in somewhat different significa-
tion to the American. The American straddle is a " put and
call option " in England, whereas the English straddle is a gamble
on the difference in price of the same or different grades of the
commodity at different periods — a bet on the difference in price
of the same grade at different dates, or a bet on the difference in
price of different grades at the same or different dates. As
defined in the rules of the Liverpool Cotton Association : "A
' straddle ' means a transaction in cotton for future delivery in
which contracts are made either —
" (a) For the purchase of a certain number of bales of one growth
for a certain period of delivery, and for the sale of an equal number
of bales of the same growth for another period of delivery.
" (b) For the purchase of a certain number of bales of one growth
for a certain period of delivery, and the sale of a contract or contracts
of the nearest equivalent in weight of another growth for the same
or another period of delivery." x
1 The Liverpool straddle is classified as an arbitrage transaction in
America.
48 ORGANISED PRODUCE MARKETS
It will be observed that in this definition there is no mention
of option or choice to be exercised by either of the parties.
There are contracts to buy and to sell, in each case definite and
without qualification, but hope of gain rests on nothing more than
an expected alteration in the usual difference in price of futures of
different periods or in the usual difference in price of two different
growths. Such transactions have their justification in the pro-
tection they can give to spinners in certain situations that may
arise in their business ; and it is with this purpose in view that the
association has given official sanction to them, while at the same
time seeking to discourage their use as mere betting agreements.
The price to be paid for a privilege or option on the American
exchanges is influenced by three considerations, which turn mainly
upon the risk to the seller :
i. The length of time during which the option is to run. The
longer the time the greater is the probability of fluctuation in the
market price of the commodity, the greater the risk, therefore,
to the seller and consequently the higher the price expected by
him for the privilege granted.
* 2. The condition of the market. The risk of the seller is
greater the more unstable the market at the moment. Therefore
the more stagnant the market the smaller the price.
3. The greater the difference between the price or prices
named in the agreement and the prices prevailing in the open
market the less is the risk of the seller being called on to fulfil
the contract and, therefore, the smaller the cost of the privilege.
In practice, on the whole, the custom is to keep the price of
options fixed and to vary the other conditions, narrow the range
of price and extend the time when the market is stagnant,
extend the range of price and curtail the time when the market
is " wild." Ten dollars per thousand bushels of wheat is the fair
average price at present for a put or a call with range of price
one-fourth or three-eighths of a cent away from the market price,
available within fifteen days.
Theoretically the risk in buying a privilege is confined to the
actual cost, and this fact has attracted unskilled speculators
recently in great numbers to the American exchanges. They
lose, it is said, less money in this way than in any other ; for in
every case the possible loss is known exactly beforehand. This
new development is causing controlling bodies to place increased
restrictions on the use of privileges and to attempt to suppress
dealings in them even in places off the exchange floors and where
the ordinary disciplinary rules do not hold. Yet there is a point
of view from which they may be regarded as something more than
mere betting transactions ; for it is possible to conceive a privilege
as an ordinary deal in futures proper, with a special stipulation
that, in consideration of a cash payment, one of the parties has
SPOT TRANSACTIONS, FUTURES, PRIVILEGES 49
the right to withdraw from the contract within a specified time.1
In view of actual practice and recent developments it is difficult
to find much justification for this standpoint ; and there is little
doubt that controlling bodies are acting in the best interests of
bond fide traders in discountenancing them entirely.
Much more readily justified is another recent development in
organised markets, which is rendered possible only by the exist-
ence of trading in futures, that is, the adjusting of price between
different markets by means of arbitrage transactions or " spread-
ing." In its simplest form an arbitrage transaction consists in
buying in one market when the price is low, selling at the same
time for forward delivery in another market where the price is
high, and transporting the produce from one to the other to fulfil
the contract But instead of moving the produce, a dealer may
buy futures in one market and sell futures in the other, and close
out each contract in the market where it was made. Suppose, for
example, the two markets are New York and Chicago. Wheat is
normally 6 cents per bushel higher in the former than in the latter,
this figure representing the expenses involved in transport from
one to the other. If New York quotes, say, 72 cents, and Chicago
60, a dealer is justified in assuming that this difference of 12 is
unusual, and will be reduced to about 6 within a reasonably short
interval. He, therefore, buys futures in Chicago and sells them
in New York. When the difference is narrowed down to 8, in-
dependently of the movements of the prices themselves (suppose
New York falls to 67 and Chicago to 59), he can close out at a
profit. By selling in Chicago he loses i cent per bushel, but he
can buy in New York to cover his contract there at 67, thus
making 5 cents per bushel ; that is, a net gain of 4 cents per bushel
on the completed -series of transactions. This action on the part
of arbitrage dealers tends to ensure that prices in markets which
are in close communication shall differ only by the cost of trans-
port from one to the other — shall remain " in line," as the phrase
runs. Yet for considerable periods of time neighbouring markets
may be " out of line," owing to heavy commitments in one
making dealers reluctant to put through transactions of the kind
required in the other. Cases are on record of arbitrage dealings
even in the same market, when excitement has split dealers up
into groups, which for the moment worked independently of one
another and quoted different prices. Dealers less excitable than
the rest then used their opportunity, and by their knowledge of
different prices in places a few feet apart succeeded in making
1 This is the view taken on the Continent, and the sum paid for the
privilege of withdrawing from the contract by the person who would be
the buyer if the contract were completed is called, in German, a Lie-
fevungspvdmie or Vorprdmie. Empfangsprdmie or Ruckprdmie is the corre-
sponding term if it is the seller who purchases the privilege of withdrawal.
E
50 ORGANISED PRODUCE MARKETS
considerable profits in a very short time. Arbitrage transactions
between centres in different countries are not infrequent in the
case of securities. They are difficult to put through in the case
of produce ; for straightforward dealings are not possible, owing
to the additional problems raised in connection with rates of
exchange. Representatives in the producing countries of im-
porting houses elsewhere, and agents abroad of firms in the pro-
ducing countries in constant communication with one another
and with their respective headquarters, succeed in setting and
maintaining a general world price level for the main staples of
commerce ; but arbitrage in the produce markets finds its real
field within the limits of a single country.
CHAPTER V
SETTLEMENTS AND CLEARING HOUSES
DIFFERENT contracts for the same number of units of wheat,
cotton, or other produce of standard grade are, for all practical
purposes, identical if they mature within the same delivery
period. Thus it is obvious that a dealer who has bought and
sold equal amounts of the same grade for the same period of
delivery has not necessarily any concern in the actual goods.
The difference between the prices of the sale and of the purchase
complete his interest in both transactions. If, therefore, he can
bring together the person from whom he purchased and the
person to whom he sold the produce he can drop out, on payment
or receipt of differences due on the two contracts, without handling
anything but a warehouse receipt. It is to afford facilities for
off-sets of this kind and for the settling of differences that
clearing houses have been established and periodical settle-
ments introduced. These are effected daily in some cases,
weekly in others, while on some exchanges no settlement takes
place before the close of the term of the contract. The general
principle underlying a periodical settlement is one of partial
payment pending final delivery and final settling up. The
operation of clearing houses and short settlements is most clearly
seen when settlement takes place daily. Some examples of the
methods used in the Chicago Board of Trade afford good illustra-
tions in this connection. Suppose on June 14 A sells to B 10,000
bushels of wheat for September delivery at 92 cents per bushel.
The price fluctuates from day to day, and as it rises above 92, B,
owning the wheat, would be the gainer and A the loser. By the
rules of the Board, A must pay B the differences in value calcu-
lated on the basis of the closing market prices each day. If
prices go down, B must pay A each day on the same basis.
Suppose that on August i the price is 93, then the net total
passed between them would amount to a payment of i cent per
bushel by A to B. If B now sells to C, a similar process takes
place, in addition, between B and C, and so on, with successive
pairs of dealers, if further transactions take place on the basis of
this particular lot of wheat. Suppose C holds the wheat until
September i when the price is 95. A, being the original seller,
51
52 ORGANISED PRODUCE MARKETS
would then hand to B warehouse receipts for the quantity and
grade agreed on. C, on receipt of these from B, would give pay-
ment to A on the basis of 95 cents per bushel. Having already
received from B, by way of difference, 2 cents per bushel, he
really is out of pocket only 93 cents, which is the price he agreed
to pay for the wheat ; while A, though now (on September i)
receiving 95 cents, had already (on August i) paid B i cent and
between August i and September i another 2 cents. Thus, as
net result, he receives 92 cents per bushel, the price at which he
originally agreed to deliver. B has as profit i cent per bushel on
the complete transaction. B, in this case, is merely a speculator
having judged correctly that prices were likely to rise. A and
C did not necessarily know that they were dealing with a person
who did not intend to handle the actual wheat.
If the parties consent, delivery can be offset by a corresponding
contract on the immediate payment of differences. For example,
two contracts which agree in all particulars except price may be
offset and closed out by payment of the price differences. This
can be done either by direct settlement between the parties or by
what are called " rings " or through the clearing house. A ring
is formed when a group of dealers can get together and settle up
without the intervention of the clearing house. Suppose A sells
5,000 bushels to B at 92 cents per bushel and the market price
at close is 93. This requires a payment of 50 dollars (i cent per
bushel) from A to B. The next day B may sell to C, and he,
through D, E, F, etc., to M, and the market may close at 92 \,
differences being passed at the end of business between all the
successive pairs as on the previous day. The process continues
up to Z, who buys, let us say, when the market is at 98. Differ-
ences again are passed until Z, who has bought from Y, has paid
Y 4 cents per bushel, and A 90 cents per bushel. In this way a
complete ring is made, each intermediary between A and Z
securing his profits and meeting his losses without unnecessary
delay. It is not even necessary that Z and A should actually
pass wheat between them, and if both were speculators that
would not be done. A need only repurchase 50,000 bushels from
Z, offsetting delivery in that way, and pay whatever difference
such transaction demands.
Much time and trouble may be expended in the formation of
a ring, and it is in this respect that the clearing house is of
importance. On all exchanges it is an independent organisation,
though not necessarily an independent corporation, with its own
set of officials and regulations. Moreover, it is the record office
of the market where all contracts in futures must be registered.
In Chicago (and much the same system prevails on other ex-
changes) each member keeps a " settlement book," in which he
has to enter the names of parties with whom he makes his daily
SETTLEMENTS AND CLEARING HOUSES 53
settlements, dates and terms of all contracts involved, including
particulars of the original contracts which pass through his hands,
the amounts due to or owing by him on each separate settlement,
and the consolidated amount on all settlements. At the close of
business each day all members attend at the clearing house and
pass in their " reports " or accounts. If a member has a credit
as result of his day's business, a cheque on the clearing house is
handed to him ; if the contrary, he hands over a cheque for the
amount to the clearing house. There is thus no need for a
member to search out at close of business all those with whom
he has traded during the day. In the ring example given
above, as the days went by, the intermediate traders would
gradually disappear on the clearing-house record in respect of the
contract in question, until on delivery day Z would be seen to
be the actual purchaser of the wheat. The clearing-house clerk
would then instruct him accordingly, and A would then ascertain
to whom to make delivery.
In Minneapolis the Clearing Association in connection with
the Chamber of Commerce is a separate corporation, membership
of which is not compulsory for the ordinary members of the
chamber ; but non-members of the association may clear their
transactions through those who are members. Thus, in practice,
the advantages of the clearing arrangements become available for
all. /Themethodof working may be_gathefed from the feHowing
extract from the explanatory pamphlet issued by the secretary
of the chamber in 19147 : —
" When two members of the Chamber of Commerce make a con-
tract for future delivery, on the floor of the Exchange Room, and
both these members are also members or stockholders of the Chamber
of Commerce Clearing Association, they make reports on blank
forms provided for that purpose to the Clearing Association ; one
party, whom we shall call A, reporting the sale to the second party,
whom we shall call B, of 5,000 bushels of May wheat, at 85 cents
per bushel ; B makes a similar report, showing the purchase from
A of 5,000 bushels of May wheat at 85 cents ; both these reports
being forwarded to the Clearing House promptly after the close of
the market.
" The Clearing Association immediately makes a record of these
reports, showing A to be f short ' 5,000 bushels of May wheat, and
B to be ' long ' 5,000 bushels of May wheat. The total amount of
wheat which is short in the Clearing Association must always be
precisely equal to the amount of wheat which is long in the Clearing
Association.
" The Clearing Association requires all open trades upon its
books to be protected or margined daily ; that is, if at the close of
the market the day following the date of the trade above mentioned
1 McHugh, The Formation, Development, and Economic Function of
Grain Exchanges, pp. 4 and 5.
54 ORGANISED PRODUCE MARKETS
May wheat closed one cent higher than on the previous day, A
would be required to forward a cheque for one cent per bushel, or
50 dollars to protect his short sale to B, and the Clearing House would
forward a cheque to B for this same amount. If the market fluctuates
considerably, the Clearing House may require additional and special
protection, as margins from its members. The Clearing House is
maintained by a small charge made for clearing trades.
" We will suppose that in the above case B was a speculator.
The market having advanced one cent per bushel, the purchase from
A shows B a profit of one cent per bushel, or 50 dollars, and he may
desire to sell the wheat which he has contracted to buy from A to C.
If he does so, B reports the sale of 5,000 bushels of May wheat to
C at 86 cents, and C reports the purchase of 5,000 bushels of May
wheat from B at 86 cents. If this is the only open trade that B has
in the Clearing Association/ the Clearing House would cancel the
purchase from A with the sale to C, and B would be neither long nor
short in the Clearing Association. The Clearing Association would
then show A still short of 5,000 bushels of May wheat, and C long
5,000 bushels of May wheat, thus substituting C for B, as the party
to take delivery of the wheat sold by A.
" All contracts for the purchase and sale of wheat for future
delivery, whether speculative or not, must contemplate the actual
taking of the delivery ; and if an individual makes a purchase of
wheat for future delivery, as B did from A above mentioned, B is
quite certain to receive delivery of 5,000 bushels of No. I Northern
wheat, as evidenced by a warehouse receipt as above mentioned
sometime during the month of May following, unless before delivery
takes place he resells the contract to another purchaser, as in the
case last above cited."
In consequence of offsetting or the cancelling of a purchase by
a sale and by means of ringing-out and the work of the clearing
house, very few futures remain to be fulfilled by delivery. This
is the feature that has attracted most adverse criticism, because
of the facility afforded to those who practically bet on price
changes. An attempt to discourage this objectionable type of
operator is made by demanding that, in addition to short settle-
ment, a sum equal to 10 or 5 per cent, of the total sum involved
on the contract shall be lodged with the clearing house. This is
called " putting up a margin/' It is claimed that the short-
settlement system and the putting up of margins do prevent
dealers from assuming risks beyond the power of their means
to cover; and that though the system does offer facilities for
gambling in mere price movements, as distinct from dealing
in commodities, it has to be borne in mind that it helps to
check wild speculation by weak dealers unable to meet the losses
which they were yet very ready to incur before the system was
introduced.
The Winnipeg Grain and Produce Exchange Clearing Asso-
ciation is, unlike the Winnipeg Grain Exchange itself, a company
SETTLEMENTS AND CLEARING HOUSES 55
incorporated under the Joint Stock Companies Act of Manitoba.
It was formed in 1901 " for the purpose of more efficiently and
economically exchanging the daily balances due to the fluctua-
tions in the price of grain and for the added security to contracts."
Not all members of the Exchange are members of the Clearing
Association, but all members of the Clearing Association must be
members of the Exchange. Non-members of the association,
however, may have their futures contracts cleared by members.
Contrary to the general practice of the North American continent
the association assumes the position of seller to the buyer and
buyer to the seller on all contracts of its members, and guarantees
the fulfilment of all such agreements. It has ample liquid assets
available as security, but its manager in every case can call for
such additional security as in his judgment is necessary to ensure
the due fulfilment of the contract. Each member must be a
holder of five shares. The price of the latter was 50 dollars each
at organisation. At present it is 1,500 dollars. There are 123
members with 615 shares subscribed. The authorised capital
stock is 1,000 shares, providing, therefore, for a possible member-
ship of 200.
In the case of the Liverpool Corn Trade Association the
procedure is almost identical with that in Chicago. All contracts
on being entered into are recorded in the books of the association ;
and this record, during the currency of the contract, affords
protection to both parties against the risk of non-fulfilment. It
is obligatory on the association to call upon the seller or the
buyer, as the case may be, to deposit in its custody a fixed amount
of margin, id. per cental, together with the difference accruing
between the market value and that of the previous day. When-
ever a contract is passed on, which happens when either the seller
or the buyer closes his interest in it and becomes an intermediate,
the latter receives his profit or unexhausted margin and dis-
appears altogether from the agreement. The new contract
created by this process is also adopted in the books of the asso-
ciation, and is treated precisely as the old. If the amount neces-
sary to maintain a proper margin is not paid when demanded, all
contracts standing in the name of the defaulter are immediately
closed by the association.
Similar arrangements hold good in the markets of the Buenos
Aires Grain Association, which is, to a large extent, modelled on
that of the Liverpool Corn Trade Association, with the further
simplification that after the contract has been duly recorded no
member is responsible to any other member but only to the
Association itself. This assumption of responsibility by the
market authority or by a clearing house, which may be a corpora-
tion independent of the exchange, is unknown in the United
States, but is common on the Continent, particularly in the coffee
56 ORGANISED PRODUCE MARKETS
trade. The oldest clearing house of this kind is the Caisse de
liquidation des affaires en marchandises, of Havre, dating from
1882, which handles cotton, coffee, indigo, and lard contracts, not
necessarily futures proper in every case, but also ordinary con-
tracts for deferred delivery. Corresponding institutions exist in
Marseilles, Paris, Antwerp, Hamburg,1 Rotterdam, and other
centres, while the London Produce Clearing House, Ltd., was
established in 1888 to assume responsibility in contracts for
forward delivery, including futures proper, in wheat, maize,
coffee, sugar, tea, raw silk, and other commodities. The method
of procedure is the same in every case, and business is always
done through special brokers, from whom alone these institutions
accept binding contracts. Their aim is a double one — to
guarantee both parties to a contract the regular fulfilment of the
same, and to provide the facilities of a clearing house when these
are required. When a contract is made notice is given to the
institution, which, on the requisite margin being lodged, steps in
practically as an intermediate party and makes all payments and
accepts all deliveries. Margins are required and are altered, as
on the exchanges, in accordance with price movements during
the time the contract is running ; but interest is paid on the
average amount lodged. In case of the default of either party,
the institution secures the other party to the contract from loss,
and recoups itself, as far as possible, from the security lodged by
the defaulting party and from a reserve fund accumulated with
this object. The fact that the institution is, for all purposes, a
party to each contract greatly facilitates its work as a clearing
house.
A rather remarkable recent extension of this type of clearing
house to agreements not directly concerning produce is of interest
as illustrating not only the methods of a caisse de liquidation, but
also the growth of an organised market as soon as the requisite
conditions therefor are fulfilled. The Caisse internationale de
liquidation et de garantie des operations en marchandises was
established at Antwerp in 1920, to protect Belgian purchasers of
foreign goods against losses caused by wide fluctuations in
foreign exchange. Through this agency the local supply of,
and the local demand for, foreign currency or credits are consoli-
dated. Prices are quoted in Belgian currency. Sterling is
handled in units of £1,000 ; French currency in units of 25,000
francs ; Dutch florins in units of 3,000 ; German marks 50,000 ;
and American dollars 3,000. The delivery period may be the
first or the second fortnight of any given month. Sessions are
held twice daily, 11.45 a.m. to 12 noon, and 3 to 3.30 p.m. Units
of the several currencies are offered by sellers for the various fort-
nightly periods, but if no business is done, or if there is no offer
1 The German title is Waren-Liquidationscasse.
SETTLEMENTS AND CLEARING HOUSES 57
of delivery for a stated term, a quotation committee publishes a
figure arrived at by " interpolation " * or by comparison with other
quotations taken from actual business concluded. At the close
of each session all contracts for the delivery of exchange are
registered with the caisse, which then assumes the obligations of
buyer and seller towards one another and guarantees the execution
of all the agreements made under its supervision. The method
of delivery is exceedingly simple.2 It is possible to maintain,
with a considerable degree of truth, that such an organisation can
accomplish little more than a small but active group of foreign
exchange dealers working independently of one another. But
on the other hand, the adoption by a money market of methods
hitherto peculiar to the produce markets is a fact not without
considerable significance.3
In the Liverpool Cotton Association weekly settlements are
the rule in the case of all contracts made on " Settlement Terms."
This condition is essential in all the agreements which are required
to be drawn up on the authorised contract forms of the associ-
ation. Only these forms are admitted to the " Settlement." The
trading week runs from Monday to Saturday, and the following
Thursday is " Settlement Day." On the Monday before settlement
day prices known as settlement prices are struck at n a.m. by
committees, whose decisions are not open to question. On the
following Wednesday members render to each other, through the
clearing house on authorised forms, statements based upon
these prices referring to all contracts on settlement terms made
between them and open, or running, at the close of business on
the previous Saturday. Cash balances due on these statements
are paid at the first clearing at the Liverpool Cotton Bank, Ltd.,
on the settlement day. In the settlement statements only the
balance of bales is carried forward to the next settlement at
the settlement prices ; and other purchases from, and sales to, the
same member of the same quantity of cotton for the same
months of delivery are deemed closed contracts and are rung
out. It is obvious that in this partial cancelling of his own
contracts each settlement on behalf of each individual member
cannot affect those contracts in which delivery is contemplated
by either party, and it is in this connection that the clearing
house plays one of its most important parts. A seller who has to
deliver cotton is bound, before noon on the last day of the delivery
period, to tender actual cotton, available for immediate delivery,
of which full particulars as to bales, date of arrival in Liverpool,
1 I.e. by using known figures in a regular series of quotations as basis
for an estimate of the missing intermediate figures of the series.
2 See Bradstreefs, vol. xlviii. p. 803.
3 There are traces of the growth in England also of a future market
in foreign exchange. See The Bankers' Magazine, February, 1921.
58 ORGANISED PRODUCE MARKETS
and other matters have to be supplied on a standard recognised
form. He is then known as the first seller. The declaration
forms are in duplicate, one being retained by the clearing house ;
the other, after being numbered, is handed by the clearing house
to the buyer. This is known as a " docket," and can be " signed
over " by the buyer to the member to whom he has sold the
cotton, who, in turn, can sign it over to his buyer, and so on, any
number of times. When the signing over has ceased the buyer
whose name is at the end of the list is known as the last buyer.
On depositing the docket with the clearing house the last buyer
receives the duplicate with the clearing-house register stamp
impressed upon it. If any question arises as to the quality of the
cotton, the matter is referred to arbitration and/or appeal
committees. If all is in order, the first seller enters on a clearing-
house form the amount he demands before delivery of the cotton,
plus or minus the balances due to or from the intermediate parties
mentioned on the docket, and lodges with the clearing house the
warehouse receipts in his possession. On payment to the Liver-
pool Cotton Bank, Ltd., at the first clearing, of the amount
demanded, the last buyer is handed the warehouse receipts and
thus obtains possession of the cotton. At the second clearing,
later in the day, the first seller is paid his share, and adjustments
are made concerning the payments due to or from the inter-
mediates on the contract.
In futures contracts, whether for grain, coffee, cotton, or
other similar commodity, the normal standard of an average crop
is that ordinarily selected for. delivery when the period is reached
for the fulfilment of the agreement. But it must be clearly
understood that a futures contract is a " basis " contract. It
does not require the delivery of any specific grade. Instead, the
seller has the privilege of making delivery from a range of
grades. His choice is unfettered. On some exchanges he may even
deliver a mixture of various grades, and when this is the case he
tenders those which, for the time being, are slowest of sale in the
spot market. In all cases allowances to buyer or seller are made
for the difference. The reason for the adoption of a " basis "
contract instead of a " specific " contract is a simple one, viz. the
fact that the proportions of the numerous grades to the total
crop vary widely from season to season, and, moreover, are liable
to sudden changes owing to damage by storm or early frost or
other unforeseen contingency. Hence sellers could not be found,
who would commit themselves to forward sales of a specific grade,
in numbers sufficient to maintain a practical futures market.
If they did commit themselves, they would always have hanging
over them the risk of a disastrous corner. A futures market is
only possible when a basis contract is permitted.
Very often the basis grade, though in all cases the most useful
SETTLEMENTS AND CLEARING HOUSES 59
and most representative, is not the one required ; for it will appear
later that futures are bought and sold for quite other purposes
than the securing of a supply of the basis grade at a definite date.
In such a case, rather than accept delivery, the buyer sells back
again to the other party on the contract or sells the basis grade in
the spot market and buys spot produce of the standard he requires.
As a general rule the prices of the several grades move in unison,
and their differences tend to alter proportionally to those prices ;
but this is not the case invariably. Hence the principle on which
the allowances are calculated at settlement time for the difference
between grade tendered and the basis grade is one of outstanding
importance to the trade.
The futures contract form, in use in Liverpool from 1914 to
1919, for American cotton, provided that any " grade down to and
including Fully Good Ordinary, or if tinged or stained, any grade
which (irrespective of allowance to seller for staple) is at least
equal in value to Fully Good Ordinary, should be tendered for
delivery at the agreed price per Ib. for Middling, with additions
or deductions for such other qualities as were within the contract
according to their value as compared with the spot value of
Middling on the day the cotton was tendered." Here Middling
was the grade which formed the basis, and when other grades
within the range permitted were tendered, the allowances were
calculated in accordance with the spot prices of the day of tender.
Since February, 1919, somewhat more elaborate conditions
have been embodied in the form, and the basis has been changed
to Fully Middling, with corresponding alteration of the range
of tenderable qualities. Tender is now only permitted of any
grade not lower than Low Middling (equal in colour to the standard
and fair staple), with additions or deductions for such other
qualities as are within the contract, according to their value as
compared with the spot value of Fully Middling (equal in colour
to the standard and fair staple) on the day the cotton is tendered.
Not more than one tender or more than three lots for each unit
(48,000 Ib.) is permissible, and each 48,000 Ib. is treated as a
separate contract. The additions or deductions for quality are
settled by arbitration, but any bales below or of less value than
Low Middling may be returned by the buyer at the spot value
with or without a penalty. If cotton of better staple than i»g in.
is tendered, the seller must make an allowance to the buyer of
20 per cent, of the excess value of such staple cotton over IT3^ in.
If the seller fails to tender against the contract, it is invoiced
back to him at the spot price of Fully Middling on the last
business day of the delivery period plus an allowance of \d. per Ib.
The invoicing back price, including the allowance, must never
exceed the official value of Fully Middling by more than 10 per
cent. The method prescribed for ascertaining the official value
60 ORGANISED PRODUCE MARKETS
of Fully Middling for this purpose is an innovation, and bears
deep traces of the influence of recent American legislation. Two
groups of spot markets in America are taken, one consisting of
three Atlantic markets — Augusta, Norfolk, and Savannah, — the
other of three Texas markets — Dallas, Galveston, and Houston.
An average price is struck for each group in a manner prescribed,
and the lower of the two is taken as basis for the price sought.
It will be seen, therefore, that, in this revised contract also,
allowances are calculated with reference to spot prices, either in
the Liverpool market itself or in certain selected American
markets.
This is the method of " commercial differences " as opposed
to the method of " fixed differences/' which used to be the rule
on the New York Cotton Exchange, and is the rule in the Chicago
Board of Trade and on the exchanges dealing with commodities
other than cotton. Under the latter system the premiums
and discounts allowed for better and poorer grades delivered are
fixed arbitrarily by a committee at stated intervals instead of
being fixed by the actual selling prices of the different grades in a
spot market at the time of delivery. The substitution of one
method for the other may seem a matter of little significance,
but as the change from fixed to commercial differences was
accepted reluctantly by the New York Cotton Exchange, and only
after legislation by the Federal Government, it may be worth
while to examine the question more closely.
The system of commercial differences was in substance the
method employed by the New York Cotton Exchange up to 1888,
when it was abandoned for two reasons. Firstly, owing to the
development of cotton factories in the Southern States, and to
direct buying there by the mills of the Northern States, spot sales
fell away in number and no longer afforded a sufficient basis for
determining the relative values of the various grades which could
be tendered in settlement of future delivery contracts. Secondly,
the smaller amounts of actual cotton made it increasingly easy to
manipulate the prices of the various grades, and therefore the
price differences between the grades. Accordingly, a committee
of the exchange, known as the revision committee, was appointed,
which met at stated intervals (at first nine times a year, then twice,
and afterwards four times a year), and established arbitrarily the
differences in prices between the basis grade of Middling and the
other grades. The differences thus established held good until
the next meeting of the committee, but they seldom or never
coincided with the actual price differences at the time of delivery.
The loss resulting from this always fell upon the buyer rather than
upon the seller ; for the latter, having choice of grade, always
selected that one which was most favourable to himself. The
buyer, knowing beforehand that the seller would offer for delivery
SETTLEMENTS AND CLEARING HOUSES 61
those grades most over-valued in the fixed differences, sought to
anticipate and discount this loss by offering less for the contract
than he would have done if the system of commercial differences
had been in force. Thus the value of the futures market for
" hedging " was largely destroyed, because risks were arbitrarily
increased for those cotton merchants who used it in a legitimate
way to minimise or escape any risk at all. Moreover, futures
prices were artificially depressed in New York and kept out of
line with prices in other markets, with resulting confusion to the
whole American cotton trade.
It was not the cotton merchant alone who suffered under this
system. Much of the cotton in America is bought in the South
on the basis of the prices offered in the New York and New Orleans
exchanges for future delivery ; and it is the custom for the mer-
chants' agents to offer the farmer so many "points1 'on'" or
" off " the future delivery prices of the day of sale. Owing to the
artificial depression of prices, previously referred to, the price paid
to producers for their cotton was also frequently below its true
level,2 a fact which lent support to the contentions of the leaders
of the " anti-option " movement, which aimed at the suppression
of dealings in futures altogether.
The confusion spread even to the market for manufactured
cotton goods.3 The great mass of buyers of cotton goods, par-
ticularly buyers for export, base their ideas of the value of goods
upon contract quotations on the New York Cotton Exchange,
with the result that they used to be misled as to the cost of
the raw material for manufacture. There was therefore a
tendency for prices of the manufactured article to fall below what
brought in a fair profit to the makers.
With the object of finding a remedy for these evils, the United
States Bureau of Corporations,4 after an extended investigation,
made recommendations which the New York Cotton Exchange
declined to adopt. Accordingly, the Federal Government had to
intervene, and, by means of the Cotton Futures Act, effective
1 Cotton is sold in America for so many cents per lb., and a point is
a hundredth of a cent.
2 See Report of the Commissioner of Corporations on Cotton Exchanges,
Parts 4 and 5, Washington, U.S.A., 1909, for charts and full discussion
of the whole question of fixed differences.
3 See Conant, " The United States Cotton Futures Act," The American
Economic Review, Fourth Series, vol. v. pp. i-n.
* This bureau is a section or division of the Department of Commerce
of the Federal Government, and to it is entrusted the general oversight of
all undertakings incorporated under United States laws. Before 1913
there was a single Department of Commerce and Labour with its subordi-
nate bureaus. During that year a new department, presided over by
an additional minister, was established. There are now, therefore, both
a Department of Commerce and a Department of Labour, each with its
own minister and its own bureaus.
62 ORGANISED PRODUCE MARKETS
February, 1915, which placed a prohibitive tax of 2 cents per Ib.
on all cotton futures that did not comply with certain require-
ments, including the use of commercial differences instead of fixed
differences, it compelled the Exchange authority to alter its
system. To provide against the contingency of there being in-
sufficient spot cotton dealings in a single market to make possible
an accurate determination of commercial differences (and this
was always a real difficulty in New York), the Act lays down that
the differences shall be determined by the average actual com-
mercial differences on the sixth day prior to the date of delivery in
the spot markets of not less than five centres designated for the
purpose, from time to time, by the Secretary of Agriculture.
Eleven centres have been so designated, where genuine spot
markets exist. Under the Act the official cotton standards of the
Department of Agriculture are those to be employed, but pending
their general adoption by the southern spot markets, rules are
drawn up for the translation of the differences between the spot
prices of the southern grades into differences applicable to the
official grades. It is also prescribed that every bale of cotton
delivered on contract must be identified with its grade, a practice
not usual in New York before 1915. Recent reports of the
Department of Agriculture indicate that the Act has been a
success. The prices of New York futures are now in line with the
spot prices of the South, and also conform to the Liverpool market.
While it is beyond doubt that the system of commercial
differences works better than the system of fixed differences, and is
fairer to manufacturer, merchant, and producer, it by no means
follows that it is perfect and that under it the normal relationship
of future and spot quotation is always maintained. If the volume
of dealing^ in futures is small the market becomes unduly sensitive
to errors in differences and to manipulation by cliques. This is
not uncommon in New Orleans, and is not quite unknown even in
Liverpool. But the main cause of disturbance is the provision,
natural under this system, for the delivery of " extra staple "
cotton or cotton of extra long fibre. This cotton fluctuates in
value very sharply. A difference of even £5 of an inch in length
may, in some seasons, cause a difference of more than a cent, or
one halfpenny per Ib., in price. Hence there ensues much un-
certainty and' inconsistency in the awards of the several arbitra-
tion and appeal committees, which seriously disturb the value of
the Liverpool futures contract in its relation to the basis grade.
To discourage the tender of such troublesome cotton on futures
contracts, both New York and New Orleans used to limit the
allowances to be added to the contract price for cotton of extra
staple to a small fraction of a cent per Ib. More recently no
allowance whatever can be made unless by permission of the
Secretary of Agriculture. Liverpool does not go as far as that,
SETTLEMENTS AND CLEARING HOUSES 63
but cuts 20 per cent, off the allowance when the staple exceeds
I^Q of an inch.1 The claim is made that there are now no longer,
on any of these markets, disturbances arising from methods of
calculating allowances for price differentials, which are not and
cannot be effectively dealt with immediately on their appearance.
Owing to the fact that the production of other staple com-
modities dealt in on the several produce exchanges is less localised
than cotton growing, supplies of the basis grade in their case are
available from a considerably wider area. Moreover, there tends
to be greater normality in their output, with the consequence that
the basis grade is larger in proportion to the total crop. Again,
few commodities require to be so carefully selected as cotton for
the specific purposes for which they are needed. For these
and other reasons, therefore, the question of fixed differences
or commercial differences is not important. The greater
simplicity and convenience of the former have caused their
general adoption for all commodities other than cotton.2 It is
only in the case of coffee, the main crop of which, like that of
cotton, comes from quite a small area, that there has been any
agitation for a change.
1 See supra, p. 59.
2 See the 6$rd Annual Report of the Chicago Board of Trade, 1921.
In the case of wheat and maize the system of fixed differences results
in the imposition of a penalty on the seller. In this way the buyer is afforded
the protection to which he is fairly entitled.
CHAPTER VI
CROP REPORTS AND MARKET PRICE QUOTATIONS
NOT the least important of the services rendered to society by
market organisations is that of the daily determination of prices ;
for it is on published market quotations that producers and con-
sumers alike rely for guidance in their actions in the future. Simi-
larly, in their turn, operators in the market have to search for a
foundation on which to base reliable estimates of demand and
supply. It is to provide this sure foundation that reporting agencies
have been instituted, whose duty it is to collect information con-
cerning the condition of growing crops and to give forecasts, several
months before harvests, of possible yield and probable future
supplies. In relatio'n to the entire world product of any com-
modity, such as wheat or cotton, the markets need all the facts
available concerning the supply afforded by the previous crop,
the raw and finished products in store and in transit, the acreage
and condition of growing crops, and the present and prospective
demand, as far as they can be ascertained from returns, or from
forecasts based on returns as adequate as it is possible to obtain.
Two classes of agencies supply this information, governmental
departments and non-official agencies, the latter of which may be
sub-divided into those maintained directly by market organisa-
tions for their own use, and those which are independent of all
other organisations and are prepared to sell the results of their
investigations to all who are prepared to purchase them.
Government crop reports, even such portions of them as relate
to acreages and yields, are not the result of actual farm-to-farm
inspection, but are the results of a union of a large number of
estimates, or personal judgments of conditions systematically
collected and average<|. The reports are valuable in proportion
as they are timely, that is, in proportion as they furnish reasonably
accurate information concerning crops before they have been
completely marketed or consumed. An exhaustive census is
costly and requires so much time that the results are not known
until they are no longer useful ; but tests have shown that for
ordinary purposes crop reports collected in the manner indicated
are reliable and accurate. Periodic checking by means of a formal
census permits of comparisons being made which demonstrate the
64
CROP REPORTS AND MARKET PRICE QUOTATIONS 65
degree of accuracy attained and inspire in those who use the
results that confidence which the care taken in their compilation
justifies.
It was in 1863 that the United States Department of Agri-
culture began to collect agricultural statistics for information and
reports ; and, as its methods and principles have been generally
imitated by the corresponding government agencies of many other
important agricultural countries, it may be worth while reviewing
this work in some detail.
The foundation on which the Bureau of Statistics and Crop
Estimates of the Department of Agriculture builds is the census
taken every five years by the United States Census Office, when
the acreage, the total amount of crops grown, and the numbers
of live stock are ascertained by an actual census count. Every
farm in the entire country is visited on these occasions, and the
figures obtained are those referring to the previous year.
During each of the succeeding five years the bureau uses
these figures as a basis upon which to estimate changes in acreage
and in numbers of live stock. Three main inquiries are made
concerning each important crop : first, the area sown, made im-
mediately after seed-time ; second, the condition of the crop,
made monthly during the growing period ; and third, the yield
per acre, made at harvest time. The total production is then
obtained by multiplying the estimated yield per acre by the
estimated acreage. Other minor inquiries are made at the proper
times in the year, such as quality, prices, stocks on hand, and
amount forwarded from any collecting centres to primary markets.
In reporting the acreage of a crop, the agents of the bureau
simply apply to the acreage of the preceding year an estimated
percentage of increase or decrease. Thus an error made in the
estimated change of acreage from any one year to another is
continued from year to year until the next quinquennial revision,
when the necessary correction can be made on the basis of the new
figures supplied. A comparison of actual census results and
estimated figures in a recent year show errors of 2*6 per cent, and
4 per cent, in excess, and 5^4 per cent, deficiency in the case of
maize, wheat, and oats respectively.
The condition of a crop is reported in the form of a percentage,
the base, 100, being called a " normal," that is, " normal growth
and vitality giving promise of a full crop being represented by
100." Such a normal full crop is what a farmer expects with his
usual mode of farming, with normal weather conditions, and
without unusual loss from disease, insects, or other injurious
influences. It is therefore more than an " average " yield, but
less than the maximum possible yield, and it varies from district
to district in accordance with the degree of fertility and the per-
fection of agricultural science. The condition at a given date is
F
66 ORGANISED PRODUCE MARKETS
expressed by the percentage of the normal yield which may result ,
if no change in the condition of the crop takes place between then
and harvest time ; and the purpose of the report is to estimate
probable future supplies under prevailing growing crop conditions.
It is assumed that average conditions at any time indicate average
yields per acre, and if at any time the condition is 5 per cent, above
the average condition for such time, it is assumed that the yield is
likely to be 5 per cent, above the average yield.1
An example will show how condition figures are to be inter-
preted. Suppose that on July i the condition of maize is 82 per
cent, of a normal condition, and that in the last few years the
condition has averaged 86 per cent, of a normal condition. Then
the condition on July i is 4:6 per cent, below the average (for
82 is 95*4 per cent, of 86), and the harvest expected will be 4'6 per
cent, below the average. If in the last few years the average
yield was 28 bushels per acre, then the expected yield is 95*4 per
cent, of 28 bushels, i.e. 26*7 bushels per acre. This yield, there-
fore, is a reasonable expectation, though it may be exceeded if
less than average adversity befall the crop before harvest, and may
not be attained if weather and other adverse conditions prove to be
more unfavourable than usual.
The yield per acre is obtained from the returns sent in by
the agents of the bureau after harvest. No special means are
employed to obtain estimates. The agents are left free to ascer-
tain figures by inquiry or by any other means they may select.
Four classes of reports are received on each crop, one class
from special travelling agents in the direct full-time employment
of the bureau, each of whom is responsible for from one to four
States ; a second from State agents, one in each State, who is a
part-time official, reporting for a State as a whole and maintaining
a body of voluntary correspondents from whom to collect the
information needed ; a third from township correspondents, who
voluntarily answer questions concerning crops on printed
schedules sent to them monthly by the bureau. There are close
on 35,000 of these correspondents in the country as a whole, and
each has only to deal with the crops in his own vicinity. The
fourth class consists of county correspondents, who, like the town-
ship correspondents, are voluntary reporters, but whose reports
cover entire counties. A weighted average 2 of these reports is
taken in order to arrive at a figure for a complete State, the weight
in the case of each crop being proportional to the acreage planted.
All these four classes of reports are sent direct to Washington,
1 See Monthly 'Crop Reporter, July, 1921, for an official explanation of
the interpretation to be placed upon the bureau's figures.
2 An average (arithmetic mean) being the quotient of the sum of a
series of figures by their number, a weighted mean is obtained by multi-
plying each several figure by some numerical coefficient or " weight " and
dividing the sum of such products by the sum of the weights.
CROP REPORTS AND MARKET PRICE QUOTATIONS 67
where they are summarised ; and the final report is published in
the Monthly Crop Reporter, on or about the eighth day of each
month, or earlier if the returns happen to arrive with unusual
punctuality.
In the case of the four crops known as " speculative/' that is,
wheat, maize, cotton, and oats, those crops the markets for which
are very highly organised, elaborate precautions are observed in the
preparation and publication of the reports, so that no person may
obtain an undue advantage from the possession of early informa-
tion of the result.1 The crop reporting board, consisting of the
chief statistician and four assistants, sits behind closed doors for
the co-ordination of the four sets of returns sent in, and for the
examination of any other available information which may have
reached the bureau and be relevant to the preparation of the
monthly return :
" When the hour set for announcing the figures arrives, the
Board has its report worked out with National as well as State averages
and totals, and manifold copies are made of a table of these figures,
together with a few brief paragraphs stating the leading facts as
to the acreage and condition of each crop. A few minutes before
the clock strikes the hour the Board and the Secretary of Agriculture
sign the report and take it to the corridor near the telegraph room.
Several copies of the report sheets are laid, face down, on a table.
Eight or ten telegraph operators and news reporters are ready for
the stroke of the clock, and with the word they seize the papers
and rush to the telegraph and telephone instruments. In a single
minute the wires have flashed the leading figures to New York,
Chicago, New Orleans, and other great markets." 2
1 See Murray, " The Crop Reporting System," Annals of the American
Academy of Political and Social Science, vol. xxxviii. ; and Hays, " Func-
tions and Needs of Our Great Markets," Annals of the American Academy
of Political and Social Science, vol. xlv. pp. 245-62.
2 Hays, loc. cit., As an example of the effect on the markets of a crop
report not anticipated, the subjoined paragraphs from English newspapers
of August 2 and 3, referring to the report of August i, 1921, on the cotton
crop are of interest : —
" New York,
" Monday.
" The report issued to-day by the Washington Department of Agricul-
ture gives the average condition of the crop as on July 25 at 64*7, compared
with 69*2 a month ago, 74*1 last year, 67*1 in 1919, and 75-4 the ten-year
average.
" The Bureau report came as a big surprise to the market, a deteriora-
tion of 4-5 being much larger than expected. Considerable excitement
was caused, and as a result of active general buying prices at one time
showed a rise of nearly i cent per lb. The upward movement continued
until quite near the close, when realising brought about a reaction of about
20 points, making final prices 71 to 80 points up. Sales 300,000 bales."
" Tuesday.
" The Washington Department of Agriculture, in a supplement to the
monthly cotton crop report, states : Boll weevil damage is heavy with the
68 ORGANISED PRODUCE MARKETS
It is impossible, without incurring very great expense, to
estimate the annual production of every product grown. The
bureau, therefore, confines itself to twelve of the most important
crops — wheat, corn, maize, oats, cotton, hay, rye, potatoes, barley,
flax, rice, buckwheat, and tobacco. These comprise about 95 per
cent, of the acreage and 80 per cent, of the value of all crops ; but
some of the minor crops, like beans, onions, and cabbage, are
reported on as to condition of growth and as to percentage of a full
crop produced.
It was not until the year 1908 that the Canadian Government
began to issue crop reports for Canada as a whole, although
estimates of crop conditions and yields had been issued for several
years previously by some of the provincial governments. The
results are based upon data collected by the Census and Statistics
Office from practical agricultural correspondents in all parts of
the Dominion, who voluntarily place their services at the disposal
of the Government.
The method adopted of presenting the reports is an adaptation
of the American one, viz. a numerical percentage above or below
a standard condition represented as 100. The term " standard
condition J> is taken as denoting a full crop of good quality, and
a healthy and thrifty state in the case of live stock. Corre-
spondents are asked to report under four grades of condition, viz. :
Good . . . represented by 75 to 100 or over.
Average . ,, from 50 to 74.
Fair ... „ from 25 to 49, and
Poor ... ,, below 25.
In England and Wales the Ministry of Agriculture and
Fisheries employs a staff of crop-reporters to collect the informa-
tion it publishes each autumn x ; while in Ireland the Royal Irish
Constabulary has (or had), among its other duties, the task of
furnishing very full returns and detailed information concerning
crops and crop conditions to the Department of Agriculture and
Technical Instruction of that country.
Of the non-governmental agencies supplying information,
trade newspapers are probably the most widely known. They
threat of continued and increased damage. The outlook is very serious
in some sections, where the pest promises to take all new growth.
" The American Cotton Association estimates the cotton crop con-
dition on August i at 62*0 compared with 647 estimated by the Govern-
ment on July 25."
1 Estimates are usually published in August, giving acreage under
each crop and under grass on the previous June 4. After harvest, estimates
of the hop crop, of the corn crops, and of the potato and root crops are
published at the end of October and beginning of November. Corrected
returns fappear early in the following year in the annual Agricultural
Returns.
CROP REPORTS AND MARKET PRICE QUOTATIONS 69
collect facts by means of a large body of correspondents located
in the agricultural areas ; and the methods adopted by the better
of them are modelled very much on those of the government
departments of the countries where they are published. Indi-
viduals and firms publish private reports, both in the cotton trade
and the grain trade ; and the several exchanges spend much money
in compiling statistics and publishing information for the use of
their own members.1
Probably the organisation that is most efficient in collecting
information in the grain trade is " BroomhalTs Agency." It is a
kind of official representative in this respect of practically every
grain exchange in the world, with offices, agents, or correspondents
scattered through all the grain-producing countries of importance,
and with a head office at Liverpool, which serves as a clearing
house for every kind of news that bears even remotely on any of
the several branches of the corn trade. Broomhall's Corn Trade
News is published twice daily in the chief market centres ; and, in
addition to crop reports and market quotations, it contains full
statistics of imports and exports, as well as news of shipments
and of arrivals of grain cargoes at all the chief shipping centres in
both hemispheres.
With the object of developing a system of world-area statistics
concerning crops and crop movements, the recently established
International Institute of Agriculture at Rome has organised as
one of its departments a bureau of agricultural statistics, which
collects world-area data and supplies these facts to all the fifty-
nine adhering countries. This information, which comprises
statistics of acreages, conditions, and total production, is collected
from generally accessible sources in each country, and is published
and made available as soon as it is tabulated. The Institute
utilises the agencies, official and unofficial, already organised, and
1 The following statement, taken from a weekly trade journal, may be
of interest in this connection. The reference is to the Canadian crops for
the harvest of 1921 : —
" The North- West Grain Dealers' Association has just published the
following estimate of the volume of the grain crop of the three prairie
provinces : —
Wheat . 17,498,000 acres at 14-8 bushels per acre 258,632,000 bushels.
Oats . 9,522,000 ,, 35-0 ,, „ 333,565,000
Barley . 1,846,000 ,, 24-2 ,, ,, 44,760,000
Rye . 568,000 ,, 15-9 „ ,, 9,058,000
Flax . 751,000 ,, 7-4 ,, ,, 5,576,000
" The official Government estimate claims slightly higher figures for the
wheat crop — namely, 264,912,000 bushels ; but the Manitoba Free Press,
which specialises in crop reports, predicts only 248,423,000 bushels."
The reports of Mr. H. G. Hester, secretary of the New Orleans Cotton
Exchange, are of considerable importance in connection with the trade
in American cotton. They deal with every aspect of cotton, involving
numerical estimates or numerical results of any kind.
70 ORGANISED PRODUCE MARKETS
is successfully encouraging the setting up of statistical crop-
reporting departments in all countries. Its news tends to be
rather old when received by the markets, but it is probable that
more frequent reports will be issued when experience has been
gained in the work of collecting and tabulating.1 It has already
proved of considerable service to the grain trade by the prevention
of exaggerated reports of crop damage and the like, which were
skilfully put into circulation and used to get a certain amount of
credence for a period sufficiently long to enable their originators
to compass their undesirable ends.
One important point arises in connection with the Institute's
work — that is, the degree of secrecy to be exercised in the
assembling of the facts. The difficulties in the way of maintaining
strict secrecy until the data are available simultaneously for all
parties who desire them are enormous; but if this could be
attained, the gain to the organised produce markets would be
great. With really comprehensive and efficient crop reports
they would be able to maintain fairly steady prices, fluctuating
only as the facts of production and consumption warranted ; and
their success would be the greater in proportion as the official
reports were simultaneously available to all.
It is not to be expected that the work of these agencies, official
and unofficial, should escape criticism. Indeed, there are still
many brokers who maintain that, notwithstanding the care used
in compiling and issuing the reports so as not to permit them to
become available prematurely to unscrupulous manipulators,
those concerned in the distribution of the crops would be better
off if no crop reports were issued at all. These persons, however,
are in a diminishing minority. A more justifiable criticism is that ,
from their nature, the reports can be nothing more than guesses
by an individual or a board,2 and that both weather and acreage
reports are used by manipulators to influence prices, thereby
causing more and greater price fluctuations, and producing the
very thing they were intended to prevent. With a view to meet-
ing these objections in the case of the cotton crop, proposals have
been made 3 for the direct observation of what the crop is actually
doing at a given moment. It is suggested that samples should
1 At present the International Crop Report and Agricultural Statistics
is issued monthly. A useful account of the Institute's activities appears
in Report of World Cotton Conference, June, 1921, pp. 186-91.
2 The extraordinary mistake in the estimated acreage under cotton
made by the United States Department of Agriculture in the crop estimates
during 1921 lends support to this contention of the critics. Reasons con-
nected with politics and inter-departmental finance appear to be the
explanation of the very misleading reports that were issued.
3 Balls, " The Possibilities with Cotton Crops for Exact Reporting and
Forecasting," Report of World Cotton Conference, Liverpool and Manchester,
June, 1921.
CROP REPORTS AND MARKET PRICE QUOTATIONS 71
be taken day by day throughout the season. The number of
flowers should be counted and the number of ripe bolls. These
samples should be taken from fields throughout the area under
cultivation — one field here and one there — and sent for com-
parison and tabulation to a central place. In that way the con-
dition of the crop at any given moment could be determined with
extraordinary accuracy. The present system, it is said, is like
trying to use a dictionary from which some one has torn three-
quarters of the leaves.
There are considerable difficulties in the way of the adoption
of such a suggestion as the one just outlined. It is true that it
would abolish reliance on mere personal opinion, which is never a
very safe guide ; but it could be worked with profit only in a
climate whose equability allowed the crop to make regular pro-
gress. It would not be so satisfactory where changes of weather
or the descent of pests made for alternations of advance and
retrogression.
In any single organised market the prices paid for the same
quality of a given commodity are the same at any one time. In
other words, there is at any moment a definite market price. It
is of considerable importance, not only to the members of the
exchange but to dealers in other markets, and especially to pro-
ducers, to know what this price is from day to day. Therefore
special methods have been devised for ascertaining it and for
publishing it broadcast, so that all concerned may have an
opportunity of seeing it.
Price quotations may be used for several purposes : firstly, as
a simple indication of market values ; secondly, as a basis for
fixing prices in contracts — " settling price," e.g. ; and thirdly, as an
indication to retailers or collecting agents of the price at which
they may sell or purchase. The function of quotations as a
measure of values is generally understood, and calls for no com-
ment here. Their use, however, as indicators of selling and
buying prices to retailers and collecting agents is scarcely less
important. In the cotton trade the price paid to growers is
always determined * by the price of futures on the cotton ex-
changes, and the American country elevators in the wheat trade
similarly settle the price they pay to the farmers for that par-
ticular crop. Moreover, in many countries individual farmers
periodically supply more perishable produce at so much under or
over the wholesale published price of some central market agreed
on. In this way constant discussion and haggling about prices
is avoided, time is saved, and marketing facilitated.
It is on the exchanges themselves that price quotations
perform their greatest service and that the most serious questions
arise respecting their determination. Constant disputes about
1 See pp. 79 and 87.
72 ORGANISED PRODUCE MARKETS
" settling prices " in the case of futures contracts would arise if
definite rules were not laid down. Moreover, the custom of
buying " on call " would not be possible, nor the system of
" invoicing back " on contracts, if there were not an independent
price quotation to prevent one or other of the parties feeling
aggrieved.
Where a commodity is carefully graded and the grades are
narrow, it is easy for a market to evolve a single price at any
moment for each and every grade. Such is the case on all the
cotton exchanges. But in most other commodities it is not
possible to grade in such a manner as to avoid a range of
prices for each of the standard sub-divisions. Even in the case of
wheat, which is more exactly graded than almost any other com-
modity, the spot quotations in some markets often show a spread
of 2 to 3 per cent., No. I Northern, for example, being quoted
101 and 103 in an American market recently. This means that
the best wheat falling within the grade was worth 2 cents per
bushel more than wheat which was just barely admitted into that
class. In such a case it is conventionally agreed that the upper
figure is the quotation to be followed.
In the organised markets, owing to the continuous activity
during business hours, it is a comparatively simple matter to
arrive at price quotations ; for every one in the exchange knows
the current price at any moment. But when the price varies
from hour to hour, the question arises of obtaining and recording
the quotation at specific times and of deciding 'at which hour the
price is to be taken as the official quotation for the day. On
some exchanges the closing quotation of the day is taken as of
most importance ; but it may well happen that the greater part
of the day's business may be transacted during the early hours,
and that it may be difficult in some cases to find enough trans-
actions during the closing hour on which to base a quotation.
Therefore, each exchange adopts its own methods in this respect,
and either appoints a quotation committee, to which wide powers
are delegated, or authorises its secretary to base quotations on
reports from members of the exchange, or sometimes takes a vote
of all members present at a definite moment.
In certain of the less highly organised markets, butter and
cheese markets particularly, in the United States, the traders
assemble each day at some fixed hour and hold what is termed a
" call." This is a device for making bids and offers with the
object of sounding market conditions rather than actually trans-
acting business. By its means price quotations are obtained,
and these serve as the official records for the day. A chairman
mounts the platform, round which members gather, and calls for
offers and bids. These are announced or are posted side by side
on a blackboard. If bid and offer coincide in any instance a
CROP REPORTS AND MARKET PRICE QUOTATIONS 73
sale is effected, but if there is no coincidence there is at any rate
a basis on which to build up a quotation. The whole operation
lasts only a few minutes, and while it originally had other objects
in addition, its sole purpose now is to establish the official price
quotations for the day.
The rules of the Liverpool Cotton Association make ample
provision for ascertaining what has been and what shall be the
price in every case which is not a straightforward initial business
transaction. Official (noon) closing price lists are issued daily.
What are called " mid-day striking prices " are published of the
futures of each month traded in for guidance in " invoicing back."
Mid-day spot quotations appear hi the daily official circular,
and on each Monday, for the purpose of " settlement " on the
following Thursday, prices are struck at II a.m. by the Arrival
Quotation Committees. There is, therefore, never any doubt as
to the price quotation to be used for any particular purpose,
though there may be several quoted in the same day for the same
grade and delivery period. For example, in the newspaper
report in Appendix II., for July futures five prices are given, viz.
the highest and the lowest during the day, the value at 12.15 p.m.,
the striking price at n a.m. (for " settlement "), and the price at
close of business, every one of which has its own special import-
ance and significance.
On the New York Cotton Exchange there is a quotation com-
mittee, consisting of seven members, which meets twice a day to
fix the official quotation of Middling, and similar committees
exist for the New York Coffee and New Orleans Cotton Exchanges.
In the Minneapolis Chamber of Commerce there is a committee
whose duty it is to ascertain closing prices based on actual business
done ; and, in addition, throughout the day an operator sits on a
raised platform beside the pit to record the prices and actual sales
of futures as they take place, and to telegraph the proceedings
immediately to other markets.
On the Winnipeg Grain Exchange a record is kept of daily
cash closing prices (i.e. of the closing prices for " cash grain ") ; and
a daily record of closing prices both for " cash grain " and futures
is forwarded to the Department of Trade and Commerce, Ottawa.
The ascertaining of prices, in the less highly organised markets
is not a simple matter. The call board method already described
is not entirely satisfactory, for no actual business may be put
through at the prices mentioned during the call. Price quota-
tion committees may be dominated by the interests of one side
of the market, and underquoting or overquoting practised to the
detriment of producers and consumers. To deal with these
difficulties, and to give a guarantee of impartiality to the general
public, the duties of market reporting have often been taken over
by independent firms specifically formed for that purpose.
74 ORGANISED PRODUCE MARKETS
Broomhall's agency, already referred to, is an example, but it is
probably in New York, in the less important produce markets,
that the greatest development of this method has taken place.
The market reporters employed by such firms get their information
by going about and talking with the various dealers. Their
success depends partly, of course, on the frankness and honesty
of the dealers, but mainly upon their own ability, experience, and
disinterestedness, and their knowledge of price statistics and crop
movements. The results are published daily in such journals as
The Corn Trade News and The Producers Price Current.
The method of determining prices in the butter trade between
England and Denmark offers a good example of the use of price
quotations as a trading indicator, and at the same time illustrates
the serious difficulties that occur in attempts to reach a basis that
is impartial and fair to all the parties concerned. For several
years the price at which English wholesale dealers bought was
based upon the Copenhagen butter quotation, which, in turn, was
determined by a committee using the reports of actual sales as its
guide. The market was underquoted ; for the net price received
by the creameries was really higher than the official quotation,
and much dissatisfaction ensued. Re-organisation of the com-
mittee was attempted by the granting of representatives to the
creameries as well as to the wholesale trade ; but this too proved
unsatisfactory, and the producers at length broke away and
established their own quotation system, based on the weekly
reports of sales by creameries. The wholesale dealers still con-
tinue theirs, which is always a little lower than that of the
creameries. It has not yet been superseded to any great extent
as an indicator by the newer price quotation.
From time to time suggestions have been made with the object
of improving and facilitating the collecting of prices in the
produce markets generally. While these suggestions refer
primarily to the less highly organised markets, and only indirectly
affect the exchanges, it is, nevertheless, worth while to consider a
few of them which attempt to embody methods already found
useful in the grain and cotton markets.
One suggestion is that market authorities should be given power
by law to issue quotations each day based on sworn statements of
prices received by traders, and that these prices should be binding
in all other transactions put through on that day. Such a pro-
posal does not seem possible of realisation. Prices are used
merely as a guide by others or as an indication of the state of the
market. To interpose obstacles to their free movement is to
destroy the market altogether. Again, it has been suggested
that a committee of appraisers should be appointed to include
traders, market reporters, and government officials, the latter as
representatives of the producers. This is a much more feasible
CROP REPORTS AND MARKET PRICE QUOTATIONS 75
scheme, but it would require exceptional knowledge on the part
of the market reporters and the government officials, and an
experience of market conditions not invariably possessed by them.
The introduction of government officials naturally raises the
question as to how far a government, either local or central, can
be of assistance in developing methods of collecting market
statistics and prices, and in spreading the information it obtains
in this way. There is no doubt that it can help by promoting the
study of present methods to determine their weaknesses, by
drawing attention to abuses, and by instituting legal action when
individuals are reluctant to do so. There may even be special
cases where a government may feel it necessary to help in the
ascertaining and drawing up of quotations. Such a case is that
occurring under the United States Cotton Futures Act, according
to which spot quotations have to be ascertained in a prescribed
manner in connection with the system of commercial differ-
ences. But on the whole, interference of this latter kind is
unwise in the present stage of market development ; for the best
results hitherto attained have been those of the independent
market reporters acting on behalf of impartial market reporting
firms, and the official returns drawn up by the quotation com-
mittees of the more highly organised markets or exchanges.
CHAPTER VII
LEGITIMATE USES OF FUTURES
No aspect of marketing has been more widely discussed than the
system of dealing in produce for future delivery as it has been
developed in America and England in recent years. At one time
it is attacked on the ground that the selling of fictitious produce
is the cause of low prices to the producer. At another time it is
asserted that gambling middlemen raise prices unduly for the
consumer. Again, it is said that through it alone can the crops
be moved with ease and safety, and that no cheaper means for
distribution can be devised, notwithstanding certain attendant
abuses and excrescences.
Now, most of these discussions are strongly partisan in tone,
and bear much evidence of special pleading ; for the writers are
advocates of either " anti-option " societies threatening repressive
legislation, or of " exchange defence " unions resisting attacks on
legitimate business methods by well-meaning but ignorant moral
and social reformers. A study of the part the system plays in
the larger produce markets is a necessary preliminary to any
judgment on its merits or on its indispensability in distribution.
It is natural to begin with the producer, and examine how he
markets his output. Taking cotton first, the general statement
may be made that in the cotton belt of the United States most of
the output is by small farmers who are oftgn^indebt to store-
keepers in the neighbourjtng towns. They are"7mty~iira position
to market a few bales, anoTHiey frequently pay their debts in kind
by passing on these bales to their creditors. It would seem
that the storekeepers do not treat them harshly. Competition
to obtain cotton is great and the price is fair, even under circum-
stances so apparently adverse to the seller. High prices during
the war period have enabled the majority of the small growers to
pay off their obligations, and now dealings often take place directly
with a factor or his agent. The factor is the first important link
in the chain of middlemen between producer and manufacturer.
He usually covers a wide area and works through agents who are
employees in receipt of salaries, and are not paid by commission.
Samples are submitted to him or his representative ; or he buys
by grade, fixing a price often a considerable time ahead of delivery.
76
LEGITIMATE USES OF FUTURES 77
All risks due to market changes in the meantime are borne by
him, and he pays on delivery, accepting the cotton as it leaves the
ginneries. From him it passes, by means of spot markets in the
South and otherwise, to the merchant, who sells to factories or to
exporters, or who may be a merchant-exporter himself, or the
American representative of a Liverpool firm. It is when the
cottonjs at this stage, in the merchant's hands, that dealings in it
first taterptace on the exchanges ; though futures, anticipating
supply in a general way, may have been bought or sold previously.
As the factor conducts his business without the intervention of the
broker, it cannot be said that, up to this stage, there is unnecessary
multiplication of middlemen. Moreover, competition is con-
siderable, and in the seasons of short crops the growers usually
find themselves in a position to obtain all the advantages of the
resulting high prices. There is a general belief that farmers suffer
serious loss from having to throw their crops on the market during
the first three months after harvest. To help them to hold their
crops until later in the crop year, special provision was made by
the Federal Reserve Board in 1915 for the re-discount of " com-
modity paper/' which is defined as notes secured by non-perishable
staple commodities, having a specified date of maturity, and upon
which member banks have charged a rate of interest or discount,
including all commissions, of not more than 6 per cent, per annum.
Since then increased financial facilities have been provided,1 but
it is doubtful if any tangible improvement is possible short of a
complete re-casting of the whole machinery by which the cotton
is collected from the growers. It is open to question whether,
taking into account all the expensesJncidejiiaLtaJioMing crops,
farmers in fact could realise higher 'prices bysending their output
more gradually to market.2 There is much dissatisfaction with
present methods and evident need of the application of scientific
management to the marketing of all farm products in all the
countries of the world. The growth of co-operation among the
grain farmers may perhaps offer suggestions to the cotton farmers ;
but the latter are not so educated and work under very dissimilar
conditions.
The suggestion that the farmer should utilise the exchanges
directly and sell futures on the basis of his growing crop before it
is harvested, carefully selecting the period of delivery in com-
petition with other farmers and with spinners, is not a feasible
one. The impression prevails in some circles that this is actually
done, and that it is in this way that the farmer benefits by the
futures system. " No man," 3 it is said, " knows better than the
1 See Bulletins of the Federal Reserve Board, passim.
2 See Pope, " Can the Farmer Realise Higher Prices for his Crops by
Holding them ? " Quarterly Journal of Economics, vol. xxx. pp. 805-35 ;
and Report on the Winnipeg Grain Exchange, September 10, 1921, pp. 31-43.
3 Cotton Year Book, 1921, pp. 31 and 32.
78 ORGANISED PRODUCE MARKETS
farmer what the green and afterwards snow-white acres are likely
to yield him. His crop may be according to locality — a quarter,
a third, a half, or even a bale to the acre. Let us assume that
some great financial or commercial depression appears to be
looming ahead in the autumn, or other violently disturbing
feature like a Presidential election, with the possibilities of a
congestion at harvest time of a great crop, and values down in
the commercial marts of the world to all but the bare cost of pro-
duction, if not below it. What a gloomy outlook for the realisa-
tion of hours and days and weary months of labour ! Without
the futures market the planter would be at the mercy of events,
or the money lender. In the July . . . price was as low as
per Ib. ; the same standard for delivery in November was
per Ib., while 75 per cent, of the cotton world confidently expected,
and with some reason, that it would go down to 3^., a price which
would have meant dead loss on the plantation.
"What happened in August? From various causes prices
shot up id. per Ib. in a few weeks, and from comparative ruin
every planter was raised into opulence if he could have sold then.
Yes, but he could not exchange for cash what did not exist except
in green stalk and undeveloped cotton bolls. But he could, and
no doubt did, in many cases protect himself, and although prices
might go higher (and did go higher) at 3 to 5 cents per Ib. above
cost of production, he was well off if he could realise his probable
out-turn, whether one hundred or five hundred bales. How could
he do it ? Easily enough. He had only to give a responsible
broker in any recognised cotton exchange an order to sell so many
hundred bales of futures for October, November, December, or
any other month's delivery, at the current good prices then ruling,
and sit on a fence whittling sticks, if he liked, while his crop
matured, was picked, delivered, and sent to market. His price
was secured ; all he had to do was to deliver. Could he have
done this without the ajdxiWie futures market ? Certainly not."
This idyllic picture of the farmer selling futures and then
sitting down to whittle sticks is not borne out by facts.1 Dealing
in futures is a highly specialised business, and demands intimate
knowledge and ability of a kind that farmers, in the very nature
of things, cannot possess. Nothing but disaster has been the
result in all the cases on record where farmers have entered into
such transactions on their own account. Yet they do derive
undoubted advantage from the existence of the futures market,
and any alteration in its degree of activity is soon reflected in the
prices they are offered for their crops. That the 1908 cotton
crop 2 " sold as low as it did was not altogether due to the size of
1 See Wyse, " The Selling and Financing of the American Cotton Crop,"
Economic Journal, vol. xxx. pp. 473-83.
2 Bradstreel's 1909, p. 207.
LEGITIMATE USES OF FUTURES 79
the yield, because the figures show that it was absorbed by con-
sumers at an unprecedented rate. The main trouble was that
there prevailed an almost complete absence of speculation, which
in former years helped the farmer to carry the crop and competed
actively with the consumer and spinner, thus creating a higher
range of values during the period of active marketing than could
be possible with consumers and spinners having the market all to
themselves. Despite their boasts of being able to hold their
crops until they secure the prices desired, the farmers are always
compelled by their necessities to sell more rapidly than spinners
can normally buy. With no speculation to compete with the
spinner, farmers must either carry their own burdens or sacrifice
theiFcrops," as they did in 1908. The prices offered to farmers by
the factors depend on the prices of futures on the exchanges.
Merchants buy from the factors on that basis, and the latter
therefore buy from the farmers at so many points on or off the
future delivery prices of the current period. Judgment in each
case is assisted by the careful estimates and statistics of anticipated
and actual crop yield, the publication of which is undertaken by
the United States Department of Agriculture as well as by several
private organisations.
Suppose the merchant is an exporter himself, or a representa-
tive of a Liverpool importer who has sold to a Lancashire spinner
a special grade or a special description of cotton with defined
length of staple, or a specified strength or specified style. It is
common for spinners to enter into such contracts (c.i.f. contracts
on Forms 10 and n of the Liverpool Cotton Association) for
delivery at a specified time, the price being either fixed definitely
in the agreement or indicated as so many points on or off the
seller's price of ordinary futures of a certain month at time of
delivery. Such contracts are entered into generally hi the summer
months in anticipation of the new season's supply ; and the
merchant or importer or seller bases his price on his prospects of
obtaining the necessary supplies of the particular quality he has
sold, adding to the figure at which he expects to be able to buy in
America a fair margin of profit for himself. In doing this he
takes the risk of the crop turning out to be smaller or less valuable
than anticipated, and therefore he endeavours to protect himself
if possible against serious loss on the transaction. Suppose he
has, in July, sold 1,000 bales of Middling Fair for delivery in
December,1 and the price agreed on is 10-50^. per lb., the price
on the same day for December futures (with the usual basis,
Fully Middling, Low Middling clause) being 875. To protect
himself against a rise in price, he buys December futures for
1,000 bales at 875. If the crop is short, or if prices rise for any
other reason, it ordinarily happens that the changes in prices are
1 In a c.i.f. contract actual delivery is contemplated on both sides.
8o ORGANISED PRODUCE MARKETS
small for the other grades as compared with Fully Middling — the
basic grade in futures contracts. Therefore, if Middling Fair goes
to 11*50 in December, Fully Middling may be about 9-80. He
then sells December futures with which to close his July trans-
action, gaining 1*05^. per lb., and buys Middling Fair in the
spot market at 11*50 to deliver to the spinner, losing id. per lb.
on that part of the transaction. Thus, he not only succeeds in
protecting himself against a net loss, but also makes 0*05^. per lb.
on 1,000 bales of about 500 lb. each. This latter gain arises from
the fact that, in the case supposed, the fluctuation in the price of
the higher grade is of smaller magnitude than that of the futures
basic grade. The reverse may be the case occasionally, and
then an actual loss occurs, but it is trifling compared with the
amount at stake if there had been no purchase and sale of
futures.
Operating in this manner to obtajj^-pmtecjtion^ against a
possible hpavy_Joss fc rqlk^LJllJ^g^g " It *s practised not
alone by importers 'who havesold^EcTSpinners, but by importers
who ship to sell in spot markets and by the spinners themselves,
to insure against loss on unsold stocks of yarn or cloth. Taking
the importer first, suppose he has purchased cotton in America
and has settled a price which gives him a fair remuneration after
all the necessary expenses of transport and warehousing are
allowed for. As soon as the purchase is advised home he sells
futures for a quantity of cotton equal to his purchase. If he sells
at the price he has in mind and for delivery in the month during
which he expects the cargo to arrive, he can tender actual cotton
for delivery and completely fulfil his agreement, making as profit
just the fair remuneration he had allowed for. Transactions so
simple as this, however, are comparatively rare. Few cargoes
are disposed of immediately on arrival, and there is always a
large stock in warehouse at Liverpool remaining unsold. More-
over, the cargo may not be of a grade tenderable in fulfilment of
futures. If it is warehoused and is disposed of gradually, say in
lots of one or two hundred bales, futures of the quantity sold are
bought in at the same time, cancelling just an equal amount of
the hedges. The object of the hedging in this case is to obtain
protection against falling prices. Suppose the cotton is purchased
in October to arrive in November, then futures are sold at the
same time for November and subsequent periods. If the spot
price in October is 8*30^. per lb., and if it is that or a price very
close to it that the importer calculates on receiving, the futures he
sells may be at 8'2$d. for November, 8*32^. for December, and so
on. Now, since spot prices and prices of futures advance or
decline together, if the spot price on day of sale in November is
8'2od., the price of November futures will also have fallen, and
may now be about 8'i6d. Accordingly, if he gets O'io^. per lb.
LEGITIMATE USES OF FUTURES 81
less on his spot sale than he anticipated, he recovers 0*09^. on his
dealings in futures ; for he can buy November futures at 8'i6d. to
cancel those he sold previously at 8*25^.
Spinners may hedge by means of futures for protection against
unsold stocks of yarn, as well as against sales of yarn for forward
delivery. In a period of bad trade and falling prices, when
producers cannot find sale for goods, and yet think that less loss
is likely to be incurred by keeping their machinery going, they
" make to stock," producing at a loss what is probably losing
value day by day. If the depression continues, further heavy
loss may be incurred ; and it is to keep this within tolerable limits
that a spinner sells futures of raw cotton pound for pound of his
yarn. As the price of yarn declines so does the price of futures ;
for, to a considerable extent, the prices of raw cotton and of yarn
move in unison. He can then buy back his futures at a lower price
than that at which he sold them, and thus, to some extent, curtail
his losses. In a period of good trade, if he has secured a remunera-
tive contract to deliver yarn over several months ahead, even if
he requires specific high-grade raw cotton only, he can avoid tying
up capital temporarily in raw material and yet ensure getting
what raw material he requires just when he wants it. This
he does by purchasing futures and selling them out again as he
buys the spot high grade his yarn demands. If the market has
risen in the meantime, he has more to pay for his needs ; but then
he gets more for the corresponding futures that he sells. If the
market has fallen meantime, he pays less for his requirements ;
but then he has a counteracting loss on his futures. Thus, if he
has been correct in his calculations, which were based on the
value of futures at the time he made his contract for forward
delivery of yarn, he avoids all risk and the probability of any
serious loss.
In a similar manner, manufacturers of cloth and of cotton
goods may seek to protect themselves against loss resulting from
making to stock, and from having to pay unprofitable prices for
yarn or cloth when remunerative contracts for forward delivery
are offered to them ; but in proportion as the share contributed by
the raw material to the value of the wholly or partly manufactured
article diminishes, so does the degree of protection possible through
hedging by the purchase or sale of futures of raw cotton.
From the examples of hedging given, it is clear that the
essence of the operation is the balancing of a possible loss in the
spot market by a possible gain in futures, or (from the other
point of view) the balancing of a possible loss in futures by a
possible gain in the spot market, in such a way that the importer
eliminates speculative risks for himself and reckons with sub-
stantial, though" nu I complete, cerTainly on the remuneration for
his services reasonably due to him either in the form of trading
G
82 ORGANISED PRODUCE MARKETS
profit or of commission. Similar considerations hold good in the
case of the spinner. Absolute protection (by this means) cannot
be secured. Indeed, complete protection, even in theory, is
possible only when the futures basis grade (Fully Middling) is the
one required by the buyer and tendered by the seller ; but, largely
owing to the real protection afforded when the system works
smoothly, the trading profit or commission earned by the
merchant and importer can be kept small. Further, the security
possible to the spinner enables him to manufacture on a smaller
margin of profit. Thus the gap between the price paid by the
consumer and the price received by the grower is narrowed ; and
most of the risks are thrown on to the shoulders of that special
class of dealer or speculator who looks for his profits by buying
and selling futures alone, without intention either of accepting or
tendering delivery of ThlTarttrar- commodity. The risks due to
changes in prices are not distributed, as is sometimes maintained,
among all the parties to the future delivery contract. They are
concentrated upon this single class of experts who are to be
found in all modern organised markets to-day.
The expert risk taker, the legitimate speculator, constitutes
the real buffer between the producer and- the consumer ._ When
buyers are scarce during the marketing period his action assists
materially in carrying the weight of the crop ; for he shoulders the
greater part of risk resulting from price movements. On the
other hand, when buyers are numerous and sellers scarce, he
performs the very useful function of selling short, i.e. selling what
at the moment he does not possess, an operation which ultimately
requires a corresponding purchase to liquidate. Thus he dis-
counts the future and satisfies the present demands. In this way
a market is furnished at any time of the year where produce can
be sold or purchased at a stabilised price. Yet genuine hedging
contracts by merchants form the great majority of contracts for
future ^deliver^TTTOtwithstanding certain abuses by these experts
which wiftbe the subject of discussion later.
No account of the services rendered by hedging in the move-
ment of cotton from producer to manufacturer is complete with-
out reference to the attitude thereto of the banker who is called
upon to finance the export and import of the"produce.1
When a British importer buys American cotton in the
Southern States, his agent either pays cash, using his own money
for the purpose, or he obtains credit from Southern banks. In
due course the agent gets a through 2 bill of lading from the rail-
road company, or a port 3 bill of lading, and attaches this, along
1 See Simpson, " Financing Cotton Importing," Report of World
Cotton Conference, June, 1921.
* See Contract Forms 10 and IT, Appendix V.
3 Ibid.
LEGITIMATE USES OF FUTURES 83
with marine insurance policies, to a sterling draft, representing
the invoice cost of the cotton, and drawn at 60 or 90 days' sight
upon the British importer or the latter's bank. The draft is then
sold to a New York or other American bank, which sends it to
its agent or representative in England, who presents it for
acceptance to the importer or his bankers.
The bill of lading now constitutes the English bank's security
for the obligations it has undertaken on behalf of its customer.
When the cotton arrives it is the practice of the bank to send the
bill of lading and insurance documents to the importer with a
letter instructing him to claim the goods and to warehouse them
in the name of the bank, or else to retain them in trust for the
bank pending sale. The importer acknowledges these instructions
in a letter called a " Trust Letter," in which he undertakes to do
what the bank requires'bTliirn. He thus handles the cotton on
trust for the banking house, although the profit or loss on the
transaction is his own. As long as the cotton is unsold he is
responsible to the bank for the maintenance of proper security
against possible loss on its part ; and if the price falls he is expected
to pay the bank cash or to deposit with it additional security
sufficient to cover the fall in value of the cotton and maintain a
proper margin in the security. When the cotton is sold pay-
ment has to be made by the buyer in cash within ten days ; and
the importer is expected by the bank to pay in the proceeds of
the sale at once, thus either reimbursing the bank for its advance
or providing it with the funds to meet the bill it has accepted on
his behalf.
Similar principles, though slightly different details, apply to
the financing of imports from Egypt, South America, and India,
with the addition that in certain of these cases the importer
makes advances to the grower for the purpose of cultivation of
the crop. As the crop comes forward to market these advances
are cancelled accordingly.
For the protection of its customer as well as of itself, the bank
requires that he shall hedge by the sale of futures as described
above. In the case of American cotton the process is simple, and
the hedge affords an exceedingly good protection for both parties.
It is possible to hedge with fair success in the case of an import
of Egyptian cotton by the purchase of futures in American cotton,
and this is sometimes done, because the market for Egyptian
futures is less active. But American futures are a very imperfect
hedge in the case of cotton from Peru, Brazil, and India, the
fluctuations in the prices of which do not correspond closely with
the fluctuations in the prices of American cotton, though the
general tendency may be the same. If prices rise the seller of
futures has, as previously described, to pay differences on settle-
ment days. When an importer finds himself under this necessity
84 ORGANISED PRODUCE MARKETS
his bank is very willing to advance the sums required, if the cotton
is actually in his possession in England ; for the asset presum-
ably has advanced in value to the same extent as the futures.
Naturally, the bank is more reluctant to help if the cotton has
not yet come to hand, but it is asserted that during the disturbed
conditions in the cotton market in recent years bankers have
found money for customers far in excess of the value of cotton
actually held by them as security. If prices fall exactly opposite
conditions prevail, and the importer receives considerable
differences in respect of the futures he has sold as hedges. He is
therefore able to meet the increases of margin and security re-
quired by his bankers as the market continues to fall, and this is
in addition to the protection already assured to him in consequence
of the decline in the value of his purchased cotton.
When actual cotton is purchased or sold, as distinguished
from futures, the usual practice is to quote the price at so many
points on or off the price of futures.1 Such points are
called the " basis/' and selling on a " high basis " or on a " low
basis " means selling at a large or a small number of points on.
In normal times the fluctuations in the basis are not great, and
no special provision is required by bankers in this connection ; but
in the seasons 1919-20 and 1920-21 the basis in respect of some
qualities of cotton fluctuated as much as two to three thousand
points or more, causing unexpected loss or profit of very large
amounts.2 No form of futures contract can afford any protection
against these movements, and all the banker can do is to satisfy
himself that the importer has made his contracts on a proper
basis and call upon him to reduce the advances made to him or
put up additional security if the fluctuations are against him.
Reference has been made already to the hedging purchases of
futures by the American merchant exporter, who has undertaken
to deliver by a certain date cotton of specific grade and staple to
his customer in England. In addition to the risk insured against
on that particular contract, there is another risk against which
1 E.g. Spot Quotation (from Manchester Guardian, June 17, 1921) : —
Ord.
G.O.
F.G.O.
L.M.
F.L.M.
American
• 4'65
5 '4°
6-15
6-65
7-IO
i.e.
. 340 off
265 off
190 off
140 off
95 off
Mid.
P.M.
G.M.
F.G.M.
M.P.
American
- 7-65
8-30
8-70
9-40
1 0'6o
i.e.
. 40 off
25 on
65 on
135 on
235 on
The price of futures (F.M., L.M.C.) June delivery on that day was 8-05.
Hence M.F. was (10-60 — 8-05) xioo points on, and G.O. was (8-05—5-40)
xi oo points off.
Prices are in pence per lb., and a point is the one hundredth part of one
penny.
2 A change of 2,000 points in the basis means a change of more than
£"4,150 in the cost of 100 bales.
LEGITIMATE USES OF FUTURES 85
dealing in futures affords equal protection. The merchant has
to collect cotton through his agents or from factors in various
scattered districts over a wide expanse of the cotton belt, and
when he has a large order for a specific grade he cannot readily
know beforehand where he can buy. Hence, towards the close
of a day's business, when telegraphic reports of their purchases
have reached him from his agents, he may find they have bought
more than he requires. He then immediately sells on the ex-
change the number of bales bought in excess of his needs, but
instead of selling them in the spot market he sells futures instead.
If spot cotton falls in price next day, he sells the bales over-
bought at a loss and buys back his futures at a corresponding
profit ; for, as has been described before, spot and futures prices
move in sympathy. If, on the contrary, his agents have not
bought enough to cover the amount he has sold, he buys futures
instead, with a view to protecting himself against a rise in the
price when his agents again start buying for him on the following
day.
Contracts for future delivery were common in the cotton
trade for some time before their use as hedges was discovered.
According to a former President of the New York Cotton Ex-
change,1 it was two or three years after the Civil War that the
late Mr. Rew, a Liverpool merchant, saw that the newly-laid
Atlantic cabfe made it pubbibltj-fe*1 a cotton merchant in Liverpool
to buy cotton in the Southern States and ship it to Liverpool to
arrive at a date known approximately beforehand. He perceived
also that if the price for " cotton to arrive " was high enough to
enable him to make a profit by buying in America and selling for
forward delivery two or three months ahead in Liverpool, the
transaction was a perfectly safe one ; for he would either deliver
to the party to whom he sold, or, if the price had risen meantime,
buy back his contracts and sell to spinners at the higher price.
In this way he eliminated all risk from his business, and worked
on a much smaller margin than his competitors, who had to
allow for possible losses as well. On the organisation of the
three chief cotton exchanges (New York, New Orleans, and
Liverpool) in 1870 the leading members adopted this new method
as the basis of business.
It is strange that neither its inventor nor his imitators in the
early days of hedging realised at once the full significance, or even
the true economic basis, of the new method. They regarded it
simply as a device by which genuine cotton merchants could
make use of the natural inclination of foolish speculators to buy
for a rise in price, turning this into a form of protection or
insurance for themselves against a decline in the value of their
1 Marsh, " Cotton Exchanges and their Economic Function," Annals
of the American Academy of Political and Social Science, vol. xxxviii.
86 ORGANISED PRODUCE MARKETS
unsold stock of cotton. But it was soon perceived that it is just
as feasible to obtain protection against loss in transactions
contemplating delivery in the future, to hedge by buying con-
tracts for future delivery, as it is to protect oneself against a fall
in prices by selling contracts as hedges. There arose, therefore,
a demand for futures on the part of merchants and manufacturers
who were not speculators at all in any sense of the word, but who
were simply desirous of entering into engagements for the future.
These hedge contracts, both on the part of the buyer and of the
seller, were, from the first, regarded as primarily credit trans-
actions to be terminated as soon as their protection was no longer
needed. They could, of course, be turned into dealings in actual
cotton by any one who so desired, but in practice it was found
that only a small percentage of the whole was terminated in
this way.
The essence of hedging is the making of two contracts at
about the same time of an opposite,1 though corresponding,
nature ; one ^genuine trade contract, with a view to obtaining a
dealer's ordinary trade pront, the other an insurance or protective
contract, which counteracts speculative loss (and profit) on the
first transaction. The possibility of having to forego a large
speculative profit in this way is to be regarded as a premium on
an insurance policy 2 which guarantees the holder against specula-
tive loss. Just as both contracts are entered into at about the
same time, so they must be completed at about the same time.
Otherwise, speculative loss or profit ensues fand the holder be-
comes a gambler instead of continuing to be an honest merchant.
Owing to the wider area of origin and of ultimate distribution,
and because of the greater ease with which it can be handled, it
natural to expect that wheat should pass through a greater
number of middlemen than cotton, on its way from producer to
manufacturer and consumer. This, however, is not the case ; for
the greater degree of education of the wheat farmer, and the more
detailed attention given by governments to the movements of
what is one of the world's most important foodstuffs, have
eliminated at least one class of middleman and subjected the
remainder to an exceedingly close inspection and supervision.
In the United States wheat is delivered by the farmers to the
country elevators, of which there are three lands — independent,
1 As defined by another ex-president of the New York Cotton Exchange,
" a hedge or future is the purchase or sale of contracts for 100 or more
bales of cotton for future delivery made not for the purpose of receiving
or delivering actual cotton, but as an insurance against fluctuations in the
market that might unfavourably affect other ventures in which the buyer
or seller is actually engaged." But, as there are cases when dealing in
futures is certainly not hedging, it is incorrect to identify the two terms
" hedge " and " future," as is done in this definition.
2 This analogy, however, must not be pushed too far.
LEGITIMATE USES OF FUTURES 87
farmers', and line. The independent are single elevators owned
by individuals at selected country points. A farmers' elevator
company is an association of farmers usually on a co-operative
basis,1 while a line elevator company is a corporation with
its headquarters in Chicago^^uJJatli^- Minnp^olis, or other
primary market for grain,t>wning and operating a large number of
elevators along a line or lines of railroad extending through
several different States, and having a representative as a member
of one or more exchanges. At each of a line company's elevators
the wheat is bought from the farmers for cash after grading.
Owing to competition for the grain at country points there is a
tendency to allow as high a grade as possible, so as to secure
it from the farmer, with the result that it sometimes grades lower
in the primary market afterwards, and scarcely ever higher. It
is then held temporarily in the local elevator ; and, as it accumu-
lates, it is loaded into railroad cars and sent forward to the
primary market.
The price received by the farmer is that prevailing at the
moment in the primary market, minus deductions for freight and
probable deterioration. If, for example, the freight rate to
Duluth were 6 cents per bushel, and the margin of the elevator
company for handling wheat were 3 cents per bushel, then the
country price would be 9 cents less than the price in Duluth.
Flax, oats, maize, and barley are also handled by these companies ;
but, while oats and coarse grains are dealt in on a smaller margin
than wheat, flax, owing to its greater liability to deterioration, is
only dealt in on a margin of 6 or more cents per bushel. Daily
lists of prices are sent out from headquarters by letter and tele-
graph ; and changes conform to those taking place in the primary
market.
The farmers' elevator companies act similarly, with the
difference that they do not always have seats on the exchanges,
but have to employ commission men. They have certain ad-
vantages over the line companies, in that they can get control
more readily of the available supplies of grain ; for their members
give them preference inasmuch as the profits of the concerns
depend on the amount of produce handled. There are often, at a
single station, four or five line elevators owned by different com-
panies and a single farmers' elevator owned by the farmers of the
neighbourhood. Yet the latter may handle from one-third to one-
half of the grain sent forward from that station, thus doing a much
greater volume of business at approximately the same expense, and
therefore at a lower cost per bushel than the line companies.
The inducement, therefore, to develop the handling of their wheat
by the farmers themselves is great ; and line companies find their
1 See " Co-operative Grain Marketing," United States Department of
Agriculture, Bulletin, No. 937.
88 ORGANISED PRODUCE MARKETS
most profitable sphere only where capital is scarce and farmers'
societies not yet fully developed. Statistics show a continual
increase year by year of farmers* elevators accompanied by a
marked decline in line houses and a smaller decline in independent
houses.
The management of the independent elevators is identical
with that of the farmers', except for the co-operative ownership in
the case of the latter. In competition with line elevators, the
independent have the advantage because they are regarded as a
competitive force in sustaining prices. Like the farmers' com-
panies, they employ commission men to dispose of their grain
in the primary market.
On reaching the primary market the grain is sold on the floor
of the exchange, either by the line elevator companies' repre-
sentatives, or by the commission men acting for the farmers'
companies, or the independent elevators. The purchasers are the
large terminal elevator companies or millers.
There are three types of contract in use when the sale is to a
terminal elevator company — the " to arrive " contract, the
" on track " sale, and the " in storej' sale. The terms are largely
self-explanatory. In a "to arrive^' sale the country elevator
sells large lots of ten to one hundred thousand bushels, undertaking
to deliver within fifteen days. The wheat is then sent forward at
once to the purchasers ; and the trouble of selling each railroad car
load on its arrival is dispensed with. This is a convenient method
of taking full advantage of temporary advances in the primary
market prices.
In an " on track " sale the wheat is sent forward from the
country elevator unsold. Upon arrival in the primary market it
is sold in car lots, and, at the time of sale, the railroad company is
given orders to switch the cars to the purchaser's warehouse. The
unloading is done under supervision of State officials, and the
weighing by one of their number. On this basis the seller then
makes out his bill and presents it for payment.
In an " in store " sale the wheat is not sold immediately on its
arrival in the primary market, but is stored in a terminal
elevator company's store for the account of the country owner. All
public elevators are required to accept grain for storage as long as
any space remains ; and the country elevators may use these facili-
ties, on payment of the storage charges, awaiting more favourable
conditions for marketing the grain. When the grain is sold,
delivery is made by endorsing the elevator receipt to the purchaser.
A line elevator company, having usually a large capital, and
having always its own direct representative on the exchange, is
not confronted with the same difficulties in financing its business
as the farmers' elevator companies and the independent
elevators, which have to employ commission men. The latter
LEGITIMATE USES OF FUTURES 89
receive a commission of so much per bushel (i cent in case of
wheat) for their services, which often include the providing of
valuable credit facilities for their clients. When the independent
dealers and the farmers' elevator companies send forward wheat
from their country elevators they cannot wait for payment until
it is sold in the primary market ; because their capital is not
sufficient to enable them to purchase more grain without im-
mediate payment for what they have already disposed of. It is
then the commission man comes to the rescue by permitting them
to draw a bill on him and lodge it, along with the bill of lading of
the wheat, at their local bank, which is prepared to grant them,
on this security, the further credit they require. In a normal
state of the market they may draw against their commission men
up to 90 per cent, of the value of the wheat sent forward.
A more difficult situation arises for the country elevators when
no railroad cars are available to carry the wheat forward to the
primary market. They soon come to the end of their capital
resources and have no further money to pay for the grain which is
still coming in from the farmers. In such an emergency the
commission firms advance funds on open account up to a certain
amount without requiring bills of lading or other security to be
deposited. When the grain finally reaches the primary market
and is sold, these advances are, of course, deducted in making the
settlement.
Most of the wheat reaching the primary markets is sold to the
large terminal elevator companies and to millers for local use.
The latter is particularly the case in Minneapolis, the largest mill-
ing centre in the world ; while in Chicago and Duluth by far the
greater part finds its way to the elevator companies. These com-
panies own public elevators and must accept grain for storage at
certain uniform rates. They, however, mainly purchase outright
on the exchanges as already described, and store the wheat until
they re-selL when convenient. Much judgment is needed in
reaching a oecision when to buy and when to accept for store only,
on behalf of others. Normally, wheat can be bought in the
months immediately succeeding harvest at a price which is less
than futures of the months later in the crop year by just the
amount of the carrying charges ; but outside factors often intervene
to spoil this harmony.
As wheat is graded both on being delivered to the terminal
elevators and on leaving them, it is possible for the companies to
derive large profits from mixing grain if they can succeed in
obtaining, on the whole, higher grades on the " out inspection "
than on the ' ' in inspection." This is regarded as a perfectly legiti-
mate proceeding if carried on under certain conditions ; and there
can be no doubt that the services performed, such as cleaning the
grain when it is in their keeping, clearly entitle them to some reward.
90 ORGANISED PRODUCE MARKETS
To carry large quantities of wheat for several months
evidently requires considerable capital, but in addition to their
own capital these companies borrow largely from the banks.
The very stringent rules governing the issue of elevator receipts
make these documents acceptable to the banks as security ; and
the latter ordinarily lend up to quite 90 per cent, of their market
value if lodged with them as collateral security.
From the terminal elevators the wheat is sold to the exporter
or shipper who may purchase in the primary markets or in markets
on the sea board, such as the New York Produce Exchange or
Philadelphia. In both cases the procedure is identical ; but it is
desirable, before passing on to it, to describe how hedging is
accomplished by the several interests through whose hands the
grain has passed up to this stage.
When a country elevator buys wheat from farmers it may, for
several reasons, have to wait some time before passing the grain
on to the primary market. It must therefore protect itself
against a decline in price in the meantime. This is done by
hedging. Suppose 5,000 bushels have been bought for cash from
farmers shortly after harvest, at a tune when the price in the
primary market is $1.20 per bushel. An equivalent amount of
May futures is then sold in the primary market ; and, as the price
of May futures usually exceeds that of spot by the cost of carrying
the wheat until May, their price at that moment is probably about
$1.26 per bushel. If the cash price declines to fl.lS when the
wheat is sent forward there is a loss of two points per bushel upon
the actual wheat held. But it is extremely probable that a
similar drop, for precisely the same reasons, will take place in the
price of May wheat. Accordingly, the country elevator can buy
back May futures at $1.24, thus gaining on the futures what it
lost on the spot sales. As it had already provided for its ordinary
trade profit in the difference between the primary market price
( $1.20) and the price it paid the farmer (probably about $1.10), it
has thus ensured itself against loss consequent on the fall in price.
In an exactly similar manner it foregoes extra speculative profit
arising out of a possible advance in price, but this self-denial is the
cost of the protection afforded by the hedging transaction.
All country elevator companies hedge. In fact, the keeping
of their purchases properly hedged is an essential condition of their
receiving credit or advances from the commission men.
What applies to the country elevator companies applies with
equal force to the terminal elevator companies. They may have
to hold large quantities of wheat for which there is no immediate
demand by millers or exporters. They therefore run similar risk
of heavy loss owing to a decline in price, or, on the other hand, in
case of a rise in price they likewise stand to gain. Even if
they were inclined to speculate and take chances, the banks
LEGITIMATE USES OF FUTURES 91
would not permit them. All wheat held by them on which a loan
is sought must be hedged. They are in the business of storing
and mixing grain. The assumption of speculative risk is the
function of another class.
Millers who sell flour in advance also find it advantageous to
hedge. If a miller in August enters into a contract to supply flour
in January, he will require the wheat in November and December.
He therefore bases his price upon the August price for wheat to be
delivered in November or December ; and at once buys futures of
the latter. He thus gets the wheat at the time he wants it and at
a price which assures him his legitimate milling profit. In this
case, futures are purchased to cover sales of flour in advance, and
delivery is usually contemplated by the buyer. If, however, a
special grade of wheat is required, and one not tenderable in fulfil-
ment of futures contract, the miller sells his futures and purchases
his requirements in the spot market. The fact that prices of the
various grades of wheat always move in the same direction makes
a hedge in the contract grade an adequate protection, even if it is
another grade that is required.
The exporter is often in a position similar to that of the
terminal elevator companies in having to buy up large quantities
of wheat and hold it for longer or shorter periods. To quote a
leading American exporter 1 —
" From an export or milling standpoint you cannot always buy
the grain you need in the exact position desired ; it must be bought
when there, and, perhaps, at that moment foreign markets or
domestic flour markets are not in line to buy the product the same
day ; in which case we use the hedge in the market to guard against
any material fluctuation in the price basis while we are awaiting a
market for the actual wheat. As a rule, these hedges would be
placed as far off as possible, because in normal markets the far off
hedges can usually be sold at a premium over the cash price, thus in a
measure getting back the expense of storing, insurance, and interest."
The following extract from The Market Reporter 2 of June n,
1921, is of interest, for it points out another aspect of the
exporter's work —
" A fair export business in new crop wheat for shipment up to
September has been reported. The September future has been the
basis for export transactions since trading for delivery in that month
began. That is, exporters have sold wheat for export for deferred
shipment and at the same time bought the September future as a
hedge."
The wheat trade in Canada is regulated by the Dominion
Government under the Canada Grain Act of 1912, and, in a general
1 Mr. J. H. Barnes, former President, Duluth, Board of Trade.
8 The official weekly publication of the United States Department of
Agriculture Bureau of Markets and Crop Estimates.
92 ORGANISED PRODUCE MARKETS
way, Canadian methods resemble those of the United States.1
The later development, however, of the Manitoba wheat -fields
has enabled American experience to be drawn on, and many
improvements to be introduced from the very outset in Canada,
which even now are still under discussion elsewhere. For the
purposes of the trade, two divisions are made, the eastern and the
western. The former comprises the maritime provinces of the
Atlantic, Quebec, and that part of Ontario east of Port Arthur.
The latter comprises the remainder of the Dominion, including the
city of Port Arthur. The Winnipeg Grain Exchange is the only
important grain market in the Dominion.
The country elevators in Canada are now mainly owned and
operated by large farmers' co-operative companies, though many
still belong to ordinary commercial companies. From the country
elevators, the wheat passes on to " public " or " eastern " elevators
after inspection and grading. Thence it is sent forward to
" terminal " 2 elevators, where it is graded again on both entrance
and exit. From them it passes to the exporter or miller. The
Dominion Government may itself erect and operate terminal
gram elevators under the Canada Grain Act ; and the wide powers
of inspection possessed by it ensure complete control over those
in use that it has not yet taken over. There are also " hospital "
elevators for the cleaning and special treatment of rejected or
damaged grain, and " mill " elevators for use in the manufacture of
grain products in the western division.
Though the prosperity of Canada is now largely dependent on
the progress of the western grain trade, it is a trade of very recent
origin ; for it was not until 1884 that wheat was exported from
provinces other than Ontario. The great distances to the Canadian
Atlantic ports, the poor f acilities provided by them for handling
grain in the early days of the trade, and the smaller and less varied
trade at those ports than at those of the United States all com-
bined to divert the export trade to American ports ; and it is only
comparatively recently that attempts to keep the trade altogether
in Canadian territory 3 have met with a measure of success.
Tariffs for a time prevented trade in wheat between Canada
and the United States itself, and Canadian wheat passed in bond to
United States ports. This is still largely the case, not withstanding
1 For detailed description two recent publications may be consulted : the
Stewart- Riddell Report to the Government of Saskatchewan on Wheat Mar-
keting, Regina, 1921 ; and the Report on the Winnipeg Grain Exchange,
September 10, 1921.
2 So-called because, there, all government grading and inspection ceases.
3 See Porritt, " Canada's National Grain Route," Political Science
Quarterly, vol. xxxiii. pp. 344-77. Report of Trial Shipment of Bulk
Wheat from Vancouver via the Panama Canal to the United Kingdom,
Department of Trade and Commerce, 1918. Report on the Grain Trade
of 'Canada, 1920, p. 8.
LEGITIMATE USES OF FUTURES 93
the absence now of any tariff restrictions, probably in order to
maintain identity and Canadian grades ; and dealings in Canadian
wheat futures are not common on the American exchanges. Yet
they do occur, and in 1912 rules were drawn up by the New York
Produce Exchange for their control. Bonded wheat at the port
of New York is always Canadian grown, and offers to buy it or
sell it for future delivery must be made in lots of 5,000 bushels or
multiples thereof. The four statutory grades of Manitoba spring
wheat are deliverable on these contracts — No. i Northern, with-
out either premium or discount, No. i Hard (the wheat which
gave Manitoba its fame) at a premium of i cent per bushel, No. 2
and No. 3 Northern at discounts of 3 and 8 cents per bushel
respectively. These premiums and discounts, of course, may be
changed so as to conform to any change made in premiums or
discounts in the Canadian markets. The direct trade between
the two countries is normally small ; but there was a marked
increase in 1920, l there being heavy exports of old wheat from
the United States to Canada between May and August (the last
four months of the crop year) and large imports from Canada of
the new crop in October and November. Much of the American
wheat sent to Canada is re-exported.
An American or Canadian exporter of wheat buys largely in
the primary markets of the United States and in Winnipeg, and
sells through brokers on the exchanges of the United Kingdom
and the Continent. His offers are cabled in the afternoon of one day
and the acceptances are received by him the following morning
with the names of the purchasers and shipping directions. He then
contracts for ocean freight to the amount needed, whether the
sale is for immediate or future shipment. This he can do on the
exchange, because shipowners are represented there. It is in
connection with this item that he has to exercise the greatest care ;
for freight rates are subject to considerable fluctuation, against
which no protection that is adequate can readily be obtained.
When details are arranged the exporter draws a bill against
the purchaser, and payment is obtained just as in any ordinary
import and export transaction. Many considerations weigh with
such a dealer in fixing the price at which he can sell, such as the
price at which he has bought, the rate of exchange between New
York and foreign centres, freight, insurance, broker's commission,
and so on. During the time he holds grain awaiting shipment he
hedges in the usual manner.
In addition to his own export business, an American exporter
in the seaboard market may act as agent for an exporter in a
primary market, or for Canadian exporters who have to use
American ports. In some cases, too, he may act as representative
1 See Bradstreet's, January i, 1921. This increase is being maintained
in 1921.
94 ORGANISED PRODUCE MARKETS
of a Liverpool or Continental importer. For all these extra
duties he is remunerated on the' basis of an agreed commission.
The Liverpool Corn Trade Association, Limited, now provides the
only marketer J ului£siiL.wheat in Europe. Its form of contract 1
permits trie tendering of a fairly large number of grades or types.
This is of distinct advantage to millers and others who use Liver-
pool grain futures as hedges ; for the professional gambler is not
so common there as on the America Exchanges, and futures
are consequently more often used for their legitimate function.
The Liverpool method of making allowances for differences
between the tenderable grades is a variant of the method of fixed
differences usual in America. Each tenderable variety must weigh
so many pounds per imperial bushel at the time of grading ; and
this basis of weight is altered with the grade. For instance,
Northern Spring wheat, grown in the United States, is tenderable
with basis of weight 59 Ib. ; while American Hard Winter wheat
must have basis 60 J Ib., and so on. In addition, mutual
allowances for superiority or inferiority of grade may be permtted,
provided they do not exceed one penny per cental (100 Ib.) .
The general principles underlying hedging in the Liverpool
grain market are not different from those already discussed in
connection with hedging operations in the other grain markets
and in the cotton market. Since Liverpool is second only in im-
portance to Minneapolis as a flour milling centre, it is natural to
expect that most of the hedging there is done by millers. This is
accomplished in two ways, one of which has been referred to before
as the normal way of the American miller. The other, the method
of which is not uncommon in America also, consists in buying
specific lots directfrom foreign exporters, through agents on the
spot, and the^sdiffiglmmedialaly in Liverpooi~alT equal quantity
of wheat (Liverpool grade) foToelivery aT~a1rcmt the time the
cargo is due to arrive. If the price falls in the interval, the
miller's output from this newly arrived wheat will have to com-
pete with flour made from cheaper wheat ; but in return for the
loss so experienced there will be a corresponding profit on the
futures sold, for they can be bought back at a lower price.
Similarly, if prices advance in the interval, what is gained from
the resultant advance in flour is lost on the re-purchase of the
futures. Of course, the balance of loss and gain will not be exact
in either case ; for, just as with cotton, there may be divergences
between the price movements of the standard grade and those of
the grades the miller requires. These, however, are seldom great,
and hedging in this manner is an almost perfect insurance.
If these two methods of hedging were practised equally on the
same exchange, the resulting risks would largely cancel one
another, leaving very little to be borne by the professional
1 See Appendix IV.
LEGITIMATE USES OF FUTURES 95
speculative element in the market. But, on the whole, it would
seem that there are fairly cogent reasons why millers should
prefer the first method, and ensure getting what they need by
first buying futures on the exchange and then invoicing them
back, or selling them (to buy the grades they need in the spot
market), rather than by entering into contracts for the future
delivery of specific lots. Contracts of the latter kind are difficult
to conclude and uncertain as regards fulfilment. Moreover, the
high degree of perfection to which British milling has attained,1
and the very great variety of wheats offered at any moment in
the Liverpool spot market, make it easy for a miller to obtain a
choice of several groupings of grades, any one of which will give
him the result he requires. Therefore, if he purchases futures
apportioned to the times when he needs wheat, he obtains com-
mand of the requisite funds at the proper moment ; and he can
buy, after inspection, one of the combinations of varieties suited
to his purpose. Incidentally, he can take advantage of possible
fluctuations in the relative current prices of the various sorts, and
can select that combination which gives him a greater profit than
the others open to him at the moment.
The practice of hedging, therefore, is universal in the cotton
and wheat trades. Merchants rarely or never take up uncovered
positions, and not to hedge is to be a speculator or a gambler of a
reckless kind. More than ninety per cent, of the holdings in the
great wheat elevators in the primary markets of the United States,
and in the Canadian elevators also, are protected in this way ;
and nine-tenths of all the cotton shipped from America to the
Mersey is sold against either in New York or in Liverpool.
To sum up, then, in brief, the case f orjutures dealing, it would
seem that, in the first place, it f a^clKges~the_banks in_financing / ,
the movement of produce ; because it increases_the security for
loans, and^jxjTthe liquldity^ljhe^^urity, since there is always
a market forlutures. " More7>ver7iFpe7mrls those engaged in crop
movement to work with considerably less capital than they would *- •
otherwise require.
In the second place, it is advantageous to these latter interests
in another way ; for ^enables them tp^ insure against thejrisk of fy*
price_fluctuations, and thus to trajJe'onji smaller mar^Q^fprofit.
Finally, it is advanfa^^u^~to~EIie~^)roducer because it frees j.
him from the risk of price fluctuations which, otherwise, would be
thrust upon him. At the same time, it secures him more com- */.
petition for his produce, and thus reduces his marketing costs.
Wheat anH cotton are, in consequence, marketed at less cost to
the farmer than the other farm products which are not the subject
of dealings in futures.
1 See Hubback, " Some Aspects of International Wheat Trade," Eco-
nomic Journal, vol. xxi. pp. 121-31.
CHAPTER VIII
THE WORK OF THE EXPERT SPECULATOR
EXPERT risk taking, or professional speculation, the existence of
which is necessary for successful hedging on the part of genuine
traders in the organised produce markets, is a comparatively
recent development, owing its growth to the new economic con-
ditions of the last half century. The increase of large scale pro-
duction in industry, with its accompanying concentration of
population, rendered more difficult the problem of equal distribu-
tion in time of the main staples of commerce. This could only be
solved by a very systematically developed process of exchange
under which changes in value inevitably assumed an importance
they had hitherto lacked. It is in connection with these fluctua-
tions that the new class of speculator originated ; and the service
it renders, to society is that of bearing risks incident to changes
in value /In other words, trading risks.
In a primitive state of society agriculture was attended by
the risk of failure of crops. As long as the community sought to
produce only just enough for its own support, the risk run was
the simple one of failure. It was not until it began to raise more
corn than was needed for its own use, in the hope of exchanging
the surplus for other commodities, that the risk became of quite
another kind. Crops might be produced in all the abundance
desired ; but, unless there were others who wanted the surplus, and
had, in turn, a surplus of other commodities to offer, it would
profit the community nothing. In other words, the production
of a surplus with a view to exchange gave rise to a new risk —
trade risk. The corn produced might not be of the value ex-
pected, and, in so far as the risk of this possibility was assumed,
the community speculated.
So long as society remained in a simple state of organisation,
producer and trader were one and the same person who bore the
double risk of production and of trade. In the case of some com-
modities this condition lasted during a considerable period ; but
in the case of others there soon arose a distinct trading class, who
bought to sell again, with a view to making a profit on the trans-
action. Such a class is not necessary for exchange, and some
96
THE WORK OF THE EXPERT SPECULATOR 97
business is still done without the trader intervening, but no large
development of exchange of goods is possible until such a class
arises and the trader becomes differentiated from the producer.1
This new class soon became ready to take over at any time the
surplus product of the producer class and to arrange for its
exchange when possible. Thus, it took over the trading risks of
a change in value from the producers and became the speculating
class in the community.
As men gave up the idea of producing only for their own
consumption, the market for the exchange of goods became more
steady and the growth of intercourse among traders tended to
lessen the risks they were assuming. The rise of great centres of
trade and special markets, the gathering of traders at important
fairs, and their constant meetings at smaller centres, all in-
creased the knowledge of market conditions, and diminished the
risks of fluctuation in value. Moreover, the special organisations
formed by merchants (the forerunners of the modern exchanges)
brought together the leading traders and helped to spread in-
formation through a wider group. By these means trading risks
were lessened, merely local influences discounted, and moderate
profits assured to the ordinary trader under ordinary circum-
stances.
In the case of agricultural products, the supply of which
depends on conditions of climate and weather which cannot be
controlled, and also in the case of goods from distant sources of
supply, there always remains the possibility of an unexpected
gain or loss far greater than is at the basis of trade in other com-
modities. This larger risk was beyond the ability of the average
trader to assume ; and in the course of time there appeared a
tendency for middlemen to divide into grades, and a distinction
sprang up between wholesale and retail dealers. When this
happened the risks were borne chiefly by the wholesale merchants ;
for the retailers dealt in small quantities, and, having only a local
demand to cope with, had little or nothing to fear from sudden
changes in supply. The chief economic functions, therefore, of
the trade were fulfilled by the wholesale dealers who had to develop
large centres of supply with facilities for storage, and who acquired
a detailed knowledge of the needs of each locality, and undertook
to estimate future conditions with a high degree of accurac}^.
Such is the existing system of trade in several commodities
to-day.
Before the development of transport and of telegraphic com-
munication, the important markets of the world were, on the whole,
1 See Fuchs, Der Waren-Terminhandel, Part III, and for the whole
question of the historical development of trade and commerce, Schonberg,
Handbuch, vol. ii, article " Handel " by Lexis, and the writings of Schmoller
and Lexis elsewhere.
B
98 ORGANISED PRODUCE MARKETS
independent of one another. Of course, the output at the sources
of supply ultimately affected value everywhere ; but conditions
changed so much more rapidly than news could be carried that,
except over long periods, it was the supply and demand within
each limited area that regulated the prices for that part. Con-
sequently, even the large wholesale merchants were concerned
only with local conditions ; and they bore as part of their ordinary
business such speculative risks as arose from the fluctuations in
price.
After the middle of the nineteenth century all this was
changed. Markets no longer were influenced by local conditions
only, and prices no longer depended on the stores in one centre
or even on the crop of one single country. The supplies of wheat,
for example, known to be in existence in any quarter of the world,
influence the price in the Liverpool /market ; and news of good or
bad crops anywhere is at once reflected in a universal change in
value. The wheat market has ceased to be local. It has become
a world market.
This new development, especially in the case of wheat and
cotton, has brought about a single price at any moment in all the
local markets, which are now linked together in one single world
market. Fluctuations in price are, therefore, no longer dependent
on local scarcity or abundance, but on world-wide connections
and distant conditions which no merchant, however well he knows
his own local market, can study sufficiently to justify him assuming
the new speculative risks caused thereby. He is primarily con-
cerned with buying, storing and moving actual commodities ; and
he has little time left to watch the ever-changing state of the
world market.
The need for a distinct group prepared to relieve the merchant
of the speculative element of his business has been met by making
sharper the growing differentiation between the trading element
and the element that was becoming more interested in speculation
than in business proper. The latter began to assume the new
risks by being prepared to take over from, and equally at any
moment to deliver supplies to, the merchant at an established
market price. Thus, speculation has become the business of a
special group and the speculators, instead of seeking their own
markets and moving their own goods, are a new class distinct
from both producers and merchants. " Whereas formerly each
man bore his own risks, the new class has arisen to relieve him of
these risks ; instead of all traders speculating a little, a special
class speculates much." I
From an individual point of view, therefore, the class of
expert speculators is that group which seeks to forecast changes
1 Emery, Speculation on the Stock and Produce Exchanges of the United
States, .p. 100.
THE WORK OF THE EXPERT SPECULATOR 99
in value, and buys and sells accordingly, with the intention of
securing as profit the difference between the two prices. From
the point of view of the genuine dealer it is that group in his
market which assumes the main risk of changes in value of the
produce as it passes from producer to consumer. It is a kind of
commercial scouting party sent ahead to discover and report
changes hi value, and thus to direct trade into those channels
along which the greatest efficiency requires it to run.
The fact that, like gambling, speculation depends on uncer-
tainties, tends to cause the two words to be used indiscriminately,
in referring to the produce exchanges, by those who wish to forbid
dealings in futures altogether. Whether the two terms are inter-
changeable, or whether intent or purpose is a sufficient criterion
whereby to distinguish between them, is open to question ; 1 but
there is one point always to be borne in mind in this connection.
In form there is no difference between a contract entered into by a
speculator and one entered into by a merchant who contemplates
actually to make, or to receive, future delivery of the produce.
Both incur the duties and acquire the rights of holders of property.
Delivery in every case may be tendered or demanded ; and due
provision is made on all exchanges for cases of failure of either
party to fulfil the terms of the contract. In gambling, on the
other hand, there is no similar acquisition of legal rights or duties.
One party must lose what the other wins ; and the case is not at
all analogous to that of a sale of wheat, for example, by a middle-
man speculator, at an increased price. In the latter instance
there has been an actual increase in value to which probably the
speculator has contributed by the responsibilities he shouldered
during the short time he has had constructive legal possession.
Again, the detailed nature of the work done by the speculator
sufficiently far removes it from the realms of the mere staking of
money on the artificially created risks of some chance event.
Using the collection of trade information and crop reports avail-
able, he has to exercise his judgment thereon in the form of actual
transactions, and thus convey this information to the general
public in the only way in which an impression can be made, that
is, by an alteration in the price quoted. By this means the effect
of a short or of a particularly good crop is discounted weeks in
advance ; and, when the bad or good news has become generally
known, its influence on the market price is apparently slight.
The speculators have already discounted the news, and the market
has already adjusted itself to the actual conditions. " With this
body of keen experts striving " by every means " to discover and
to foresee every event bearing on values, speculation has been
1 See Hadley, Economics, p. no, and MacCulloch, Principles of Political
Economy, also Report of Hughes Committee, referred to later in this
chapter.
ioo ORGANISED PRODUCE MARKETS
well defined as the struggle of the well-equipped intelligence
against the rough power of chance." 1
fAn expert speculator may either buy futures with the hope of
making a profit byre-selling at a higher price; or he may sell futures
with the hope of making a profit by buying in at a reduced price.
Those who trade for a rise are called " bulls/' and are said to be
" long on the commodity," or " on the long side of the market."
If their expectations are realised and the price does go up, they
sell out and are said to " unload " or " liquidate " or " realise/'
and take their profits. Those who trade for a fall are called
" bears," and if they do not have the commodities at the time
they sell they are said to " sell short," or " to make a short sale."
If their expectations are realised and the price falls, they are said
to " cover " their short sales by making a purchase of the same
amount deliverable at the same time.
It may happen that a seller of wheat (or other commodity), on
an exchange, for future delivery has the actual grain in his posses-
sion, and is therefore protecting it by hedging, and is not a specu-
lative short seller at all. Yet, so far as the market for futures is
concerned, he appears as a short seller ; for in a sale for future
delivery there is no way of telling whether the grain is in the
hands of the seller or not. Investigation shows that a fair pro-
portion of the sales of futures on all the exchanges are purely
speculative short sale-
Every seller for rature delivery must contemplate actual
delivery in the period named in the contract, and similarly every
buyer must contemplate actual receipt ; but the aggregate amount
of the commodity represented by purchases and sales for future
delivery vastly exceeds the amount actually delivered. The
annual American cotton crop, for instance, is said to be sold from
twenty to forty times over on the cotton exchanges, and the same
applies to wheat. This is because the commodity is bought and
sold over and over again for future delivery a great many times
before the month of delivery arrives.2 When a dealer buys
1 Emery, op. cit., p. 117, translated from Cohn, System der Finanzwis-
senschaft, p. 463.
2 The number of futures transactions in comparison with the actual
grain handled on an exchange may also be increased in one or more of the
following ways : —
(a) Wheat stored in elevators in October, for example, is sold against
in the futures market for a certain delivery. It is found necessary very
often to change the delivery period, every month perhaps, as the storage
continues. Every such change of hedge from one delivery month to another
is a new transaction in futures, even though there is no change of ownership
of the grain.
(b) Hedging in distant markets may be practised. Grain moving
from Australia to Hamburg, for example, "may be sold against in Liverpool
or Chicago or Winnipeg.
(c) Transfer of hedges may also take place. A holder may sell out
THE WORK OF THE EXPERT SPECULATOR ; xoj
1,000 bales of cotton or 5,000 centals of wheat as a speculation
he may re-sell it within an hour or two at a small profit per Ib.
or per centaLJ The dealings of a single trader may thus amount
in the course of one day to a very large number of bales or centals.
It is this constant buying and selling that makes the " con-
tinuous " market which is such a necessary feature of the exchanges
for those merchants who wish to hedge, and which accounts for
that very large volume of dealing in futures which is so often the
subject of adverse comment by those who consider legitimate
speculation to be gambling. It is by this continual interchange
that price is adjusted to supply and demand ; and the larger the
volume of futures handled in any one market, the more delicate
is the adjustment to the influences that ought to help in its
det er mination .
'The method by which futures are largely cancelled one by
another has been already referred to in the discussion on clearing
houses. By this means hundreds of contracts involving exceed-
ingly large amounts of produce disappear, leaving very few over
to be carried out by the actual delivery of produce. Even these
are only terminated by delivery when there is a strong desire on
the part of the buyers to receive produce. The fact is, such
contracts are not permitted to run on to their delivery periods
unless the buyer has purchased with that intention. The specu-
lator constantly balances up, in some markets so frequently that
he is rarely long or short, even from one day to the following. It
is only those who actually wish to deliver who remain short until
the delivery period, and only those who really desire produce to be
delivered to them that remain on the long side of the market^
It has sometimes been advocated, by those who wish to curtail
what they consider to be the gambling element on the exchanges,
that dealing in futures should take place only in connection with
hedging transactions, and that speculation unconnected with the
protection of actual transactions, but merely with the object of
obtaining profits from price fluctuations, should be prohibited.1
This is hardly practicable, and, even if it were, it would so narrow
and cripple the market for futures as to destroy its efficiency for
hedging purposes. Apart from the difficulty of determining the
meaning of orders from outside markets, and much hedging is
done in distant markets, it would be impossible, even in the case
of contracts concluded within a single market, to ascertain
whether the buyer or seller, or both, were hedging or speculating.
Moreover, the trouble of finding at any one moment when a dealer
requires, say, 10,000 bales of cotton as a hedge, a person or persons
futures in Liverpool and buy an equal amount in Chicago or Winnipeg.
Certain market conditions might render this desirable.
Similar considerations hold good in the case of cotton.
1 By legislation similar to the Capper-Tincher Act, Appendix I.
X02 ORGANISED PRODUCE MARKETS
who wish to sell in the aggregate just 10,000 bales as a hedge
would be serious. Such a condition might exist once in a while,
but it is highly improbable that, as a rule, the wants of hedgers
would exactly offset one another during business hours from day
to day. Indeed, it is certain that this rarely happens ; for hedging
sales at one time of the year exceed hedging purchases, and the
opposite is true at another time. When produce is being collected
in warehouses and elevators during the autumn, hedging sales,
many in number, have to be made ; while, later in the crop year, as
the stores diminish, the volume of hedging purchases is the greater.
Cotton spinners and millers do perhaps distribute their hedging
purchases with some approach to uniformity all the year round ;
but they constitute only a portion of the whole market. The
market for hedging transactions is, therefore, dependent on the
existence of the expert speculator. He is ever ready to buy and
to sell, stepping in to level up when either buyers or sellers are
in demand. It is on him that the continuity of the market de-
pends, without which there could be no means of insurance to the
actual dealer in produce. Hedging would be almost impossible
without him.
The bear speculator is one of the strongest factors in
steadying price movements, and in obviating extreme fluctua-
tions. It is not that short sellers actually determine prices.
All they do is simply, by the act of selling, to express their
judgment as to what prices will be in the future. If they are
mistaken, they pay the penalty for their errors of judgment, by
having to enter the market and buy at higher prices. Most
people are unduly optimistic ; and the higher the price goes the
more elated they become. The presence of short sellers resisting
this tendency to excessive rise is very salutary ; for it makes an
excessive rise extremely expensive. At the same time, when the
drop takes place, short sellers, to realise their profits, must
become buyers in order to cover. In this way, an excessive drop
in price is likewise avoided. Short-selling, therefore, does not
unduly depress prices as is often asserted ; but it is, instead, a
very powerful agent in steadying them. Over and over again
prices are sustained or are put up at the expense of the shorts, who
often, when a fall really occurs, hasten to cover before the drop
becomes too great, only to succeed in driving the price up to and
beyond its former level. Short selling is thus a beneficial factor
in steadying prices ; and it is by its means that the discounting of
serious and unfavourable events does not take the form of a
series of sudden catastrophes, but, instead, is spread out over a
reasonably long period of time, permitting the real holder of
produce to observe what is happening and giving him time to
limit his loss if he is caught on the wrong side of the market.
From the constant contests of short-sellers with the bulls a much
THE WORK OF THE EXPERT SPECULATOR 103
truer level of prices is evolved than could otherwise ensue. ' To
quote the Report of Governor Hughes' s Committee on Speculation in
Securities and Commodities,1 " no other means of restraining
unwarranted marking up and down of prices has been suggested "
anywhere ; fdrS the bulls take care of the interests of the farmer
and are always looking for an opportunity to send prices up ;
while the bears represent the consumer, always on the watch
to buy at the lowest price possible.
The question naturally arises concerning the source of the pro-
fits of this class of expert risk takers ; for it is obvious that with-
out profits it could not long continue in business. One source,
indeed, consists of the small losses incurred by the genuine dealers
in produce when they hedge, the sums already described as re-
sembling premiums for the insurance against heavier loss afforded
by hedging transactions in general. As this is largely offset by
similar gams on the part of the same dealers, it cannot be the real
source from which the speculators obtain the greater part of their
remuneration.
There are no adequate statistics of the ultimate sources from
which the profits of the successful expert speculator are derived.
The main contribution comes probably not from producer, con-
sumer, or genuine dealer, but from the very many small specula-
tors drawn from the outside public who, in the long run, always
lose,2 and from the occasional large speculator who happens to err
and has to pay heavily in consequence. " The outside public,
more especially in the United States, at times undoubtedly
speculates heavily in cotton," 3 and invariably loses when it
does so.
Some years ago it was estimated that 105,000,000 bales of
cotton were sold annually on the New York Cotton Exchange.4
About the same tune there was reason 5 to suppose that approxi-
mately one-third of the cotton sales were then between member
and member of the exchange ; one-third between members of the
exchange and outsiders, and one-third between one outsider and
1 New York, 1909. Reprinted in Van Antwerp, The Stock Exchange
from Within.
2 " While it is true that the speculative dealings of these incompetent
individuals do in a measure broaden the market, and assist in the distribu-
tion of the crop, still the injury inflicted on these individuals by their losses
is out of all proportion to the service which their speculative dealings
perform in the crop distribution." McHugh, Modern Grain Exchanges,
pp. 22-3.
3 Wyse, " The Selling and Financing of the Cotton Crop," Economic
Journal, vol. xxx. pp. 473-83.
4 United States House of Representatives, " Hearings before the
Committee on Agriculture on Dealings in Futures," Gist Congress, 2nd
Session, 1910.
5 See Hays, " Functions and Needs of our Great Markets," Annals of the
American Academy of Political and Social Science, vol. xlv.
104 ORGANISED PRODUCE MARKETS
another outsider, the members in this last case acting as com-
mission men only. Calculating merely the commission fees
exacted by members from the outside public, if an equal division
had been made among them the share of each would have been
close on 16,000 dollars, a sum which alone would have paid all
expenses and left a very fair profit besides. But, in addition,
there were the profits on their dealings as principals with the
outside public ; and there was also some swallowing up of the
smaller fry by the larger in the one-third between member and
member.
Similar figures, but less reliable, have been obtained for the
Chicago Board of Trade. There is evidence that the speculative
dealing in wheat in that market by outsiders is exceedingly great,
and that probably even larger sums than in New York find their
way into the pockets of the successful Chicago expert.
In Liverpool, while speculation by the outside public is not
unknown, commission, brokerage and profits taken from fellow
members constitute the sources of remuneration for the members
both of the Corn and the Cotton Exchange. The skill with which
hedging can now be accomplished in the English grain trade
makes large operations less risky and dangerous. There is,
therefore, a tendency for the more expert speculators constantly
to absorb their less successful rivals, a process which is resulting
in the concentration of the trade in fewer and fewer hands. *^>
The question of the legality of futures, especially when
entered into by the expert speculator who does not intend to
accept or tender delivery, has come up for discussion before the
American courts on more occasions than one. It seems to be
settled, and the decision is in agreement with English Common
Law, that the sale of property to be delivered at some future
time is entirely legal, even though the property in question is
not at the time of sale in the possession of the seller. It,
apparently, is equally well established that the transaction is a
gambling one, and therefore void, if the two parties to such a
contract of sale intended at the time of sale not to make or
receive an actual delivery, but to settle by payment of differences
on the future price of the property under discussion. To quote
one judge, " The principle of the law is clear ; the trouble arises
when its application is attempted to a concrete case. Further,
almost all discrepancy seems to arise through lack of a complete
determination of the facts, or the unwillingness or inability of the
judge to understand their real nature." As illustrating general
everyday opinion, the point of view that really prevails and is
acted on in business circles, o, statement of the American Bureau
of Corporations may be quoted. " The seller of such a contract,"
1 See Rathbone, "Grain Futures, their Effects and Tendencies,"
Transactions, Section F, British Association, 1896.
THE WORK OF THE EXPERT SPECULATOR 105
says a Bureau report, " is absolutely liable for delivery, and if
called upon for such a delivery by the buyer he can in no way
avoid compliance with the terms of his contract, except under
unusual conditions, especially provided for. . . . When the time
for making delivery has expired, he cannot sell out his contract.
This fact, and the fact that any buyer from the first to the last
can, if he chooses, hold his contract and compel the seller to deliver
actual cotton (grain, etc., as the case may be) when the date of
maturity arrives, gives trading in futures a character entirely
different, in principle at least, from that of a mere wager or bet."
Again, in giving judgment in a case involving the Chicago Board
of Trade in May 1905, Mr. Justice Holmes of the Supreme Court
of the United States remarked that, " of course, in a modern
market contracts are not confined to sales for immediate delivery.
People will endeavour to forecast the future and to make agree-
ments according to their prophecy. Speculation of this kind by
competent men is the self -adjustment of society to the probable.
Its value is well-known as a means of avoiding or mitigating
catastrophes, equalising prices, and providing for periods of want.
It is true that the success of the strong induces imitation by the
weak, and that incompetent persons bring themselves to ruin by
undertaking to speculate in their turn. But legislatures and
courts generally have recognised that the natural evolutions of a
complex society are to be touched only with a very cautious hand,
and that such coarse attempts at a remedy for the waste incident
to every social function as a simple prohibition and laws to stop
its being are harmful and vain."
The Hughes Committee,1 on the other hand, while admit-
ting that speculation was a necessity and that the rules of all the
exchanges endeavoured to suppress mere gambling, went on to
point out that the technical delivery of produce was so easy that
the practical effect of much speculation, in point of form legiti-
mate, was not very different from that of gambling. Speculation
having all the legal features of legitimate trading might in fact be
mere wagering accompanied by most of the evil effects of gambling
on a large scale. Therefore, the New York exchanges were urged
to exercise more rigid supervision and to suppress inordinate
speculation, but the Committee, on the whole, wisely subscribed
to the views of Mr. Justice Holmes, and refrained from recom-
mending any addition to the law of the State on this subject.
In England, popular prejudice against speculation and buying
for deferred delivery found expression in restrictive legislation at
quite an early date in the history of commerce. In the Plan-
tagenet period, English merchants were forbidden to forestall wine
in Gascony, or buy it up before the vintage. Neither were they
allowed to charge high prices for the wine on the pretence that they
1 See p. 103.
106 ORGANISED PRODUCE MARKETS
ran risks ; l and by statutes passed at the beginning of the reign
of Edward VI. it was enacted that " whosoever shall buy corn or
grain with intent to sell it again shall be reputed an unlawful
engrosser and shall, for the first fault, suffer two months' im-
prisonment, and forfeit the value of the corn ; for the second,
suffer six months' imprisonment, and forfeit double the value ;
and for the third, be set in the pillory, and suffer imprisonment
during the King's pleasure, and forfeit all his goods and chattels."
As late as 1800 there was a conviction at Common Law for the
crime of re-grading, one, Rusby , being found guilty of selling corn
in the same market in which he had purchased it at an advance
of two shillings a quarter. Lord Kenyon, Lord Chief Justice of
England, at the end of the eighteenth century charged grand
juries, by way of remedy for the prevailing scarcity, to present
indictments under these long obsolete laws against re-grading
and forestalling ; and he decided in 1800, in the Rusby case, that
buying grain and flour and holding them for a rise for speculative
purposes was against public policy, and immoral, and that there-
fore all such transactions were void. A decision like this, so
subversive of ordinary trade practice, could not be allowed to
stand for long ; and in due course it was reversed, on appeal.
Since then there has been no real interference, either through
legislation or judicial decision, with ordinary speculative dealing
in England.
It is rather a remarkable fact that public opinion, both in
England and America, for a time was prepared to regard as
strictly honourable buying with a view to selling at a higher price,
while condemning as ethically wrong the selling of something
that the seller did not own. As a matter of fact, short-selling is
in no way confined to the exchanges. All manufacturers, when
not making to stock, sell goods before they produce them ; and a
builder who enters into a contract to hand over a house at a
certain date, makes his agreement even before he has bought the
raw materials or engaged the labour. Business could not be
carried on with any facility if contracts for future delivery were
to be confined in every case to delivery of things already owned
by the seller. There is no reason why cotton and wheat dealers
should not make contracts for delivery at a date when they know
they can fulfil their agreements by securing the amounts they
require. The so-called " fictitious " wheat or cotton of the short-
seller cannot possibly affect the market to the disadvantage of
producer or consumer ; for the bear must always cover his sales,
and in the end support the market by buying. Moreover, without
short-selling, arbitrage transactions would be impossible ; and in
this way again, the beneficent work of the expert speculator would
be gravely hindered.
1 See Cunningham, English Industry and Commerce, vol. I. p. 294.
THE WORK OF THE EXPERT SPECULATOR 107
Summing up, then, the services rendered by the class of expert
speculators, at least seven may be distinguished as of paramount
importance —
(1) By standing ready always to buy or to sell, it provides a
continuous market with all the advantages resulting therefrom to
both producer and consumer.
(2) By its watchfulness and its use of both official and other
information it discounts the future, prevents panics, and spreads
over a longer time the consequences of unexpected news, either
good or bad.
(3) It regulates the rate at which the crop is consumed ; and
it helps by its action to reduce the cost of " carrying " produce.
(4) By arbitrage transactions it levels prices between different
markets, thus ensuring that produce shall find its way to where
it is required.
(5) It steadies prices through the constant contest between bulls
and bears.
(6) It hastens what would otherwise be tedious by smoothing
difficulties in the way of necessary movements of produce. It is a
creator of what the theoretical economist calls " time utility."
(7) Most important of all, it is always ready to supply the other
party required in a hedging transaction, whereby, contrary to other
forms of insurance in which the risk is jointly shared by several
classes, it concentrates upon itself all the main risks of changes in
value, and incidentally renders it easier for bankers to finance the
movements of produce at every stage from farmer to consumer.
CHAPTER IX
SOME EVILS AND ABUSES OF SPECULATION
ONE of the chief services rendered by expert speculation is the
lessening of fluctuations, and the establishment of prices which
correspond to the actual conditions of supply and demand all the
world over. But the serious difficulty arises that, without the
existence and continuance of marked fluctuations, the expert class
would disappear ; for its profits depend on the occurrence of price
changes, and dimmish with every increase in the steadiness of the
market. Each speculator at any particular moment is looking
for a movement of price in one direction ; for it is on this, rather
than on the final value of the commodity, that his success depends.
It is only natural, therefore, to find forces present in the organised
markets which sometimes offer serious resistance to the proper
determination of price, and to expect that the perfection and the
refinement of machinery in the exchanges are frequently abused
by both members and outsiders who seek to make large profits by
risking little.
If an expert speculator has sold short, it is to his interest that
the price should go down ; if he has, on the other hand, bought,
he looks for a rise in price. By some mysterious means, generally
referred to as " manipulation," it is commonly thought that he
can bring about a movement in the direction he desires. It
cannot be denied that there are circumstances under which this is
possible, and that occasionally prices can be markedly influenced
by an individual or a group of individuals acting in concert ; but
" manipulation," as an independent factor in price-making, is not
important, and, as a rule, may in the long run be entirely dis-
regarded.
A speculator in the produce markets can influence prices in
two ways, by buying and selling the commodity himself, or by
persuading others to buy or sell. A short-seller, by the act of
selling, has already done all in his power to depress the price. If
he desires it to fall still lower he must c'ontinue selling at a con-
stantly diminishing price, or else induce others by some means or
other to go on from where he stops. The first method requires
very great capital. It is conceivable that in such a case enormous
quantities, sufficient to reduce the price, may be unloaded on to
108
SOME EVILS AND ABUSES OF SPECULATION 109
the market ; but the most serious difficulty then facing the specu-
lator is the fact that, in order to cover, he must buy back an
amount equal to his original sales. Thus the same influence is
brought to bear in raising the price as was exercised in reducing it.
Accordingly, the probability is that his average selling and pur-
chasing prices will be about equal, and that nothing will be
gained as a result of the whole operation. Similar remarks apply
to an attempted raising of price by a bull speculator.
It is possible that the action of the operator may induce the
outside public to follow his example, and that there may be an
excited rush to sell on the part of those who have noticed the
heavy sales. Then, by cool action and careful buying, the
speculator may be enabled to cover at a good profit. This profit
is all the greater if the bulls, too, are seized by the general panic,
and unload their holdings at any price they can obtain ; but,
sooner or later, the excitement spreads to short-sellers themselves,
with the result that their efforts to cover often cause an upward
movement as abnormal as the earlier decline. Yet sufficient
capital and courage, combined with thorough knowledge of the
market, sometimes enable a group or clique to make the covering
purchases so quietly and unobtrusively that the price is only
slightly raised ; but for complete success, some element of luck is
needed, such as the appearance of supplies whose existence was
not known previously.
Not only is it difficult to cover at a profit after a fall thus
artificially created, and to liquidate after a rise similarly created,
but it is also much more difficult to start such a movement.
Full information is available concerning crop conditions; and
attempts to force the price in a direction not justified by probable
supply and anticipated demand will at once be opposed by the
sales or purchases of speculators ready to profit equally from a
rising and from a falling market. In the long run they know that
actual conditions determine the price ; and they do not readily let
their judgment be overborne, because large transactions have
taken place on one side or the other. Speculative judgment, of
course, is not infallible,1 but, on the whole, it succeeds in setting
a price which, in the main, represents the real market opinion on
the condition of demand and supply.
" Manipulation " is a vague term used in a wide and inclusive
manner, possessing varying shades of meaning, and almost always
conveying the idea of blame-worthiness deserving of censure.
There is usually also an implication of artificiality and of skilful
1 For a curious and unusual case of joint mistaken judgment reference
may be made to a case which occurred in Chicago in connection with wheat
in the crop year of 1891-92. Vast quantities were sold short by one
speculator in the belief that the market's estimate of the crop was too low,
and that the current price was too high. The speculator was right, and
accordingly was able to buy back the wheat at a lower price than he sold it.
no ORGANISED PRODUCE MARKETS
and ingenious management. In its most common use it has
reference to a speculator, or to a group of speculators who buy or
sell produce, in such a way as to give outsiders the impression
that such buying or selling is the result of natural forces.1 Hence
the term includes excessive speculation, the spreading of false
rumours, the working of syndicates to increase or depress prices,
" wash sales," " matched orders," and " corners."
So-called excessive speculation on the produce exchanges may
be nothing more than a sign of exceptional activity in general
trade ; but the fact that dealings are in excess of the average may
point to a successful resistance to an attempt at manipulation by
the saner elements in the market. It is not always correct,
therefore, to ascribe to manipulation every sudden increase in
dealings for which no reason can be immediately assigned.
The creating of false opinions is one of the chief means of
manipulation. A group may lead the market generally to
believe that they are expecting a fall, when really they are buying
quietly and secretly to a much larger extent than they are selling ;
and, conversely, they may buy openly when really they are selling
secretly for a fall. The direct publication of false news is for-
bidden on all exchanges and avoided by the shrewder manipu-
lators. Moreover, it is an offence against the law in several States
in America,2 where, on the whole, this evil has been greatest.
But there are many tricks by which false suggestions can be made,
some of which seem so little deserving of censure that, unless the
moral tone in a market is high, it is easy for members to condone
them and even to practise them. One example will suffice. It
is sometimes possible to engineer a rise in price on an American
wheat exchange by cabling an order for the purchase of a very
large quantity in Liverpool on a certain morning, and thus raising
the price there temporarily that day. When the American market
opens for business a few hours later it begins under the impression
that the English have information of some scarcity in supply
compared with demand not accessible for the moment to itself.
This enables the speculator who knows the real facts to act in
such a manner as to make a profit in America larger than the loss
he will incur in selling out later in Liverpool. It is very difficult
1 A definition more applicable, perhaps, to stock exchanges and one due
to counsel to the New York Stock Exchange is : " The giving by the same
man or group of men of contemporaneous, or practically contemporaneous,
orders to various brokers to buy, and to other brokers to sell, the same
security at the market price whatever it may be, from time to time, for the
purpose of realising a speculative profit, in some cases from an expected
or intended fall in the price, and in other cases from an expected or intended
rise in the price, the vice of such a system of orders being that their execu-
tion may not involve a change of ownership." For the purposes of the
produce exchanges this is rather narrow, applying, as it does, to the case
of " matched orders " only.
2 E.g. California and Ohio.
SOME EVILS AND ABUSES OF SPECULATION in
to suppress misleading rumours, which may have a grain of truth
in them, but the most surprising aspect of this kind of manipula-
tion is the haste with which speculators rush to extremes, and
leave aside all judgment, upon the circulation of any plausible
story. The very great body of information collected and pub-
lished, both by governments and private agencies, and the official
collections of the exchanges themselves, ought to give assurance
to the saner members, and cause them to restrain their im-
petuosity.
Syndicates or pools are often formed by a number of specu-
lators uniting or joining their interests for the purpose of buying or
selling, and thus driving up or down the market price of some
selected commodity on an exchange. Profits are divided and
losses shared equally. One individual or firm is given the sole
authority to buy or sell on behalf of the pool. No member of
the pool can buy or sell any of the selected commodity on his
own account as long as the pool lasts, though, of course, he may
deal quite freely in other produce. Attempts to evade this rule
by members who see an opportunity for additional profit usually
bring about a collapse when the pool is doing well. If it loses,
it breaks up quickly in consequence of the withdrawal of the
financially weaker members. There is nothing inherently wrong
in this practice ; but it is open to the criticism of encouraging
rather reckless plunging on the part of the agent of the pool,
who is prepared to run greater risks when he has a number of
other persons with whom to share possible losses. Moreover,
the moral conscience of a firm or group of this kind is that of its
least desirable member ; and many speculators are prepared as
members of a pool to take part in acts they would shrink from
as individual business men.
Manipulation, by means of " wash sales," occurs from time to
time on some of the American produce exchanges. These are
fictitious transactions, in which one broker arranges to sell to
another at an artificially high price. Other speculators, being
unaware of the collusion between the two, are misled into thinking
that there is real reason for the advance in price. As the trans-
action, to serve its purpose, must ta^ce place on the floor of the
exchange and the price be quoted officially, the risk of detection
is great. All the exchanges have strict rules against this kind of
conduct, and the penalty in every case is immediate expulsion.
Closely Dallied to wash sales are " matched orders/' which
are much more common, and in skilful hands can be made to
attain the same ends. A speculator desiring to advance or depress
the market price gives orders to different brokers, some of whom
he instructs to buy and others to sell. He names the price limit
in each case. The market is in this way stirred to activity by the
simultaneous orders to buy and to sell ; and the official list appears
H2 ORGANISED PRODUCE MARKETS
with the price the speculator has determined on beforehand. In
most cases the brokers employed are ignorant of the object in view,
and they act in perfect good faith. The chances are that the two
sets will make their transactions together, and the greater the
number of cases in which this happens the greater the success of
the speculator in attaining his object. But there is the grave
disadvantage to him that he may have to take over a large amount
of produce, if he is endeavouring to manipulate a rise ; for the
advancing prices will cause the farmers and the other holders to
sell enormously, and the innocent buying brokers may purchase
in good faith from the farmers' agents rather than from the selling
brokers instructed by the speculator. These purchases will have
to be paid for at the high price, a fact which will materially reduce
the profits of the speculator, even if it does not bring about his
ruin. Defence of this practice is sometimes attempted on the
grounds that a " constant liquid market " is maintained ; but
there can be no adequate justification of any action that brings
about an artificial increase or decrease of price, notwithstanding
the counteracting advantages claimed for it.
Probably no form of manipulation calls forth more condemna-
tion from the general public than the " corner." This is due
partly to the natural feeling entertained against any combination
which has the effect of raising prices, and partly to pity for the
plight of the victims who are caught, and who have to accept
unconditionally the terms laid down by their captors. Notwith-
standing the great volume of business done, it is only in extremely
rare instances that the speculators who are short when a given
delivery month arrives fail to have enough actual produce at their
command to fulfil their contracts. But it may happen that the
buyers have bought up more produce than the short-sellers can
find to deliver. In this case a corner is created, and the buyers
are said to have cornered the market. A corner, then, is the
result of an oversold market bringing about a situation in which
the sellers are unable to fulfil their contracts and have to buy back
from those to whom they have contracted to deliver, or, in other
words, settle their contracts by paying over to those who have
cornered the market the difference between the price they have
contracted to sell for and the price which the manipulators have
succeeded in bringing about. It is evident that in a successful
corner there is a control amounting to monopoly on the part of
one set of speculators, and that, therefore, the price can be put
up to any extent. Moreover, this kind of monopoly is much more
effective than the ordinary monopoly sometimes obtained by
producers or sellers in the usual course of business. In the latter
case, the consumer is not compelled to purchase ; but the short-
selling speculator must deliver within a certain period or submit
to ruin.
SOME EVILS AND ABUSES OF SPECULATION 113
The usual method of bringing about a corner is for a syndicate
to buy all the offerings of the short-sellers, and to encourage the
latter to go on selling until their sales exceed the amount of the
commodity that is available for delivery. The syndicate then
demands delivery in due course, refusing to settle except on its
own terms. As a rule, nothing is gained by absolutely ruining
the shorts. Therefore, the terms arranged are in the nature of a
compromise, depending largely upon the financial standing of the
victims. The latter are " squeezed " to the full extent to which
it is considered judicious.
An actual corner of spot wheat or spot cotton is practically
impossible to engineer because of the vastness of the crops and
the very great amount of capital needed. A speculative corner,
however, that is, one occurring when futures maturing in a
particular month are bought up by a group who suddenly threaten
to require delivery, is quite possible. May wheat and August
cotton have been cornered at times with some success, but the
difficulties of getting control of the whole supply, even in a single
market for a few days, are enormous. If the price rises, farmers
and dealers have a wonderful way of sending forward supplies,
the existence of which has hitherto been unknown to all but them-
selves ; and supplies from other markets can also be rushed in for
delivery. To maintain the corner, all these must be purchased ;
otherwise, they are available for the shorts to buy and to use for
delivery. The cornering group or syndicate, therefore, assumes
great risks, and must discount in advance very heavily any gain
likely to result from the transaction. When there is success, a
temporary squeeze results, the price is driven up for the last few
days of the delivery month, and the shorts settle at this advanced
quotation. At the beginning of the following month prices drop
again to the normal level, and, except for the inconvenience
suffered by those who had legitimate hedging contracts to make,
no lasting harm ensues.
Since the possibility of engineering a successful corner depends
upon the facility with which the buying group of speculators can
acquire control over available supplies, it follows that they are
helped in their operations by any natural or artificial limitation of
supply. Therefore, corners in wheat cannot easily be contrived
in July or September, or in the last few months of the year,
because large quantities of the new crop are being sent forward to
market at that time. In the case of the United States wheat
markets May futures offer the best opportunity ; although in those
markets (Duluth and Minneapolis, for instance) where only
northern spring wheat is deliverable on futures contracts, corners
are possible in July, because the new crop does not begin to reach
the markets until August.
Artificial limitation of supply may be the result (not perhaps
i
H4 ORGANISED PRODUCE MARKETS
intended) of rules having for their main object the strict pre-
scription of the kind of produce deliverable on futures contracts.
On the Chicago Board of Trade, for instance, a relatively limited
number of elevators and warehouses is designated in which,
exclusively, produce is deliverable in fulfilment of contracts,
although similar produce may be in existence and available else-
where. The temptation to manipulate the market offered by
such a regulation is considerable ; and the frequent disturbances
caused by both successful and unsuccessful efforts to corner
supplies have, in the opinion of competent observers,1 prevented
Chicago from maintaining the pre-eminent position it used to
occupy as the world's greatest wheat centre.
Narrowness of range tenderable in fulfilment of futures may
' also help in the cornering of supplies ; for the smaller the number of
specific grades permitted as legal tender in place of the standard
or contract grade the easier it is for a group to arrange to demand
delivery at a given period and to ensure that the short-sellers shall
not have access to sufficient supplies.2 Consequently, there has
been a tendency to enlarge the range that may be offered on pay-
ment of discount or premium for quality, notwithstanding the
greater inconvenience caused thereby to the wheat millers or
the cotton spinners. Further, it has been recommended that, in
the case of corners obviously arising out of the narrowness of the
range permitted as legal tender, exchange committees should be
empowered to relax, temporarily, the rules for delivery, and that
this relaxation should be granted, even if there is only a slight
squeeze of short-sellers, when the price at the time of settle-
ment is markedly above that of other grades, and that of the same
grade in the recent past and not too distant future. The desk-
ability of such concessions as a means of preventing and discourag-
ing manipulation is not open to doubt.
A corner based on a true estimate of the future price is in-
variably a source of great profit to the speculator engineering it.
Such an example is that of the Leiter corner in wheat in 1897 in
Chicago. Leiter thought that the current estimates of the 1897
crop were too high, and the price consequently too low. He had
large funds at his disposal, and, forming a clique to help him, he
bought enormous quantities. Wheat not under his control he
prevented from reaching Chicago by all kinds of skilful devices.
Many who had sold to him and who had failed to deliver had to
pay heavily for non-fulfilment of their contracts. But the price
1 See Hubback, " Some Aspects of International Wheat Trade,"
Economic Journal, vol. xxi. p. 128.
2 Probably one of the reasons for the failure to establish a futures
market in wheat in London was the narrowness of grade permitted as legal
tender. It was sought to restrict it to No. I Manitoba, with the result
that there were constant squeezes and minor corners, which rendered
the market quite unreliable for the purposes of legitimate hedging.
SOME EVILS AND ABUSES OF SPECULATION 115
did not fall abruptly from the settlement price after the corner
matured ; for he was correct in his anticipation that the shortness
of crop justified a higher price than that current before the corner.
In the case of a corner based on a mistaken estimate of the future
price great fluctuations prevail, the corner is always broken, and
the speculator is ruined ; for the price falls lower than it was before
the attempt to raise it was made. A second attempt by Leiter in
1902 was a failure. This time he was wrong in his estimate.
Moreover, his previous success had made him rash, and he over-
looked certain sources of supply from which his debtors were
enabled to acquire sufficient quantities to liquidate their contracts.
A good example of a speculative corner in cotton on a large
scale is that of Patten, Hayne, Scales and Brown in 1910, in New
York and elsewhere, when August futures were driven up to five
times their usual price. August, being the last month of the crop
year, affords the corner engineers in cotton their best opportunity.
The operating clique on this occasion had hundreds of thousands
of bales delivered to them, but they were enabled to sell again at
a profit. The disturbance caused by this incident was confined
to a single month ; for the arrival of the new season's crop the
following month restored the market to its normal course.
An interesting example of a corner successful, but in the long
run by no means profitable to the operators, is that which took
place in iron warrants in the north of England in 1905. The
practice had grown up of buying and selling these warrants on
the metal exchanges for forward delivery, with the result that
speculation was facilitated, and dealings were very often concluded
in the expectation that warrants would be available when the
time for their delivery arrived.
In October 1904 a leading iron merchant came to the conclusion
that America would require iron from England in the following
spring. Therefore, in league with some others who shared his views,
he began to buy up spot iron and warrants with the object of
profiting by the higher prices he had forecasted. He was
successful in obtaining large holdings before prices began to rise,
even though the increase in the price of warrants caused makers to
put their iron into store and thus provide the basis whereby the
redemption of warrants might be rendered easier. But the
selling of warrants continued until it became obvious that there
was considerable over-selling by the bears. It was at this stage
that a syndicate was formed to corner the bears, but the latter
were not at first alarmed, and over-selling still continued. The
anticipated American demand did not take place, and it seemed
as if the bears might be correct after all. The bulls, however,
decided to bring the corner to a termination, and refused, on
April 19, to buy iron for delivery at a month. That meant that
all existing warrants would have to be redeemed on or before
n6 ORGANISED PRODUCE MARKETS
May 19. Iron, therefore, was poured into store, but not enough
to back all the warrants in circulation. When settlement took
place, on May 19, the bull clique had to take over 740,000 tons,
of which 440,000 tons were actual iron in store. The remaining
300,000 tons constituted the amount oversold by the bears. On
this 300,000 tons they merely received differences, very large
sums changing hands in consequence. They had now to carry
the whole of the 440,000 tons in a market in which prices were
falling ; and, getting no help from the bears whom they had
squeezed, they had to sacrifice part of their profits in order to
get rid of their stocks. Ultimately they succeeded, but the net
result to them was nothing. Practically no profit was left to the
clique, but considerable disturbance of legitimate trade had been
occasioned by its manipulations.1
An example of a partial corner or squeeze, due to shortness of
supply artificially created by rule rather than caused by actual
scarcity of wheat, is that which took place in Chicago at the close
of May 1921. The elevators in Chicago recognised by the Board
of Trade were comparatively short of wheat. " On May 25,
Chicago May wheat sold up to $1.85, a price 24 c. above the low
point of the previous day. From $1.85 the price broke rapidly
and at one time was 19 J c. below the high point. Wheat was
shipped from Omaha and Kansas City to Chicago to apply on
short sales of May in the latter market. Several hundred cars
were expected to reach Chicago by May 31. The rules of the
Board of Trade provide that delivery may be made in cars on
track the last three business days of a contract month. The
rules also provide that in the event the shorts cannot deliver
grain on their commitments, or if they do not cover or close their
contracts by a purchase in the futures market, then they must
settle at a price 2 arrived at by a committee of the board." 3 May
wheat " went out " at $1.87! per bushel (i.e. the final price of
May futures on 3ist was $1.87 J). The cash wheat market was
disturbed and unsettled (round about $1.66) and after May closed
the price dropped. On May 31 July futures were at $1.28^ per
bushel, and trading in September futures began on June 4 at
i.22j after the market recovered its even tone once more.
The defence that manipulating a corner instead of restraining
competition actually tends to increase it, was pleaded by the
defendants in a case that came before the American courts in
1912 and 1913. The prosecution took place under the anti-trust
laws which sought to prohibit any action that was calculated to
1 SeeMacrosty, " Prices and Speculation in the Iron Market," Economic
Journal, vol. xv. pp. 340-60 ; and Hood, Iron.
* In addition, liquidated damages have to be paid, amounting to not
less than 5 or more than 10 per cent, of the total value of the contract.
3 Market Reporter, June 11,1921.
SOME EVILS AND ABUSES OF SPECULATION 117
prevent fair competition in commodities which were the subject
of interstate trade. Cotton being one such commodity, an
attempted corner on the New York Cotton Exchange, therefore, was
conceivably illegal. The Supreme Court was impressed by some
of the arguments advanced before it, that a corner actually may
increase competition instead of preventing it ; but it very properly
decided that, though this was possible at the beginning of the
operation, the net result in the long run was to prevent competition.
Therefore, attempts to corner cotton were in restraint of trade
and came within the provisions of the anti-trust Acts.
When corners are attempted the most effective reply on the
part of the intended victims is counter-manipulation. Therefore,
the more active the market the more possible it is for short-
sellers to counter their opponents. They may break the corner
by continuing to sell short, thus forcing the cornerers to take not
only the whole of the real supply but the " fictitious " supply as
well. This is evidently a highly risky course for the shorts, but
if their capital and nerve are greater than those of the bulls they
may well frighten the latter into surrender. Caution, however,
and adequate watchfulness on the part of short -sellers will always
prevent them getting caught in an oversold market.
The prevention of corners is on the whole best accomplished
by rules prescribing generous treatment in the case of default on
the part of short-sellers. This is the method adopted by the
Liverpool Corn Trade Association, for example. The rules of
that body do not permit anything in the nature of the exaction
of a penalty for default unless it is obviously deliberate or in-
tended, and of that the committee of the association is the sole
judge. Therefore, if a clique succeeds in driving up one month's
futures to an unreasonable height, or corners all the cargoes
arriving during a certain period, it is not permitted to profit
unreasonably by that action. When the intended victims
default, settlement is ordered at a price close to or coincident
with the prevailing spot price. Moreover, in contracts on c.i.f.
terms, the condition permitting invoicing back gives adequate
protection to an innocently defaulting seller * in cases in which
buyers seek to squeeze him inordinately.
Corners are not necessarily a result of futures dealing. They
are in reality more common in transactions outside the exchanges
1 " If the seller shall make default in shipping or declaring shipment,
or in tendering the documents required by this contract, the contract shall
be closed by invoicing back the goods contracted for at such price as the
arbitrators shall determine, and this shall apply whether the price so deter-
mined be higher or lower than the contract price." The buyer in such
a contract may often, on payment of a higher price, have this clause
struck out. Thus, any loss resulting from inability to obtain wheat on
the contract can be provided against ; for in this case the seller then becomes
liable for damage suffered by the buyer owing to the default.
n8 ORGANISED PRODUCE MARKETS
than within them. Moreover, in the case of wheat and cotton
the fact that, at certain periods of the year, only small amounts are
available would still render cornering possible apart from any
contracts for future delivery. It may well be doubted whether
the existing risk of occasional or partial corners on the exchanges
is greater than an actual monopoly of wheat under conditions in
which contracts for future delivery would not be possible.
An indirect result of the speculative facilities afforded by the
exchanges is the so-called " bucket-shop." l This term is applied
where gambling on prices takes place by means of fictitious sales
and? purchases. Bucket-shops are not uncommon in England in
connection with the stock markets ; but they scarcely exist in con-
nection with speculation in produce. In the United States they
exist in the case of both stocks and produce, but they do not
always speculate in the same field. Circumstances render their
operations more profitable in stocks at one time and in wheat or
cotton at another time.
The distinctive features of this kind of speculation consist in the
fact that produce is not usually bought or sold for the customer,
and that selling or buying does not take place with a view
to delivery. The method of working is well explained in the first
section of a law of the State of Wisconsin prohibiting this type
of trading. " A bucket-shop, within the meaning of this Act, is
defined to be an office, store, or other place wherein the proprietor
or keeper thereof, either in his own or its own behalf, or as the
agent or correspondent of any other person, corporation, associa-
tion or co-partnership, within or without the State, conducts the
business of making or offering to make contracts, agreements,
trades, or transactions respecting the purchase or sale, or purchase
and sale of any stocks, grain, provisions, or other commodity, or
personal property, wherein both parties thereto, or said proprietor
or keeper, contemplate or intend that such contracts, agreements,
1 According to the Oxford Dictionary, which quotes the Leeds Mercury
of a date in 1886 as its authority, the term was invented in Chicago. In
order to catch men of small means, who could not afford to deal in futures
proper, what was called the Open Board of Trade started business in an
alley under the regular Board of Trade rooms. Access to the Board of
Trade proper was by means of a lift, and when legitimate trade was slack
and members tended to gather in the alley below, the lift used to be sent
down to " collect a bucketful " from the shop downstairs. Hence the
name" bucket-shop " came to be applied to all grain gambling institutions,
and was in due course widened to embrace stock gambling places as well.
On the other hand, American authorities assert that the term came from
England soon after 1870, and they trace its origin back to the custom in
London where gangs of hooligans used to drain barrels which had been
thrown out of the public-houses. When the roughs had collected enough of
this wretched liquor, and a few ends of cigars as well, they used to withdraw
to a hovel and consume them. These retreats were called bucket-shops,
and the name came to be used by the members of the London Stock
Exchange for the outside agencies that sought to rival them in business.
SOME EVILS AND ABUSES OF SPECULATION 119
trades or transactions shall be, or may be, closed, adjusted or
settled according to or upon, the basis of the public market
quotations of prices made on any Board of Trade or Exchange,
upon which the commodities or securities referred to in such
contracts, etc., are dealt in, and without a bond fide transaction
on such Board of Trade or Exchange ; or wherein both parties . . .
shall contemplate or intend that such contracts, etc., shall be or
may be deemed closed or terminated when the public market
quotations or prices made on such Board of Trade or Exchange
for the articles or securities, etc., shall reach a certain figure ; and
also any office, store or other place where the keeper thereof,
either in his, or its own behalf, therein makes or offers to make
with others contracts, etc., for the purchase or sale of any such
commodity wherein the parties do not contemplate the actual or
bond fide receipt or delivery of such property, but do contemplate
a settlement thereof based upon differences in the prices at which
said property is, or is claimed to be, bought and sold."
A bucket-shop is therefore a mere gambling institution in
which the customer bets against the proprietor on the price of
some article or of produce. Dealings are simply in profits and
losses, not in produce itself, prices being settled by means of
quotations secured from the legitimate exchanges. As the
majority of bucket-shops advertise that stock can be actually
delivered, the general public often conclude that there is no
distinction between dealings there and dealings in differences
inside the exchanges. To this the reply may be made that all
dealings on the exchanges are always actual transactions, even
though offset by other real transactions, and that every one of
them exercises its influence on price, while no bucket-shop deal
can affect price to the slightest degree.
Bucket-shops flourish best when prices are falling ; for the
majority of their customers bet that prices will rise. Hence it is
to their interest that prices should always tend to fall ; and it is
not uncommon, especially in the stock markets, for several to
unite and employ a broker on a legitimate exchange to sell a large
amount short so as to depress the market and wipe out the small
margins they keep on deposit from their customers.
It is evident, therefore, that for the protection of genuine
trading, exchanges and governments must wage relentless war
on these unscrupulous concerns. This is done by dealing
drastically with any broker suspected of lending himself to the
furtherance of the plans of any bucket-shop, by preventing
quotations reaching them, and by regarding their advertisements
as incitements to illegal action. Most States of the American
Union * have laws directed against them, the test imposed being
1 The State of West Virginia has, or had, a law licensing and permitting
the operations of bucket-shops.
120 ORGANISED PRODUCE MARKETS
the intention of one or both parties to the transaction to settle
merely by payment of differences instead of actually to receive
or deliver produce. Some require this intention on the part of
one side only, some on the part of both. The Federal Govern-
ment can intervene by prosecution for the misuse of the mails for
the purposes of fraud ; and in this way it has succeeded in
suppressing great numbers of bucket-shops in recent years.
The comparatively small extent of this evil in the United
Kingdom has rendered legislation unnecessary in this connection.
Reference has already been made to privileges 1 and to the
services they can render in the course of legitimate business.
They are, however, now forbidden on most exchanges on account
of the ease with which they lend themselves to the attempts of
the inexperienced to gamble. Only a small capital, the price of
a put or of a call, is needed for a deal, in contrast with the margin
of 10 per cent, usually required in the case of an ordinary trans-
action in futures.2
Organised speculation on the exchanges, constructive specula-
tion, has had to withstand the most damaging attacks directed
against it from those who seek to make a distinction between what
they term bond fide trading and trading for differences. The
former is acknowledged to be necessary and legitimate ; the
latter is supposed to be " illegitimate/' According to the
Hughes Committee, the rules of all exchanges " make so easy a
technical delivery of the property contracted for, that the practical
effect of much speculation, in point of form legitimate, is not
greatly different from that of gambling. Contracts to buy may
be privately offset by contracts to sell. The offsetting may be
done, in a systematic way, by clearing houses or by ring settle-
ments. Where deliveries are actually made property may be
temporarily borrowed 3 for the purpose. In these ways, specula-
tion which has the legal traits of legitimate dealing may go on
almost as freely as wagering, and may have most of the pecuniary
and immoral effects of gambling on a large scale/'
Now it would be exceedingly difficult to discriminate between
these two classes of transactions on any exchange. The form of
contract is the same in both cases, and the settlement by difference
is merely a matter of convenience after the contract is made.
Practically all futures contracts are so settled. To forbid such
transactions is to abolish speculation altogether. They are bond
fide transactions helping to make prices, not mere adjuncts to
real speculation and gambling. Their nature is in no way altered
1 See pp. 45 sqq.
2 Trading in wheat privileges is one of the features of the Milwaukee
Chamber of Commerce, but the chief market for speculation in privileges —
the London Stock Exchange — is not a produce market at all.
3 This applies to the American stock exchanges rather than to the
produce markets.
SOME EVILS AND ABUSES OF SPECULATION 121
by the manner of their termination ; and the continuity of the
market is largely determined by their possibility.
On the other hand, it cannot be denied that there is great
evil in the participation in the market by a large outside public,
who assume unnecessary risks and simply bet on fluctuations.
These amateurs, who have neither capital nor the mental equip-
ment necessary to form a real opinion concerning the course of
prices in the market, are attracted by the possibilities of making
great and speedy gains from the fluctuations in prices. Their
action is, in fact, the merest gambling and leads to unsteadiness
of the market in times of excitement ; for the larger the number of
such persons involved, the more unreasoning is their action when
their fortunes are threatened, and the greater the tendency for
them all to act precipitately in the same wrong way. Moreover,
it is almost certain that most of them have no reserves from which
they may increase their margins if required. Hence, any sudden
movement in price threatens their solvency, and there is a rush to
cover or to liquidate, which causes prices either to rise rapidly or
to fall suddenly under the fear of panic.
It is possible that this evil of speculation on the part of foolish
outsiders can never be entirely abolished, but it might be greatly
lessened by requiring a higher original margin at the outset.
Instead of 5 or 10 per cent., as is the figure on many exchanges
(it is nothing on some exchanges), it might be increased to 25 or
33 J per cent., with the result that the number of bets possible to
a person determined on gambling would be considerably reduced
in number. As a matter of fact, in recent years there has been a
diminution of the evil without drastic action of the kind suggested.
This has been particularly so in the smaller wheat exchanges in
the United States, and is ascribed to the growing awakenings of
conscience on the part of brokers and grain dealers who have
come to refuse altogether any speculative orders from outsiders
whom they do not regard as properly qualified to assume the
risks involved.
Yet, from another point of view, it is difficult to see how the
speculative market can be maintained for the legitimate traders
without the admission of the foolish outsider also, in quite con-
siderable numbers. As has been pointed out already, it is from
this latter class that the expert speculator in the long run derives
the main portion of his remuneration for the valuable services
he renders. It would not be possible to bring about a condition
of affairs under which expert speculators of great experience and
knowledge carefully investigated all the circumstances bearing
on prices and then alone worked out the consequences and arrived
at a scientifically determined market price. Desirable as such a
state of things may be, the fact remains that the experts are not
prepared to act in this way. It simply would not afford them a
122 ORGANISED PRODUCE MARKETS
living ; for it would merely re-distribute their individual capitals
among their number without any increase in the way of profit.
For their full activity, an adequate supply of outside lambs to
fleece is a first necessity. Moreover, without the constant
supply of fresh speculators always coming forward, the market
would become too narrow and too restricted for the possibility of
advantageous hedging by the genuine dealer in produce.
There is thus a conflict between moral and economic ideals in
this connection. The economic advantages of a speculative
market, wide in extent and active in being, cannot be doubted ;
but, on the other hand, the moral evils accompanying the induce-
ment to gambling, brought about by the very existence of this
market cannot be denied. The advantages and disadvantages
cannot be measured by any common standard, and every com-
munity must decide for itself at what point the evils of speculation
are outweighed by the advantages attendant on a well-organised
and speculatively active produce market.
Attempts by means of legislation to deal with the evils of
speculation, while not unknown in England 1 and in Germany,2
have been most numerous in the United States.
They may be classified in two divisions : Acts and proposals
of the State legislatures affecting speculative markets; and
attempts at the Federal regulation of speculation. The adjective
" anti-option " is applied to these Acts, proposals and resolutions,
because they usually take the form of bills for the taxation of
options and futures. By option the framers mean privileges
(puts and calls).
This legislation is not confined to any part of the United
States, but has been tried or experimented with in almost every
State of the Union. The history of such legislation, as well as
its interpretation by the courts of the various States, shows that
the older States of longer commercial standing, having passed
anti-option and anti-short-selling laws, discovered their un-
desirability and uselessness, and repealed them in the very early
days of modern speculative activity. The newer States and the
more purely agricultural States, especially in the south and west,
have passed the most stringent laws of all, devoting special atten-
tion to short-selling and ignoring the differences between properly
organised legitimate exchanges and mere gambling devices such
as bucket-shops. It is the ineffectiveness of these laws that
has led to determined attempts on the part of the representatives
of those States in Congress to secure by Federal legislation what
they have failed to accomplish by State legislation.
It would be tedious and unprofitable to discuss in detail the
1 E.g. Barnard's Act, 1733 ; Leeman's Act, 1867, both, however,
referring to stock exchange transactions.
' E.g. the Borsengesetz of 1896, for which see Chapter following.
SOME EVILS AND ABUSES OF SPECULATION 123
various acts of the several States. A few examples, therefore,
typical of the general body, will suffice.
Illinois, quite early in its history, decreed that " whoever
contracts to have or give himself or another the option to sell or
buy at a future time any grain or other commodity, stock of any
railroad or other company, or gold, or forestalls the market by
spreading false rumours to influence the price of commodities
therein, or corners the market, or attempts to do so, in relation
to any of such commodities, shall be fined not less than $10, nor
more than $1,000, or confined in the county jail not exceeding one
year, or both ; and all contracts made in violation of this section
shall be considered gambling contracts and shall be void/' This
law has had very little effect. Options are traded in at Chicago
to quite an appreciable extent, while false rumours and corners
are by no means uncommon.
It was in the early 'eighties that legislative activity was at its
height, and that attempts were made continually to declare futures
illegal if one or other or both parties had no intention actually to
receive or to deliver the article sold. In 1890 Massachusetts decreed
that whoever contracted to buy or sell upon margins, without
intent actually to receive or deliver, might sue for any payment
made. In 1905 the legislatures were beginning to learn to
discriminate between bucket-shops and legitimate markets ; and in
1909 a group of States passed laws of which the following pro visions,
paraphrased from the statutes of Kansas, are representative : —
Maintaining or aiding in maintaining a bucket-shop is a felony,
a bucket-shop being defined much as in the Wisconsin law quoted
above. Telegraph and telephone companies and their employees
who permit the transmission or the making of any such sales over
their lines are guilty of felony, as are also persons knowingly
allowing use of their buildings for such purpose. The mere
offering to make such purchases or sales constitutes a felony.
Every broker or commission merchant is required to furnish a
written statement to his principal or customer of the name of the
other parties to the contract, the time of sale or purchase, the
place of sale or purchase, and the price at which the transaction
took place.
About the same time Arizona prohibited hedging contracts,
with, however, a modifying clause to the effect that bond fide
dealings on boards of trade or exchanges were not to be prevented.
The cotton States of Georgia, Louisiana and Alabama sought to
enforce penalties for dealing in futures, and California, in 1879
and 1908, attempted, by means of provisions in its constitution,
to prevent speculation in stocks.
In the bills submitted to Congress for the Federal regulation
of speculation the attack at first (in 1890 and 1892) was
made directly upon the short-seller. It was the habitual and
124 ORGANISED PRODUCE MARKETS
professional selling of what was not in the possession of the seller
that was singled out as the evil requiring suppression. In the next
attempt, in 1894, the line of attack was different. The bill seemed
to permit short-selling, but insisted on what was termed " absolute
sale and actual delivery." It was not certain if this merely pro-
hibited off-setting and ringing out by means of clearing houses, or
was only another method of stopping short-selling under every
circumstance ; but fortunately the attempt to compel a return to
the cumbrous methods of cash payments and physical delivery
failed, and it was not until the turmoil, following on the 1903 panic,
that further efforts were made. The bills promoted then sought
to " define options and futures, to make such contracts illegal,
and to provide for violation of the law/' None of these met with
any success.
It was in the Congress that met immediately after the crisis of
1907 that there appeared the greatest volume of bills, attacking,
condemning, and prohibiting futures and options. Margins also
were added to the proscribed list, and one bill went so far as to seek
to prevent any one " gaining or losing sums of money called
margins from the fluctuations in value of the products of the soil "
— a provision which could be interpreted as directed against
profit in any trade at all in raw materials. No less than twenty
such bills were submitted, but none was debated or voted on.
In the next Congress, thirteen, and in the first session of the
following Congress (1911), eight bills came forward, but none met
with success. They were all similar to one another, being modelled
on previously rejected bills or on Acts of State legislatures.
It was not until 1915 that a measure of success was obtained in
the passing of the Cotton Futures Act of 1 that year, which confers
certain powers on the Federal Department of Agriculture in
respect of the cotton exchanges. This success has been followed
up in 1921 by the Future Trading Act (the Capper-Tincher Act) 2
which imposes the rather prohibitive tax of 20 cents per bushel on
privileges entered into anywhere in the United States, and a
similar tax on futures except hi the case of hedging transactions
on exchanges or boards of trade. These latter institutions must
fulfil certain conditions laid down in the Act ; and their members
must keep all memoranda of such transactions available for
inspection by a representative of the United States Department of
Agriculture or of the United States Department of Justice at any
time within a period of three years from the date of conclusion of
the agreements.3
1 Already discussed in Chap. III.
* For full text of this important Act, see Appendix I.
3 The Egyptian Government, towards the close of 1921, had under
consideration the passing of an Act regulating business in the Alexandria
Cotton Market. Legislation similar to the two American Acts was
contemplated.
SOME EVILS AND ABUSES OF SPECULATION 125
The numerous resolutions and Bills concerning speculation in
produce submitted to Congress in the period since 1894 have given
rise to many official inquiries and reports, of which the following
are the most informing :—
(1) Special Report on Speculation and Prices of Wheat and
Cotton. Report of the U.S. Industrial Commission, 1901, vol. vi.
(2) U.S. Commissioner of Corporations, Report of, on Cotton
Exchanges. Washington, 1909.
(3) U.S. House of Representatives. Hearings before the Com-
mittee on Agriculture on Dealing in Futures, 6ist Congress, 2nd
Session, 1910.
(4) U.S. House of Representatives, Hearings before the Com-
mittee on Rules on Grain Exchanges, 63rd Congress, 2nd Session,
1914.
(5) Report of the Hughes' Committee on speculation in Securities
and Commodities, 1909. (This was a New York State Committee.)
It is unlikely that attempts to suppress the abuses of specula-
tion by means of legislative action can ever meet with unqualified
success. Enduring reform can only come with the gradual
growth of an enlightened commercial public and the adoption of
the highest standards of social ethics by those who manage the
large businesses in the various countries of the world. The
recognition by merchants and dealers that they stand in a high
fiduciary relation to the community, and that the latter will always
adequately remunerate them for services rendered, would soon
bring about the disappearance of those sharp practices that still
survive in some organised markets and exchanges.
CHAPTER X
THE INFLUENCE OF SPECULATION UPON PRICES
REASONS have already been given in support of the assertion that
short-selling steadies prices, and that active legitimate speculation,
by concentrating risks on experts, tends to narrow the difference
between the price paid by the consumer and that received by the
producer.
It is proposed now to discuss in greater detail the views
of farmers, statisticians, and others, on these points, and to
examine in a general way the manner in which speculation
influences the prices of those two commodities, cotton and
wheat, in which it is most widely employed, and in which it
can work out its effects with the smallest interference from
outside causes.
It is often asserted that the prices fixed in the speculative
markets are unreal because they are determined " regardless of
the law of supply and demand." This statement probably means
nothing more than that the price is not in accordance with some
preconceived idea of what it ought to be. In other words, value
is considered as something objective, something that can be
discovered by certain physical tests independent of the feelings
of individuals. It is thought that it can be determined at any
moment by examining, on the one hand, the total physical supply
of the commodity, which is regarded as easily ascertainable, and
on the other, a very definite demand on the part of consumers of
the commodity, and that these two items can be balanced one
against the other, no regard being paid to the obvious fact that
" effective " demand and " effective " supply, the really important
elements, vary according to the changing opinions of individuals
concerning the prospect in the future and with the proposed
present price itself.
The fact is that prices in the organised markets are determined
by the existing supply and demand, but that the existing supply
and demand, effective supply and demand, are both speculative.
They are dependent on conditions in other markets, and on judg-
ments concerning the future. Hence, future supply and demand,
by their influence over present speculative supply and demand,
126
INFLUENCE OF SPECULATION UPON PRICES 127
affect prices ; but this is the only way in which it is in their power
to do so.
The speculative demand and speculative supply find ex-
pression in offers to buy and to sell, and are, therefore, quite as
genuine as ordinary demand and supply. The goods dealt in may
be either goods for immediate deli very or for future delivery ; and
the offers on either side may be regarded as estimates of what the
future market is likely to be. There is, therefore, a present
market for the future goods which will then be in existence. The
speculator deals in estimates of future values. This is where the
class of critics already referred to goes wrong. They fail to
recognise that one main service of speculation consists in the
influence it exercises over the determination of prices throughout
a range of time in the future. It is not the present price so much
as the future price over which it seeks control.
About the years 1894 and 1895, when prices were considerably
depressed, the question of the influence of the active operation
of a market in futures was widely discussed in England, America,
and the Continent. Anti-option bills were promoted in more
than one American State ; the so-called Exchanges Act was passed
in 1896, in Germany, to regulate speculation on the exchanges
there ; and a committee of the section of Economic Science and
Statistics of the British Association reported in 1900 on the effects
of dealings in futures upon prices, with special reference to wheat.1
The particular point then under discussion was the assertion
that futures tended to depress prices. This was a natural
supposition in view of the prevailing low prices at that time, but
the exactly opposite opinion has been maintained in times of high
and rising prices,2 with as little justification in the one case as in
the other.
Taking first the assertion that dealing in futures depresses
prices, with consequent loss to the producers, the argument runs
that short -selling is a selling of produce that does not exist, in
addition to that which does. The increase of supply thus caused
by this fictitious store necessarily depresses prices ; and the fact
1 Reference may be made to the following (the more important of a
very great mass of literature dealing with this topic): " Future Dealings
in Raw Produce," Report of Committee of British Association, Section F.,
1900. Chapman and Knocp, " Dealings in Futures in the Cotton
Market," Journal of the Royal Statistical Society, vol. Ixix. pp. 321-64.
Hooker, " The Suspension of the Berlin Produce Exchange," Journal of
the Royal Statistical Society, vol. Ixiv. pp. 574-604. Chapman and Knoop,
" Anticipation in the Cotton Market," Economic Journal, vol. xiv. pp. 541-
54. Emery, " Legislation against Futures," Political Science Quarterly,
vol. x. pp. 62-86. Special Report on Speculation and Prices of Wheat and
Cotton. Report of U.S. Industrial Commission, 1901, vol. vi.
2 See, e.g., Order in Council of the Dominion Government dated July,
1919, establishing the Canadian Wheat Board for the marketing of the
wheat crop of 1919.
128 ORGANISED PRODUCE MARKETS
that the whole annual wheat or cotton crop is sold many times over
in the course of the year on, probably, more than one exchange
lends statistical support to the statement. To this the reply may
be made that these sales are also at the moment purchases, and
the question of their amount is of little importance. Moreover,
every short-seller must later on become a buyer before he can
carry out his contract, and so far as spot prices are concerned he
appears as a buyer and not as a seller. Thus, if his action in short -
selling really does depress prices in the future, his action in cover-
ing his short sales makes him an unwilling instrument in raising
spot prices later on.
It is possible to contend that, granting for every sale there is a
corresponding purchase, yet the contending forces are not equal,
and that short-selling is not necessarily equalised by long buying.
Moreover, it may be urged that the price is depressed by a multi-
tude of unaccepted offers. Now, it cannot be denied that an
increase of supply, even if only speculative, does tend to depress
price ; but the question whether it succeeds actually in doing so
depends upon the strength of the demand. Seeing that short-
selling does not in fact depress prices to an unlimited extent, it is
evident that demand relies for its strength on something other
than genuine traders and ordinary consumers. This something is
the speculation provoked when the price is depressed below what
the speculators think it ought to be. Short-sellers cannot sell
fictitious produce indefinitely ; for the bulls become equally active,
and their purchases raise the price. It is not only in a falling
market that profits can be made ; and it is just as easy to create a
so-called fictitious demand as to create a so-called fictitious supply.
The latter invariably calls forth the former as soon as the exercise
of judgment by bull speculators leads them to think that bottom
prices have been reached, and that it is now possible to speculate
for a rise. It is not the fact that bulls are less enterprising than
bears. They can, and do, go into the market at any time, and
bid for large quantities of produce ; and they raise the price with
exactly the same success as the bears depress it when they offer
to sell similar amounts.
That speculative sellers do not control the market is further
borne out by the fact that prices of wheat and cotton rise and fall
quite independently of the amount of dealings in futures. If it
were true that the influence of these transactions is, on the whole,
to depress prices, the greater their volume the lower the price ought
to be. It is not easy, or even possible, to get complete figures from
all the exchanges in order actually to test the connection, if any,
between volume of dealings and price. Moreover, the practice of
buying in one market and hedging in another may render the
figures taken from a single market not altogether reliable. Yet
the fact that there is no correspondence of the kind required in
INFLUENCE OF SPECULATION UPON PRICES 129
such figures as are available affords sufficient reason for concluding
that such a connection does not exist.1
There are occasions when short-selling has temporary success
in depressing prices, but the cause is then invariably impulsive
action on the part of the majority of the speculators for which no
reason canbe assigned ; and it is independent of the existence of any
intrinsic good or evil in short-selling itself. If two or three dealers
of known ability and financial strength continuously sell wheat
when the general indications point to a rise in price they may
succeed in bringing about a fall ; for the other speculators in the
market may be frightened and may lose their self-confidence,
fearing the wisdom and strength of these operators rather than
trusting in the indications and in the predictions arrived at by
themselves. This is an instance of manipulation by means of a
scare ; but if the short-sellers are making a mistake the penalty
they will be called on to pay will be immense. If, on the other
hand, they are correct in anticipating an unexpectedly great
supply they will reap a large reward for their superior economic
foresight in putting the price where it ought to have been. This
is precisely what happened in Chicago in 1891-92, when an
operator, Pardridge, sold large quantities of wheat and kept the
price down in face of the unanimous opinion of expert forecasters
that there would be a shortage of supply. Much was made at the
time of the supposed evil effects of his short-selling ; but events
proved that he was correct. He just made the price what it ought
to'have been. Had he been wrong in his views as to the world's
supply and demand, he would have been unable to have made
good his contracts except at a loss ; and his efforts to cover would
have probably inflated the price temporarily to a point above the
actual value. He could not have unduly depressed the price
without involving himself in ruin. Thus, short-sellers succeed in
depressing prices only when their action is in accordance with the
public interest. They may have a very passing measure of
success at other times ; but it is immediately followed by thorough
ruin and their disappearance from the scene of their operations.
They can only make a profit and survive while serving the general
interests of the community.
It would seem that, at the time the view prevailed that short-
selling depressed prices, the main argument of its upholders was
that other causes seemed inadequate to produce the low prices
1 One set of figures, characteristic of others, may be instructive : —
WHEAT FUTURES SOLD ON NEW YORK PRODUCE EXCHANGE.
Average price of wheat
Bushels. during the year.
1891 . . 1,604,450,000 108 cents.
1892 . . 1,079,713,500 89!
1893 . 972,670,000 72^
130 ORGANISED PRODUCE MARKETS
then experienced. Further investigation, however, has shown
that in the particular cases of wheat and cotton there were
additional causes depressing prices which were overlooked at the
moment. Yet hi one way it may be true that the operation of a
futures market can depress the general price-level of the produce
bought and sold in it ; for the cost of handling may be so reduced
by the perfection of organisation in the market that the price may
be lowered to the consumer without a corresponding reduction of
price paid to the producer. It must be admitted that in this case
the tendency to deprive the producer of his increased propor-
tionate share of the total price paid by the consumer might be
one he could not easily resist ; but statistics given in the British
Association report 1 do not lend support to the view that the
growth of futures markets in wheat has resulted in a remuneration
to the farmer less in proportion than formerly.
A second suggestion, as to the effect of dealings in futures on
prices, is that they cause greater steadiness (or unsteadiness) than
would exist without them. At the outset of any discussion on this
point it is desirable to give precise meaning to the phrase " price
steadiness," and to examine in what it may be regarded to consist.
Dealing in futures and the ordinary work of the speculator act,
as has been already seen, in such a way as to concentrate in a
single market all the factors influencing prices. By arbitrage
transactions differences of price in different places are eliminated ;
and fluctuations arising from causes that can be foreseen are
discounted in advance. Anticipation of changes in the future
market prices affect the present price ; and violent future changes
are thereby avoided. On the other hand, the more perfect the
speculative side of the market becomes the more sensitive it is
to every change in conditions ; and an alteration in the supply or
demand of the commodity has more influence than it ever had
before. Therefore, as a market develops on the speculative side,
the less violent, but also the much more frequent, fluctuations in
price become. A ceaseless fluctuation within certain limits, with a
tendency continually to narrow those limits, is the natural result of
every speculatively active market. It is only right, however, to
point out that there are occasions when speculation is responsible
for increased fluctuation. The possibility of manipulation, for
instance, cannot be excluded ; and there is now and again the
opportunity for panic influence, and the violent movements in
price due solely to the unreasoning excitement of a crowd. But
those cases are rare, and of short duration when they do occur.
Average farm price. Years ending Average export price.
1 " Years. Wheat — cents per bushel. June 30. Wheat — cents per bushel.
1869-78 . . 1047 1870-79 . . 126*6
1889-98 . . 66-5 1890-99 . . 79-7
" These figures indicate a fall of not very different proportions in the
two prices."
INFLUENCE OF SPECULATION UPON PRICES 131
The question, then, in what does price steadiness consist has
to be answered. There are two variables to be considered —
frequency of fluctuation and extent of fluctuation. Which is the
more important, and which ought to be the determining factor
in any given case ? It is not easy satisfactorily to frame a
definition for a term which, after all, is comparative. The ideal
steady price is one which never alters ; and, on the whole, therefore,
it might be better to regard a price which changes less frequently
to be steadier than one which varies more often, and to say that
less frequent, if more violent, variations from a simple average
constitute increased steadiness. But it is evident that the com-
munity is interested rather in having the extent of fluctuation
narrowed than the frequency of movement diminished ; and it
regards more frequent changes by means of small increments as
less harassing than less frequent changes by larger increments.
Therefore, to conform to the popular, if less logical, view a price
is steadier according as its fluctuations diminish in extent, even
though they may increase in number. A diminishing range of
movement (neglecting small oscillations), less variation from the
average, are the characteristics then of growing steadiness. In
this sense of the term it is true, theoretically, that dealing in
futures has led to greater steadiness of price ; and statistical in-
vestigations seem to support this contention. It is not easy to
devise a satisfactory statistical measure of price steadiness;
because the extreme quotations at the two ends of the range,
which are those that must be used, may be entirely accidental,
and quite out of relation to the rest of the prices in the period
considered. Accordingly, undue weight need not be attached to
the results of such investigations, though the fact that they do not,
on the whole, contradict results reached otherwise must be
* admitted to possess some significance. The greatest difficulty
met with by the statistician arises from his ignorance of the extent
of dealings by the inexpert public, and of the degree in which
dealings are used to influence prices, instead of being determined
by them. There seems to be little doubt that certain marked
periods of price unsteadiness in the produce markets in recent
years have been accompanied by increased tampering by syndi-
cates, and increased gambling on the part of the outside public ;
but which is cause and which is effect is a question not easy to
answer. Many changes, both permanent and temporary, in
economic conditions have accompanied these movements; and
these may have been the really determining factors influencing
the course events have followed.
Another change in price phenomena directly traceable to
speculation is the gentler gradation of the fluctuations. Only
second in importance to the fact of the fluctuations themselves
and their extent is the question whether the extreme points are
132 ORGANISED PRODUCE MARKETS
reached suddenly or by easy stages. A moment's reflection at
once shows that a speculative system affords the most advan-
tageous means by which this desirable end of easy gradations can
be attained. There are always some persons in the market ready
to buy as soon as prices begin to fall, and others ready to sell the
moment prices begin to rise. Thus, a sudden large change in
price is very rare ; and the finer sub-divisions in the quotations
now employed in the cotton and wheat markets are the outward
indication of the growth of price movement by easier stages.
This development is of great practical benefit ; because the public
thereby gets early warning of a change in values, and the smaller
holders of produce are enabled to unload their stocks, if the market
is falling, without the serious loss that they would incur if the
price jumped at once to its lowest extreme, while the small pur-
chasers are enabled to buy their supplies before the price reaches
its uppermost limit ; but the value even to the larger merchants,
producers, and consumers, of a graduated price movement is too
obvious to require discussion.
It may be instructive at this stage to glance at the opinions
expressed by farmers themselves, and by others speaking on their
behalf, concerning the effect of dealing in futures on the prices
received by them for their harvests.
" Were it not possible for large elevator companies and exporters
to hedge their holdings of grain, the fanner would be unable to
dump his large crops, as at present, on the market within the three
months of the crop-moving season and receive cash therefor. No
class of middleman could be induced to take a year's harvest within
so short a time and hold it for gradual distribution during the balance
of the year ; and if any cared to be such reckless gamblers, it is
doubtful if bankers would care to finance their operations. Without
the hedging privilege, elevator owners and their dealers would be
obliged to discount the enormous risk assumed in buying large
quantities of grain, and, to be on the safe side, would have to make
allowance for the worst contingency anticipated by offering the
farmer a much smaller price for his grain than is now given. It is
generally maintained by the leading interests in the market that
without the hedging privilege farmers would get an average price
of at least 10 per cent, less than that prevailing to-day." 1
Again —
" In the absence of hedging, every one in the grain business,
from country elevator company to exporter, would undoubtedly
demand a greater margin of profit on account of the increased
risk. ... It is practically the unanimous opinion of men intimately
connected with the grain trade that the abolition of future trading,
which implies the elimination of hedging, would result in the farmer
receiving less for his grain. There is no doubt that, without the
1 Huebner, " The Functions of the Produce Exchanges," Annals of
American Academy of Political and Social Science, vol. xxxviii.
INFLUENCE OF SPECULATION UPON PRICES 133
protection of these hedging transactions, which enable a large volume
of business to be done along a small margin, every one handling
grain would require a larger margin of safety, and this in the end
would come out of the grower. ... If trading in futures were
eliminated in this country, the farmer would surely have to take from
five to twenty cents per bushel less for his wheat." 1
The farmers themselves, at first, were hostile to the exchanges ;
but that feeling has now passed away.2 Instead, they are coming
to realise that they can learn more, and accomplish more by
obtaining places in the grain exchanges than by unreasonably
attacking them from outside. The Farmers' Co-operative Grain
Dealers' Associations in North- West Canada are members of
the Winnipeg Grain Exchange. The Farmers' Equity Union of
the United States is represented on the Omaha Grain Exchange,
and has also purchased membership of the Kansas City Board of
Trade. Numerous other farmers' societies in America have
expressed themselves well satisfied with the existing methods by
which their wheat is marketed ; and they do not consider that the
speculators' interests are necessarily hostile to their own.
Comparisons of prices, before futures were used with prices
at present, yield results of doubtful value ; because such early
periods have to be taken as representative of non-futures trading
times, that economic conditions of a kind wholly dissimilar to the
present enter as disturbing features. Dealing in futures has only
gradually attained its present magnitude ; and its coming has been
attended by many other important economic changes. Therefore,
the conclusions drawn by the United States Industrial Com-
mission, 1901, from its comparative study of prices before and
after speculation, on both the wheat and cotton exchanges, ought
not to be pressed too far. Yet they are worth recording, and they
point to the fact that month to month fluctuations in price have
steadily diminished in extent, but increased in frequency since
1840, the earliest date considered. Moreover, there are indica-
tions that the natural tendency to falling prices, when the new
crop comes on the market, has not only been counteracted by the
development of speculation, but has been turned into an opposite
movement, making the April and May price of wheat differ from
the autumn price only by the cost of storage, interest, and other
carrying charges, and sometimes even by less than these.3
1 Harris, " Methods of Marketing the Grain Crop," Annals of American
Academy of Political and Social Science, vol. xxxviii.
2 The President of the Chicago Board of Trade, in his report for the
year ending December 31, 1920, notes with satisfaction that futures trading
was not even mentioned as a contributing cause among the seven reasons
outlined by the Federal Trade Commission which investigated the causes
of the decline in the price of produce in 1920. The farming interests were
strongly represented in this enquiry.
3 The series of charts pp. 32-40 in the Report on the Winnipeg Grain
Exchange, September 10, 1921, afford good illustrations of this statement.
134 ORGANISED PRODUCE MARKETS
The interference of the German Government in 1896 with the
exchanges under its supervision, and the resulting suspension of
dealings in futures on the produce section ol the Berlin Bourse,
afforded an opportunity of testing practically the effects of trading
in futures on prices. But in this case, also, caution is necessary
in drawing conclusions ; for it is extremely improbable that the
prices in Berlin during the period of suspension were independent
of those in the remaining speculative markets. The market for
produce is a world market ; and no one of its subdivisions can
ever be uninfluenced by what happens in the others.
The demand for this restrictive legislation first arose from the
failure of certain banks in Berlin, in 1891, which misused their
deposits in rather rash speculation on behalf of customers who
were mainly ordinary members of the non-trading public. In
1892, the Imperial Government appointed a commission to con-
sider the whole question of the Bourse and of the speculation that
took place there. The report of this body, which appeared towards
the end of 1893, recommended certain statutory and administra-
tive changes ; but, on the whole, it was impartial, judicious, and
prudent. The Reichstag at the time was controlled by the
Agrarians, or rural land-holding party, which consequently had
undue influence over the Government. This party was naturally
dissatisfied with the low prices then prevailing for all agricultural
produce ; and it blamed the system of future delivery on the ground
that it allowed the short-seller time to get in his supplies from
abroad, and thus, by favouring imports and increasing the avail-
able supply, to depress prices. Under pressure from it the
Imperial Government, in 1896, passed a law (the Exchanges- Act *)
to operate from the beginning of 1897, containing provisions
much more stringent than those recommended by the commission.
These provisions may be classified under five headings : —
(1) General organisation ;
(2) Quotations of prices and duties of brokers ;
(3) The listing of securities ;
(4) Transactions for future delivery ; and
(5) Dealing on commission.
A register was established in which was to be recorded the name
of every person engaged in transactions in futures. Contracts
made by persons entered on the register were declared binding ;
but if one of the parties was unregistered the contract was void,
and that one whose operations were ill-judged could evade pay-
ment by putting forward the defence of wager. The object of
the Act was to prevent the manipulation of prices by short -sellers,
cornerers, and others, especially against the interests of the pro-
ducers, and to prevent the outside public participating in specula-
tive transactions.
1 Borsengesetz.
INFLUENCE OF SPECULATION UPON PRICES 135
The law did not actually prohibit contracts for future delivery.
All it did was to prohibit them when made " according to exchange
procedure " x ; and slight changes in the form of contract in use at
Berlin were sufficient to alter the transactions from exchange
(borsenmdssig) transactions into ordinary commercial (handels-
rechtlich) dealings. But difficulties arose in connection with the
appointment of a board, heavily weighted with agriculturalists,
to assist in the management of the exchange, and the consequent
secession of all the produce brokers from the exchange building,
leaving the Government nominees no brokers to preside over, and
the Agrarian representatives no colleagues with whom to do
business. The seceding members moved across the street and
took up new quarters. Here, trading for future delivery was
carried on, but without the machinery for clearing and the
official announcement of prices, and with the contract forms
expressly stating that the established usages of the grain trade
were not there in force. Short -selling continued as before, but
there was much hesitation and uncertainty.
After a short time, under further pressure from the Agrarians,
the Government notified the brokers that it considered their new
organisation an exchange and therefore subject to the Act ; and
it forced them to make yet other arrangements. They next took
refuge in a hospital, in the various adjoining rooms of which each
broker claimed to have a private office and to do business only in
strict accordance with the commercial code. They, therefore,
had no fixed formal rules as to " contract grade/' " option of
delivery," etc. — no clearing house or official price quotations.
In course of time a private agency arose which cleared settlements
for those who cared to use it ; but the hindrances to properly
organised exchange dealings were serious in the extreme.
It was not long before the effect of this hampering and the
practical cessation of organised speculation began to be felt in
the grain trade. Disorganisation set in all over the country with
the disappearance of the central indicator, the Berlin price list.
The local markets increased in importance, but they, too, were
subject to similar restrictions. Moreover, they varied widely as to
rules concerning dealing ; for contract grades and prices were local
only in influence and could be of little help in aiding the farmer or
the miller to determine what was a fair price for his grain. As a
substitute for the old central price reports, a board was established
to collect and publish three sets of prices: local spot prices in
Berlin, Dantzig, and Stettin ; a few other large market prices ;
and prices on foreign exchanges, the latter being exactly of the
speculative class abolished in Berlin. The inadequacy of these
prices is obvious. The two former were local prices, under local
1 " DerborsenmassigeTerminhandelinGetreide und Miihleufabrikaten
1st untersagt."
136 ORGANISED PRODUCE MARKETS
conditions, figures of sales that had taken place and not of prices
at which futures might be bought or sold ; while the foreign prices
were of no use to the German producer who, normally, did not
export grain, though they may have been of use to the miller
who hedged on the exchanges abroad.
The regulation as to registration proved a failure. The leading
banks made every effort to require registration by refusing to
deal with unregistered persons except in purely cash transactions.
Yet not only the general public, but even the smaller brokers and
provincial banks declined to put their names on what they called
the " gambling register/' This portion of the Act was repealed
in 1908.
It was in the case of the stock markets that the greatest abuses
and dislocation took place, in consequence of the failure of the
registration clause and the substitution of so-called cash dealings ;
but, as regards produce, it seems probable that the buyers, feeling
the need of greater caution, in consequence of the absence of an
authoritative price list of actual transactions, were less liberal in
their offers to producers, and the latter less able to inform them-
selves as to whether they were being fairly treated by the larger
merchants than when they could refer to the prices in Berlin.
It is not a simple matter to deduce from the German ex-
periment the effect of short-selling on prices. By incurring a
little more expense dealers were able to take advantage of the
foreign speculative market for their hedging operations. More-
over, the period of greatest restriction coincided with the beginning
of a rise in prices throughout the world, a rise in no way attribut-
able to German legislation. The results obtained by the several
statisticians who have examined the question, point to the con-
clusion that the suppression of dealings in futures did not raise
prices in Berlin, but lowered them, and in all probability rendered
them less stable. The Liberals in Germany itself asserted that
German prices, for lack of former speculative demand, lagged far
behind prices in foreign markets ; to this the Agrarians replied
that prices in Germany were always lower than prices abroad,
but that the difference was less under the new system than it had
been under the old system.
From the fact that they constantly made demands for further
suppressions, and, in their efforts to get introduced a reliable
method of price determination, sought to require a compulsory
declaration to some authorised body of every sale of grain, with
details of quality, price, and conditions of transfer, it is clear that
the Agrarians were by no means satisfied with the results of the
Act. Attempts between the two parties to come to agreement
led to the return, in 1900, of the produce brokers to the exchange.
They were still forced to keep to crude devices to avoid the law,
and they remained in a state of legal uncertainty as regards their
INFLUENCE OF SPECULATION UPON PRICES 137
contracts. In 1908, there was another attack by the Agrarians
on grain futures, and still further restrictions, which caused the
traders to threaten to close the exchange altogether. They
refrained, however, from taking this step on being assured by the
authorities that hedging would be permitted ; and since then there
has been no further legislation to harass them.
For several reasons the results of this Berlin experiment are
less instructive than might appear at first sight. In the first
place wheat, which alone can serve as basis of comparison with
other markets, is not the main grain food of the bulk of the
German population in the way in which it is of the populations of
France, America, and the United Kingdom. Therefore, the
German demand for wheat is more elastic than the demand in
other centres of speculative activity; and wheat price move-
ments, consequently, may not exhibit the same range of variation
as elsewhere. Again, the fluctuations in the price of wheat in
Germany must necessarily be interwoven with the fluctuations in
the price of all the other grain food — rye, oats, barley ; and com-
parisons with markets in countries where wheat alone is used are
vitiated by the fact that there are influences at work in one country
which have no effect in the rest . Moreover, the fact that during the
period for which comparisons can be made, Germany both im-
ported and exported wheat, while the contrasted countries either
imported or exported only, accentuated the effect of price move-
ments in Germany to an extent not possible elsewhere. Indeed,
one writer 1 admits that Germany suffered from injudicious ex-
ports in the autumn of 1897, encouraged by the abnormally low
price at home compared with that abroad, and afterwards, in
the same crop year, had to import at a high price to meet her own
necessities. But too much importance, perhaps, need not be
attached to these considerations which, after all, demand but
slight qualifications in the general conclusions.
Another point of importance in the discussion of the effects of
dealings in the organised markets on prices is the relation between
spot prices and the prices of futures. In the main it -is the same
factor that determines the price of spot goods as determines the
price of future goods, viz. the present and anticipated future
conditions of the market. Present supply depends on anticipated
future demand as well as on the actual demand at the moment ;
and spot prices, therefore, cannot be determined independently
of the market judgment concerning the future. Prices for cash
and future goods vary together, moving up and down in accord-
ance with estimates of future supplies and future needs. Yet,
since the prices of future goods are not determined by temporary
inadequacies in supply, and are much less under the influence of
the circumstances of the moment than the prices of present goods,
1 Hooker, loc. cit.
138 ORGANISED PRODUCE MARKETS
it is not to be concluded that the differences between them must
be always of the same degree of magnitude. A comparatively
urgent present demand might cause a large movement in a present
price which would affect prices of future goods in the same way,
but to a much smaller extent.
A distinction must be drawn between futures whose delivery
periods, in the case of wheat and cotton, lie within the current
crop year and those whose periods run into another crop year.
When the contract runs forward to the time of incoming receipts
from the new crops, the price for that delivery is often distinctly
lower than in the case of futures culminating before the end
of the current crop year. For example, in Chicago, May futures
normally stand high and well above spot wheat in the early
part of the crop year. The new crop begins to come forward
in July, and hence July futures are often below the price of those
of May. For the same reason September futures in the summer
are relatively low ; but as the year proceeds, and dealing in
December futures begins, the price again rules high, in some
degree, according to the distance of the delivery month.
In the case of wheat, the prices of futures normally stand
higher than spot prices by the cost of storage, including interest,
insurance, etc., so that, when account is taken of these items,
prices for different times are practically the same. There are,
however, causes at work to spoil this simple harmony — cutting
of charges for storage, the failure of outside speculation to main-
tain the market against hedging sales, the buying and carrying
of wheat by elevator companies at exceedingly low prices, and the
consolidation of brokerage and transport charges by these firms
all bring down the prices of futures compared with spot wheat.1
For example, the quantity of wheat in store in England in the
possession of the Government on July 3, 1921, and the fixing of
an official price for its disposal, rendered the market for Liverpool
wheat futures nominal. Spot price was round about i6s. 6d. per
cental, while September, October, and December futures were
quoted 135. iod,, 135. 8d., 135. jd. respectively. But anticipation
of increased supplies, and of lower rates of interest and discount,
were also contributing factors in this case in bringing about a
comparatively low price for futures maturing in the succeeding
crop year. Moreover, there may be causes at work operating
on one price alone, and driving it up or down independently of the
rest. For example, if short-sellers all come in at the same time
towards the end of one delivery period to make purchases to cover,
1 Throughout the crop year, 1920-21 (September i, 1920 to August 31,
1921), there was a premium on spot wheat in the Winnipeg market. This
is accounted for by the fact that millers and European importers declined
to buy wheat for distant months owing to the disturbed financial situation
and to difficulties of payment consequent on fluctuations in foreign exchange
rates.
INFLUENCE OF SPECULATION UPON PRICES 139
the spot price will tend to rise well above the prices for later de-
livery periods. Similarly, a concentration arising from any other
cause, even long before the time, may succeed in driving up
futures of one selected delivery period above those of other periods.
Again, trade requirements at certain times of the year also inter-
vene to throw the list out of line. Mills may need wheat for
grinding ; and elevators, when empty, tend to bid up wheat for
immediate delivery in order that they may earn storage.1 This
may happen in the early spring ; and in a large milling centre, like
Minneapolis, the demand at that season sometimes puts spot
prices above the prices of July or even May futures. This is all
the more the case if the demand is pressed ; for the needs in spring
must be satisfied out of the existing crop supply, while future
needs will be met by the new crop.
Since the greater part of the cotton crop comes from a single
area, is harvested during a very narrowly denned part of the year,
and is calculable in magnitude a considerable time in advance,
it is but reasonable to conclude that the break in the continuity
of futures between two crop years depends upon a clearer basis
of facts than is the case with wheat, which is always being sown
or harvested somewhere in the world all the year round. As
information about the new crop becomes more complete, the
prices of futures referring to that crop become more responsive ;
and the gap between the prices for the new and the old is either
accentuated or smoothed, as circumstances require. A sudden
drop as the harvest month is passed indicates the expectation of
a much lower level of spot prices in the coming year, due either
to a very large crop in sight, or to a forecast of greatly lessened
demand.
The price of cotton futures for the current month is always a
certain variable amount below the spot price.2 This is a con-
sequence of the disadvantages, already discussed, of buying
actual cotton by means of futures. Hence, towards the end of
any current month, the majority of transactions are those of
dealers buying back futures. Neither buyer nor seller wishes to
have the contract terminated by delivery ; and so a price is reached
for invoicing back, which is convenient for both to accept rather
than to have the original agreement carried out. This is in-
variably below the prevailing spot price of the moment.
Turning now to the relations between spot prices and the
prices of futures with different periods to run, seven different
possibilities are found, if the assumption is made that the series
1 This remark must not be taken to apply to public terminal
elevators in Canada, which, unlike those in the United States, are
confined by law strictly to warehousing buriness ; they are not permitted
to buy or to deal in wheat on their own account.
2 In June, 1921, the amount was 20 to 25 points in Liverpool.
140 ORGANISED PRODUCE MARKETS
of prices is continuous. The accompanying diagrams illustrate
the seven cases. As cotton futures are usually quote^ for the
current month, and each of the succeeding eleven months, the base
line or horizontal axis in each diagram is divided into eleven
equal parts. Twelve points, reckoning in the origin " O " are thus
obtained, each of which corresponds to one of the twelve monthly
periods for which futures are quoted. If June is the current
month, then O represents June, A July, B August, and so on.
Measuring vertically upwards, from B e.g., BQ represents, on some
selected scale, the price of August futures ; OP similarly repre-
sents the price of current futures, on the same scale ; while OS is
the spot price. On the assumption made concerning continuity,
P, Q, and the remaining ten points lie on a continuous curve
which may assume roughly, any one of the seven shapes
depicted.
The following are the main characteristics of each case : —
I. The prices of futures gradually increase as the delivery becomes
more remote, without ever reaching the spot price.
la. The prices of futures in the range increase at first, and
afterwards diminish, the highest price reached being less than the
spot price.
Ib. The prices in the range increase as the delivery month
becomes more remote, and rise above the spot price.
Ic. The prices increase at first, rise above spot price, and later
fall, possibly, below spot price again.
II. The prices steadily diminish as the delivery month becomes
more remote.
Ha. The prices diminish at first, and in the later months rise
again, without attaining the level of the spot price.
lib. Prices diminish at first, and then rise until they exceed the
spot price in the later months.
It now remains to discuss the possibility and the probability
of one case rather than another occurring in practice.
The prices of futures must move along with the price of spot
cotton. A rise in the price of spot cotton means that there is a
present shortage, or an anticipated shortage in the near future.
This is immediately shown by an increase in the offers of cotton
for the future. Conversely, if futures rise in price it means that
dealers have concluded that the total available supplies will be
insufficient for the season if the present rate of consumption lasts.
There follows, therefore, a tendency to conserve existing stocks,
and the spot price rises. Buying of cotton, except for immediate
needs, is checked, and purchase of futures takes its place. Thus
the prices of the latter are influenced, those for the remoter
periods to a less extent than those for the nearer. Yet the whole
range does move in the same direction. This rise encourages
importers to ship home greater quantities, and to sell futures as
INFLUENCE OF SPECULATION UPON PRICES 141
hedges against these new cargoes ; while others avail themselves
o A B c
0 A B
O A B
I.
Ib.
n
O A B
O A B
O A B
O A B
Hb.
a.
\
Ic.
n
of the opportunity to sell their cotton, and buy back the futures
formerly sold against it.
It is" obvious that, other things being equal, the longer a futures
142 ORGANISED PRODUCE MARKETS
contract has to run the greater is the possibility of cotton being
available at a low price to meet it, and, therefore, the lower its
price. Moreover, it is an expensive operation to hold cotton, and
the expense increases with the length of time. For this reason,
also, the more remote futures tend to fall in price below those
maturing sooner. If the market is expected to fall steadily, on
the whole the prices of futures will be less as their delivery
periods are more distant. On the other hand, if the market is
expected to rise the more remote the delivery period the higher
the price. But there is an upward limit to the possible rise in
this case. The price cannot exceed the price of spot plus the cost
of holding. It is not often that the market prospects seem
to favour a seller to such an extent as to make it probably
worth his while to hold his cotton ; but there must always
necessarily be some who reckon on a profit from higher prices
in the future, and it is they who, in such a case as this, have
it in their power to maintain the high prices of the more remote
futures.1
According to Chapman and Knoop,2 there is at any moment
in the Liverpool cotton market a kind of feeling which
criticises and judges the spot price to be high or low, in reference
to what they term the " norm," i.e. the price at which the cotton
should sell, in view of the crop and stocks and demand existing
and foreseen. That the spot price does not coincide with the
norm is owing to the greater weight given at the moment to
the present demands in relation to Liverpool supplies, and to the
cotton on the way. When the spot price is high in this sense,
then the market is likely to fall ; and the opposite is the case when
it is low. The effects of these impressions on the prices of futures
have just been described.
Now, turning again to the curves, it would seem from these
considerations that II is, on the grounds of theory, the most
likely of all to occur. There are not sufficient data available to
enable this probability to be tested by the facts, but there is no
doubt that it is an exceedingly common case. The quotations
for American cotton in Liverpool on January 18, 1922, form a
good example.3 I is probably the next most common, and seems
to have been at one time the characteristic form for wheat. Ila
and la occur with fair regularity ; lib less often ; Ic scarcely
ever. Ib, described by Chapman and Knoop, in 1904, as happening
" only very seldom/' has been much more common of late. It was
1 This is likely to occur more often in the case of Egyptian than in the
case of American cotton.
2 Loc. cit. Economic Journal.
3 The figures were: Spot, 10-58; Jan. 10-23; Feb. 10-18; March,
10-18; April, 10-14; May, 10-12; June, 0-07; July, 10-04; August, 9-93 ;
Sept. 9-79; Oct. 9-65; Nov. 9-55; Dec. 9-49.
INFLUENCE OF SPECULATION UPON PRICES 143
the form for a great part of the middle of 192 1,1 for the ordinary
American cotton futures in Liverpool. This was a period of slack
trade with the probability of a considerable carry over (or unused
surplus) from the current into the succeeding crop year. Moreover,
the prospects of the coming crop were not very good. Therefore,
there was no likelihood of shortage, on the one hand, or of
particularly abundant supplies in the near future, on the other
hand. The consequence was an absence of break in continuity in
the prices of August and September futures, with a rising grada-
tion in the prices of the more distant futures, the justification
for the latter phenomenon being the anticipation of a continua-
tion of demand at its usual level.
An equally interesting question is that of the agreement of the
prices of futures some time before their delivery periods with the
spot prices prevailing during their delivery periods.2 Statistical
comparisons of this kind were among the earliest made with a
view to testing the influence of speculation on prices ; but before
conclusions can be drawn from such figures the assumptions
made in compiling them require careful examination. If the
price of futures is the spot price, plus cost of carrying, then the
comparison is simply one between spot prices at different periods,
influenced by such disturbing factors as changes in the rate of
interest and movements in the cost of storage ; but if the spot
prices and the prices of futures are independent (and this may be
assumed if the existence of Chapman's norm is granted), then
the comparison is a justifiable one, provided allowance is made for
1 The figures appended may be useful —
1921.
June i.
June 8.
June 15.
June 22.
June 29.
Spot
8'l8
8-31
8*29
7-66
8-03
June
7-98
8'06
8*04
7-46
7-88
July .
8-28
8-22
8'20
7-50
7-91
August .
8-42
8-35
831
7'6i
8-06
September
8-54
8'47
8-44
775
8-20
October
8-66
8'59
8-58
7 '93
8-36
November
874
8-66
8-66
8-02
8-44
December
8-82
8-74
8'74
8-10
8-53
January
8-88
8-80
879
8-15
8-57
February
8-92
8-84
8-84
8-21
8-62
March .
8-96
8-89
8-89
8-27
8-67
April
8'99
8'93
8'93
8-31
8-71
May
9*02
8-96
8-97
8-35
8-75
2 Conn and Kantorowicz, figures in Schmoller's Jahrbuch, vol. xv. p. 220,
reprinted in the Statistische Anlagen of the Bbrsen-Enquete Kommission,
Berlin, 1893. Emery, op. cit., p. 132. Report of United States Industrial
Commission, 1901, vol. vi. Stone, Special Report on Speculation and Prices
of Wheat and Cotton.
144 ORGANISED PRODUCE MARKETS
the fact that in the interval, say from June to September — if
those are the months in question — strong bulling or bearing
influences may be at work disturbing September spot prices to a
degree not experienced by June prices.
With these considerations, then, in mind, some results may
be given which are taken from the Report of the United States
Industrial Commission, 1901, summarising several pages of tables
and of charts containing spot and futures prices. The Report
proceeds : " Out of fifty-seven different futures compared with
the spot prices realised in the New York cotton market from
1881-82 to 1889, in twenty-nine cases the futures proved to be
higher than the spots realised three months Lence, and in twenty-
eight cases the futures were lower than the spots at maturity,
that is, the speculative judgment anticipated the realised value
of cotton a little too favourably in half the cases, and not quite
favourably enough in the other half.
" In the Liverpool market, out of fifty-seven cases (1881-82
to 1899) of comparison of future bids with spot prices realised at
the expiration of the contract period, it appears that in thirty
cases the future prices were lower than the spot prices realised at
the maturity of contract, and in twenty-seven cases the future
prices were higher than the spot prices realised at maturity. In
the New Orleans market, out of fifty-one cases, in twenty-five of
them the future price was lower than the spot price realised three
months later, and in twenty-six cases the future price was higher
than the spot price.
" These results would seem to support the conclusion that, in
the long run, the speculative quotations for future delivery are
neither uniformly above nor below the level of the proper cash
value of cotton as determined at the future date, but that they are
tentative anticipations of such realisable value as the conditions
of supply and demand are most likely to determine at the time
when the future contract matures."
In evidence given in 1892 before the German Imperial Com-
mission * on the exchanges already referred to, it was strongly
maintained that one effect of dealing in futures was to raise the
price of the contract grade in comparison with the price of the
other grades, or, what comes to the same thing, to depress the
prices of the other grades in comparison with the contract grade.
Similar statements are made from time to time in connection with
the organised markets in other countries ; but investigation of the
definite examples quoted shows that in every case there was either
actual scarcity, or over-abundance, or difference of demand for
milling or export purposes, and that spot prices were in all cases
determined by relative qualities. If either, of two grades are
legal tender on futures contracts, it is natural to expect that the
1 See Report, p. 120,
INFLUENCE OF SPECULATION UPON PRICES 145
grade which is more abundant and cheaper in any year will become
the ordinary contract grade, and that the other will be delivered
only at a premium. The rules of most exchanges make provision
for this; and no conclusions of the kind under discussion can
justifiably be drawn from their action in this respect.
Hitherto, the discussion has centred upon the more direct
effects of speculation upon prices, so far as they can be ascer-
tained. It now remains briefly to notice some of less direct, but
possibly more far-reaching, influences on supply and demand in
general.
Speculation in the organised markets contributes to the regula-
tion of consumption of produce, both in time and in place. Rise
in price is the immediate consequence, as already seen, of a con-
viction on the part of experts that supplies are being too rapidly
consumed. In this way the necessary diminution is brought
about in the rate of consumption, and the falling off is accurately
adjusted to the needs of the case. Similarly, arbitrage dealings
ensure the transport of produce, from place to place, in accordance
with the requirements of every district. Scarcity in one place,
indicated by a rise in price, draws supplies from other places
where prices are lower and demand less pressing. Hence,
speculation exercises a directive influence in distribution ; and
thereby, with its control of markets and prices, it reacts on pro-
duction and consumption, and not infrequently modifies the
nature of new developments in industry and in commerce among
the leading nations of the world.
It is difficult to determine the extent to which the quotation
of futures for several months ahead influences producers or farmers
in deciding how much wheat or cotton to plant in any given season.
In cotton, especially, where futures are quoted a full twelve
months ahead, the farmer, theoretically at any rate, knows almost
exactly what to expect for his crop. It is said that in conse-
quence some of the large planters in the Southern States are guided
somewhat by the prices of futures. At the same time by far the
greater number of the small growers plant the same average from
year to year, largely independently of the price. It needs, how-
ever, action on the part of but a small number of the large growers
to bring about an adjustment of crop to anticipated price ; but
the fact remains that the latter is a variable price altered fre-
quently, particularly in the case of the more distant futures, in
accordance with crop and acreage reports, and that the accuracy
of forecast is in inverse ratio to the length of time ahead. Hence,
it cannot be relied on by a planter as a safe guide. The price on
which he does depend is the prevailing price over a series of years,
or else the spot price of the moment. The prices of distant futures
in the speculative market are rarely taken into consideration.
In the case of wheat, the quotation of futures does not reach
L
146 ORGANISED PRODUCE MARKETS
ahead from the time of planting to the period of harvest. Hence,
there is not the same possibility of the use of speculative prices
as in the case of cotton. Furthermore, wheat farmers, like the
larger cotton farmers, are not quick to take advantage of market
conditions. What has happened in the past is their guiding
sign-post rather than what is likely to happen in the iuture.
CHAPTER XI
FUTURES IN COMMODITIES OTHER THAN COTTON AND GRAIN
APART from cotton, wheat, and maize, dealings in futures in
produce in the United Kingdom are confined to sugar and coffee
under contracts guaranteed by the London Produce Clearing
House, Ltd. The methods employed by this firm have been
already described.1 In accordance with its rules it is not pre-
pared to guarantee contracts for future delivery of wheat except
" ex- warehouse/' London, after inspection. As the millers prefer
to buy " ex-ship," a seller of London wheat futures would find
himself at a disadvantage ; for he could not pass on to his buyers
the rather large costs of unloading and storing which they decline
to incur on their own account. As these costs are considerably
higher than at other ports, and as the docks are not particularly
well adapted for the handling of grain cargoes, dealers in wheat
futures in London meet with obstacles absent elsewhere. For
these and other reasons 2 transactions in grain futures practically
ceased in 1904.
Pepper used to be handled in London through the Produce
Clearing House's contracts ; but the ring of dealers in that com-
modity came to the conclusion that the comparative publicity
involved hi the registration of their contracts gave away trade
secrets. Therefore, this business has also disappeared.
Attempts at handling tea by means of transactions in futures
have always failed, owing to difficulties in grading. It was found
that the experts were unable to value consistently even their own
samples when confronted by them a second time. Some success
is being met with in efforts to induce the rubber trade to adopt a
standardised form of contract for future delivery guaranteed by
the company. There is no doubt that such an agreement would
do much to mitigate the violent fluctuations in price that have
been so frequent, in recent years, in the case of this commodity.
Sugar futures have always been a large item in the company's
business, and, now that the effects of the dislocation caused by
Government control during war-time are passing, they are making
their appearance again. The old form of contract, however,
which contemplated a unit of 400 tons f .o.b. Hamburg, has given
way to one based on a unit of 50 tons, ex-store London. Contracts
1 P. 56. a See p. 114.
148 ORGANISED PRODUCE MARKETS
are entered on in August, for example, for delivery during any
month up to and including the following March. Sugar is a
commodity exceptionally well adapted for organised market
dealing. Unlike tea, it can be graded with extreme precision by
means of simple chemical tests ; and it also fulfils, to a high degree,
all the other conditions requisite for dealings in futures on a con-
siderable scale. In New York, which was always a large market
for sugar, dealings in sugar futures, suspended in August 1917,
were resumed in February 1920. Owing to the very wide
fluctuations in the prices then ruling, the margins demanded were
large and the business at first consequently small ; but later in the
year hedging contracts began again, and there was an increase in
the number of dealings recorded. The Exchange, however,
arranged to permit business in a contract in refined sugar ; for it
was felt that such a contract would appeal more to the trade than
one in the raw product. Further, it made provision in this new
contract for delivery in Chicago. It will be interesting to observe
the progress of this innovation ; for hitherto attempts to establish
dealings in futures in other than raw materials have always met
with failure. There is a fair business in coffee futures in London
under the Clearing House Company's standard contracts, the basis
being No. 5 Santos Type, determined in the following manner :
The Board of Directors appoints every year, from among its
members, a standing committee of three called the Coffee Type
Committee, to which an undefined number of members of the
coffee trade are added. To this body is entrusted the duty of
selecting, renewing, and adjusting, from time to time, the following
seven types : —
Type No. i Extra fine
No. 2 Prime
No. 3 Superior
No. 4 Fully good
No. 5 Good
No. 6 Regular
No. 7 Low regular
Types are fixed for one year, and the experts assess tenders
according to the following scale : —
No. 5 basis.
No. i premium of 95. per cwt. (for quality)
No. 2 ,, 75.
No. 3 „ 55.
No. 4 ,, 25. 6d.
No. 6 allowance of is. 6d.
and
No. 7 „ 35.
The unit of amount is 250 bags (= 290 cwt. net). In case of a
threatened corner, the seller, with the permission of the directors,
FUTURES IN OTHER THAN COTTON AND GRAIN 149
may have his contract invoiced back to him or may tender any
other merchantable coffee in bags of a quality judged equal to
or superior to " Good " with a fine of 35. per cwt. In this way
any injustice resulting from narrowness of range or temporary
shortage of Brazilian coffee in London is entirely obviated ; and,
at the same time, the interests of the purchasers are adequately
protected.
Three-quarters to four-fifths of the world's supply of coffee
comes from the three Brazilian States of Sao Paulo, Minas Geraes,
and Rio de Janeiro. Up to about the year 1900 increasing
demand, virgin soil, and cheap labour led to easy profits with
careless and uneconomic methods of cultivation and preparation.
After 1900 conditions changed. Supply exceeded demand,
surplus stocks began to appear, and prices which had already been
declining fell below even cost of production. Moreover, the
Brazilian rate of exchange began to alter rapidly in a manner pre-
judicial to the interests of exporters. The more competent
growers perceived that the real remedy lay in improved methods
and in reduction of costs, but the majority turned to the banks for
aid. When this source of help failed them recourse was had to
the artificial checking of supply ; and the Government was induced
to help by the prohibition of further planting. But owing to
evasion of the law, the improved methods of cultivation adopted
by some growers, and the maturing of trees planted out during
the preceding ten years, the total output continued to increase.
Matters reached a crisis when the latter suddenly jumped from
11,300,000 bags in 1905-6 to 20,000,000 in the following season,
and that, too, at a time when there was already a surplus on the
market of more than 4,000,000 bags.
It was at this time that the coffee States started the " valorisa-
tion " plan which proved so disastrous for one of their number,
Sao Paulo. In accordance with this project, the three States, Sao
Paulo, Minas Geraes, and Rio de Janeiro, agreed to purchase and
hold for higher prices sufficient coffee to keep out of the market
all but the actual amount needed to supply the world demand.
This latter was estimated at 17,000,000 bags. It was anticipated
that, as Brazil had by far the greatest share in the trade, this
withdrawal of excess supply would send up prices immediately
to the minimum fixed by the governments as the price giving
a " reasonable profit " at the existing cost of production, the
price at which purchases and subsequent sales were to take place.
It was proposed to raise the funds needed for the purchase by
a loan of £15,000,000 on the credit of the States, interest and
sinking-fund to be provided for by a surtax on coffee exports.
The loan, however, could not be placed without guarantee by the
Federal Government, and this was not forthcoming. Minas
Geraes and Rio de Janeiro at once withdrew ; but Sao Paulo, which
150 ORGANISED PRODUCE MARKETS
produces 60 per cent, of the total crop, and of whose exports at
that time coffee constituted more than 98 per cent., decided to act
alone. Large coffee houses in Europe and the United States,
along with some London and New York banking houses, lent
almost £18,000,000 between them ; and, by the end of 1907, Sao
Paulo had bought nearly 8,500,000 bags at more than 55. per bag
above the market price. Yet prices failed to rise. In fact, they
fell slightly, due probably to dealers refraining from buying in
consequence of the huge Government stock, and also to the placing
on the market of large stocks previously hoarded in anticipation
of valorisation. When the Government attempted to dispose of
some of its holdings, the market threatened to become further
demoralised, creditors began to demand their money, no more
funds could be raised on the security of coffee, and purchases had
to be suspended. Thus, by the beginning of 1908, this attempt at
valorisation ended ; and Sao Paulo was rescued from bankruptcy
by means of another loan, this time guaranteed, without qualifica-
tion, by the Federal Government. Close on 7,000,000 bagsof coffee,
however, had to be dealt with ; and arrangements had to be made
for the handling of the subsequent output of the State. It was
agreed to warehouse the holdings in New York and seven European
ports, warrants to be deposited for them with specific banks which
acted as trustees for the bondholders. The coffee was placed
under the sole control of a committee of seven residents of the
United States, or Europe, who had full power over its liquidation
except for a proviso as to minimum sales during the subsequent
ten or twelve years. The State of Sao Paulo had to raise its
surtax on export and to guarantee the application of the proceeds
solely to the payment of interest and sinking fund on the loan.
It had also to agree to restrict coffee exports to specified amounts
for succeeding years until the loan was finally paid off. The net
results of this effort on the part of Sao Paulo to help its coffee
producers to tide over a period of slack trade have been wholly bad.
It is true that the Government's policy of giving preference in its
purchases to the better grades of coffee stimulated efforts, already
begun, to introduce more scientific methods of cultivation and
preparation, but against that there has to be placed the serious
injury done to the credit of the State and the imposition of the
surtax on export, most of which seems to have been borne by the
planters. Moreover, there is always a renewed demand for valoris-
ation whenever output seems to be in excess of requirements ; 1
and this is always a disturbing element interfering with the smooth
and normal working of the world's coffee markets. That valorisa-
tion, if repeated on a large scale, is likely to be just as disastrous as
it was in 1908, is indicated by the ease with which the United States
1 E.g. in 1920, when valorisation through the medium of a loan of paper
currency was talked of.
FUTURES IN OTHER THAN COTTON AND GRAIN 151
satisfied its requirements from Japan, Central America, and the
East Indian Islands when the partial failure of the Sao Paulo crop
of 1919 cut off a very large part of the normal supplies from
Brazil. But the tradition remains of governmental interference
with this trade in Brazil ; and, from time to time, projects are put
forward and carried which only just fall short of complete State
guarantee or valorisation on a very large scale.1
Reference has already been made to iron warrants, and to the
growth of dealings in them in Glasgow and Middlesbrough. Iron-
masters must always, to some extent, manufacture for stock.
Furnaces once blown out or damped down are exceedingly
expensive to re-start, and when in operation they must be run
night as well as day. There is consequently, in the iron trade, no
possibility of a speedy adjustment of output to a falling demand,
and stocks quickly accumulate during periods of slack trade ; for
it is only when the depression is long continued that manu-
facturers venture to curtail the output. The amount of iron the
makers can carry is limited. Therefore, after a short time they
are forced to seek advances from their bankers or others on the
stocks in hand. At first, about seventy years ago, the Scottish
ironmasters sold notes to whoever would buy them. These were
merely promises to deliver a certain quantity of iron to the bearer
on presentation of the note and on payment of the accrued charges
for storage. After a time it was found necessary to provide
security, in addition to the maker's name ; for firms in difficulties
often raised money on notes for iron that did not exist. Therefore
arrangements were made to hand over the iron to railway com-
panies or to a store owned and managed by an independent firm,
which issued warrants undertaking to deliver the iron to the
bearer. The firm of Messrs. Connal & Co., Ltd., of Glasgow and
Middlesbrough, secured the bulk of this business, with the result
that their warrants became a marketable security all over the
world. The warrants for Scottish iron were for 300 tons No. i,
and 200 tons No. 3 ; for Cleveland G.M.B. No. 3, 500 tons. One
penny per ton per month was charged for rent or storage.
Having thus been rendered negotiable, iron warrants were
readily accepted by the banks as security. Indeed, it was possible
to obtain advances on them up to within a few shillings of their
1 For detailed accounts of the course of events during the progress
of the 1907-8 scheme, see The Economist, September to December 1908
inclusive. Reference may also be made to the annual reports of the New
York Coffee Exchange and to Hutchinson, " Coffee ' Valorization ' in
Brazil," Quarterly Journal of Economics, vol. xxiii. pp. 528-35.
It would appear that, notu ithstanding previous experience, the Brazilian
Government, towards the close of 1921, was endeavouring once more to
raise a loan in foreign centres for a coffee valorisation scheme. As American
and European bankers were reluctant to help, the prospects of success were
not good ; but the wild speculation and the disturbance to trade caused by
the proposal were very unsettling to Brazilian commerce and industry.
152 ORGANISED PRODUCE MARKETS
market value, with the result that dealers were enabled to hold a
large number at a very small cost. The Glasgow Iron Market was
established specifically to deal in these warrants ; and the Scottish
store gradually increased until in the 'go's of last century it
contained more than one million tons of pig-iron.
About 1900 the Glasgow ironmasters decided that the existence
of the store was not in their interests. They therefore ceased
sending iron to it, with the result that it gradually became depleted
until, about the period of maximum demand during the recent war,
it practically disappeared altogether.
The store on the Tees for Cleveland iron had its origin about
1872-73, when the demand for iron was so great that the Scottish
store was almost emptied. The Glasgow market, finding itself
hampered for want of a sufficient supply of warrants, had resort
to the comparatively new and growing output on the Tees ; and
Messrs. Connal & Co., Ltd., the proprietors of the Glasgow Store,
opened branch stores in Middlesbrough and district in 1876.
Owing to various causes, from time to time the Tees stores became
nearly exhausted ; and the Glasgow market was driven, in 1904, to
accepting warrants for what it termed " standard " iron, in order
to get the necessary number for the maintenance of speculative
gambling. This " standard " iron was defined as certain brands,
the list including Lincolnshire, Northamptonshire, and even
American makes. Moreover, other iron that gave a certain
defined analysis was admitted, with fixed differences for different
qualities, but the effect of this was to destroy the value of the
standard warrant ; for the grade became too wide and the place
of delivery too uncertain and in nearly every case too inconvenient.
Therefore, no sales of standard warrants for consumption could be
effected, and comparatively little business was done in them.
Hematite iron from Cumberland, to a small extent, formed a basis
for warrants ; but the Cleveland hematite ironmakers, after a short
trial, discontinued sending their output to the store. Shortage
of pig-iron during the war depleted the Teeside stores also ; and at
present there is no pig-iron there to act as the necessary basis for
dealings in warrants.
From the fact that dealings in warrants originated in Glasgow,
and have always been centred there, even after the decision of the
Scottish ironmasters to boycott the store, the Glasgow Iron
Market has long occupied a predominant position in the trade.
It is constituted by the Scotch Pig Iron Trade Association, and
meets twice daily, from eleven to twelve, and from two to three
o'clock. There, warrants, when they were to be had, were bought
and sold for forward delivery ; and thus transactions in them
closely resembled dealings in futures in cotton and in wheat.
This, of course, was a development independent of their original
purpose, and it was always the cause of much heart -searchings on
FUTURES IN OTHER THAN COTTON AND GRAIN 153
the part of the ironmasters ; for, by putting their iron into store
and depositing the documents with their bankers, they were able
more easily to get advances than if they had kept it in their yard.
On the other hand, it meant that they parted to some extent with
control of the market ; for stocks and output were known, and it
became possible, by skilful forecast of the course of trade, for
dealers to establish corners, or at least, bring about a squeeze.
Things became worse for the masters when dealers obtained
possession of warrants in large numbers ; for then the iron in store
was used to bid down the price of the new iron that was being sent
forward for sale from the blast furnaces. When sale of warrants
for forward delivery began, and dealings became quite dispro-
portionate to the number in existence, speculation in iron by
outsiders was encouraged to an extraordinary extent. The result
was seen in the great exaggeration of all price movements, and
the consequent disturbance to legitimate trade. It was, there-
fore, only to be expected that the ironmasters should come to the
conclusion that the disadvantages of the system far outweighed
the advantages.
Since dealing in iron warrants for future delivery has been
compared to dealing in futures in wheat and in cotton, the question
arises could speculation in warrants have been used like a purchase
or sale of cotton or wheat futures for the purposes of protection by
means of hedging transactions ? To this the answer may be given
that, actually, dealings in iron warrants were rarely used for this
purpose. Iron is not, like cotton and wheat, produced periodi-
cally, and a year's output required to be moved and handled during
a limited season. It is produced regularly throughout the year,
and is partly sold and partly used by the producers in their own
works. There is, therefore, no necessity for devising any plan
whereby a whole twelvemonth's output can be financed in advance
of its production and sale. Moreover, pig-iron is not absolutely a
raw material. It is partly manufactured, and is commercially
in the position of wool tops or flour. The reasons which
prevented the growth and development of dealings in futures in
those cases apply also in its case, and the limited field in which
dealings in iron warrants prevailed seems to indicate that they
were always exceptional or abnormal. Their utility had further
diminished in later years owing to amalgamations of firms and the
growth of vertical combinations in the iron and steel industries.
It is probable that they have now finally disappeared ; but doubts
are expressed by some ironmasters as to whether the feeling
against putting iron into store will be strong enough to resist the
temptation, when production is temporarily in excess of demand, to
place it where it can be readily hypothecated as security for loans.1
1 See Hood, Iron. Macrosty, " Speculation in the Iron Market,"
Economic Journal, vol. xv. pp. 340-60.
CHAPTER XII
SPOT AND C.I.F. BUSINESS IN COTTON AND WHEAT
HITHERTO attention has been confined mainly to the speculative
aspect of the cotton and wheat trades and to discussion of the
special part played by dealing in futures in the movements of
those commodities. It is proposed now to examine, at greater
length, the methods of the spot and c.i.f . markets, and to notice
some of the problems that arise in the actual carrying out of
the work of importers and exporters of these main staples of
commerce.
In the case of the cotton trade, representatives of merchants
and importers in Liverpool are sent abroad to the United States
(or other cotton-growing centres) about the end of July or
beginning of August, with instructions to buy those grades and
standards that are likely to be in demand by the Lancashire
spinners during the ensuing year. In some cases Liverpool
brokers send their orders and offers direct to American buying
houses which have centres in the larger towns in the cotton belt ;
or samples, called types, may be submitted from America and
offers cabled to importers. Continental houses often, in order to
make certain of supplies later on, buy futures of the very distant
months in Liverpool in the early part of the crop year and retain
them until, perhaps, the month of maturity is reached. They
then buy what they want in the United States about the date of
requirement, and ship home immediately, selling off in Liverpool,
at the same time, a corresponding amount of the futures previously
purchased as hedges.
Cotton bought by buyers or their representatives in the
interior markets of the Southern States of America may have to be
collected from several points in order that a sufficient amount of
the particular grade desired may be secured for export in a single
shipment. Buyers may purchase either at " gin " or at " com-
press points," and the procedure, as regards financing, differs
slightly in the two cases. At gin, the seeds are removed and the
cotton is baled in packages of 28 X 56 X 42 in. in size, weighing
approximately 500 Ib. including 20 Ib. bagging and steel straps,
thus having a density of about 14 Ib. per cubic foot. If bought
154
SPOT AND C.I.F. BUSINESS 155
at this stage the buyer issues tickets to the sellers, which are
redeemed in cash by the local banker with whom arrangements
have been made previously. When enough cotton is collected
it is sent to a railroad " compress point " and the local railroad
agent issues to the banker a bill of lading to the " compress
point " in exchange for the tickets in the latter's possession.
Payment is made to the local bank by means of a draft
drawn by the buyer's agent upon the buyer's head office.
This draft includes the price paid for the cotton, interest,
and other charges of the local banker, who thus disappears
from this particular transaction on forwarding the draft, with
the local bills of lading attached, to the buyer's American
head office for collection. When, along with other cotton
similarly handled, enough is ready for a single shipment abroad,
the buyer's banker, who now has the local bills of lading from
point of origin to point of compress, exchanges them either for
local bills of lading to the port of embarkation or for through bills
of lading from the interior collecting centre to Liverpool.
At a " compress point " the cotton is sorted according to
grade, is compressed and marked, the size being reduced to
28 x 56 x 18 in., giving a density of a little under 30 Ib. per
cubic foot. If bought at this stage, compress receipts instead of
the less formal tickets are delivered to the local banker who pays
cash as instructed. These are then exchanged by the banker for
local bills of lading to port, or for through bills of lading as the
case may be. The latter are attached to the draft drawn by the
buyer's agent on his head office ; and thus, in due course, the local
banker is reimbursed for the sums he has advanced.
If the person, hitherto called buyer, is a British importer or his
agent he (or his American bank) is now in possession of the bills
of lading of the cotton which is on its way to Liverpool, and the
remainder of the financial side of this transaction has been already
described. But if he is an American exporter, and if he sells to a
European buyer, there is a greater choice of method of reimburse-
ment. The usual method is for the European buyer to arrange,
as in the manner described,1 for his bank at home to accept, on his
behalf, drafts drawn by the American exporters against cotton
shipped for his account. These drafts are then sold to the foreign
exchange dealers and the procedure follows quite the normal
course. If the bank or foreign exchange dealer who holds the
accepted draft wishes to realise before the date of payment, the
bill can be discounted with a London bank or discount house on
very easy terms. The American foreign exchange buyer receives,
by cable every day, quotations at which such bills, going forward
within a specified time, can be discounted ; and it is upon that basis
that he fixes the price he can afford to pay for the sterling bills
1 In Chapter VII.
156 ORGANISED PRODUCE MARKETS
he buys. His calculation may be something like this (the
figures are only approximate) :
Rate per £ sterling at which a sight draft on
London can be sold $3*85
English stamp charges 0*0040
Discount for 63 days at so much per cent. . . 0-0420
Cost of collection o-ooio
Margin of profit 0*0030
0*0500 0*05
3-80
He, therefore, will be able to offer $3 '80 per £ sterling for a draft
payable 60 days after sight.
A second method of reimbursement is the drawing of a draft
upon the European importer direct and the holding of the
acceptance and documents by the European correspondent of the
American exporter until actual payment is made. This involves
the storing, on arrival, of the cotton for the account of the
American banker or foreign exchange dealer ; but the European
buyer may at any time redeem it by tendering payment for the
draft, less the rebate allowed for the number of days the draft has
still to run before maturity. This rebate rate is usually, in
England, I per cent, below the Bank of England rate at the
moment, and on the Continent it is the actual bank rate. Such
bills are not readily discounted, and only banks and exchange
dealers with whole-hearted faith in the future of cotton prices,
and with much free funds, will tie up money in transactions of this
kind. It is possible, however, to render such bills " liquid " by
arranging for acceptance by the European correspondent ; but this
does not seem to be ordinarily done, and there are many obvious
objections to the practice.
A small amount of cotton is imported from America by
spinners direct, that is, without the intervention of merchants or
brokers in Liverpool or Manchester. The sellers in these cases
are usually American firms with an office in Manchester which
serves as a selling agency and to watch the interests of the shippers.
The bills of lading are handed over as soon as the shipper's draft
is accepted by the buying spinner's bank, though, of course, the
cotton may not arrive until some little time later. There are
several disadvantages to the spinner in this way of doing business.
If the cotton is not equal to sample, for example, it is difficult to
settle with a firm which has a foreign domicile and all its assets
abroad, and similarly with other claims that may arise, there is no
arbitration body available to adjudicate : remedy is by legal
action, and that, too, in a foreign country. Yet, with a well-
established and reliable American firm, much business may be
SPOT AND C.I.F. BUSINESS 157
conducted satisfactorily by this method, with considerable saving
of commission fees.
Owing to the fact that the shippers of cotton from Alexandria
are largely British houses who are well acquainted with the
Lancashire spinners, Egyptian cotton, bought in Liverpool or
Manchester, is commonly paid for by means of three months' bills
drawn on the spinning company by the shipper in Alexandria.
This is very rarely done in the American trade ; for American
exporters prefer to do their business by means of banks' accept-
ances.1 It is evident that such an arrangement as the Egyptian
is of considerable convenience, and a source, even, of financial gain
to a spinning company ; for, before the bill has to be met, the
cotton may be spun into yarn, sold, and paid for. The mill,
therefore, has the advantage of a larger balance at its bank for
the remainder of the period the bill has to run. Buying on long
terms and selling on short terms always strengthen the financial
position of the firm that can do business in that way. There is
a considerable spot business, however, in Egyptian cotton in
Lancashire.
Indian cotton is handled largely by the Indian merchant
houses who give credit to spinners on terms that are not standard-
ised, but are varied to fit the circumstances of each transaction
as it occurs.
In arranging for an import from an interior market in the
Southern American States for sale in Liverpool as spot cotton,
a difference must be allowed for of £10 to £15 in the price of each
100 bales to cover cost of the freight and insurance. This works
out at about 35 points, i.e. $fa of id. per Ib.
Much of the cotton imported at Liverpool is bought on c.i.f.
terms, the contract form for which is No. 10 or No. n of the set
drawn up by the Liverpool Association, according as the ship-
ment takes place from a seaport or from an interior market
centre in America. The meaning of the various clauses and con-
ditions is probably clear after the explanations already given of
the previous stages in the movement of the commodity. One
point, however, calls for comment, and that is the method of
arriving at price.
In the Liverpool cotton c.i.f. contracts, two ways are employed
of stating price, one, the ordinary straightforward method of
naming the price in pence per Ib. for the particular grade bought
and sold, " fixed price " ; the other, by settling it at so many
points on or off the seller's price of a certain delivery,
(Fully Middling American, L.M.C.) in Liverpool at the time of
call, " on call." That means that the price is to be so many
hundredths of id. per Ib. above or below the price of a certain
1 See paper by Parkes, " Financing the Mills," Report of World Cotton
Conference, Liverpool and Manchester, June, 1921.
158 ORGANISED PRODUCE MARKETS
month's futures (the basis grade of which is Fully Middling
American cotton with the option of delivering grades down to
and including Low Middling — L.M.C. signifies Low Middling
Clause). Further, the day on which the price of the certain
month's Fully Middling American is to be taken, is not arbitrary,
but is determined in the case of each type of contract in a manner
carefully prescribed.1 This " on call " method has certain ad-
vantages, the most obvious being that in times of rapid fluctua-
tion of price buyers and sellers do not find themselves dealing in
contracts made only a short time before, at prices very different
from those prevailing at the moment. Moreover, the system
offers certain advantages to spinners, who can thus arrange for
receipt of cotton at the very times they need it, and feel secure
against loss resulting from price fluctuations ; for, of course, they
have in every case hedged by a previous purchase of futures.
The c.i.f. contract forms for Egyptian and East Indian cotton
are similar to those for American cotton.
In the Liverpool spot market the selling brokers' representa-
tives wait each morning in or about the Exchange to learn the
day's probable requirements. The buying brokers, meantime,
have learned from the spinners exactly what is needed and send
their staffs to inform the sellers' representatives. Samples are
then sent by the sellers to be submitted to the spinners, who are
usually assisted in their selection by their brokers. As many as
70 to 100 different lots, all of the type required, may be available
to choose from. If a price is agreed on, delivery is taken by the
buying broker, who charges commission at the rate of J per cent,
of the gross value of the cotton, plus cartage and porterage charges
which are fixed by rules of the association. The cotton is then
forwarded to the spuming mill, where the bales are broken up.
If any are found faulty, due claim is made upon the selling broker
in accordance with the rules on the contract form.2 The selling
broker charges J per cent, on the gross value of the cotton to the
merchant on whose behalf he acts.
Spinners may also buy " on averages," that is, a broker
forwards small samples (called " averages ") to the spinner who
makes a choice and sends a bid by telephone or telegraph. If an
agreement is reached in this way, the same conditions apply as
in spot transactions.
Cotton bought by one Liverpool house from another for re-
sale on the market is called " Speculation," but if for export it
is classed " Export." The buyers in these cases are responsible
for furnishing the returns to the association, which, along with
the returns of the spot sales, are posted up in the Exchange
twice each day.
1 See Rule 442, printed on the back of the forms, Appendix V.
2 See Contract Form i, Appendix V.
SPOT AND C.I.F. BUSINESS 159
In addition to the ordinary direct sale and immediate delivery
of spot cotton, either at fixed price or on call, contracts can be
concluded (either at fixed price or on call) for Deferred Delivery
Spot Cotton, Forward Delivery, Shipment, or Cotton "To
Arrive/' There is no particular difficulty calling for comment
in these cases, and the conditions are identical with those of the
ordinary spot contracts, with the addition of provisions dealing
with questions arising out of loss or damage to cotton declared
but not delivered under the terms of the contract.
The Liverpool Cotton Association demands that all cotton
reaching Lancashire should be dealt in according to its rules and
to no other. It is therefore only to be expected that its attitude
towards the Manchester Cotton Association (established in 1894)
should be a hostile one, and that at first it should have refused to
co-operate on any terms with this newly-formed rival Manchester
body. " The object of the foundation of the Manchester Cotton
Association was to develop a competitive market in the interests
of the cotton spinners, and to encourage spinners to buy upon
c.i.f. terms instead of buying spot ex-warehouse Liverpool. It
is calculated that on 100 bales of American cotton, c.i.f. delivered
at Oldham via Manchester compared with 100 bales delivered via
Liverpool there is, at present rates, a saving to the mill of over
£10, and that, therefore, the advantages of direct shipment via
the Manchester Ship Canal ought to ensure that course being
largely followed by the managers of all the spinning companies/'
In the Egyptian section, in normal times, more than one-half
of the imports destined for Lancashire consumption are landed
direct at Manchester. This is a natural consequence of the close
relations existing between the Alexandria shippers and the home
spinning companies; and the competition thus occasioned is
sufficient to cause a rebate to be given on Egyptian cotton landed
at Liverpool going forward to the Bolton area, where the greater
part of this cotton is spun. The saving to the mill on cotton
delivered via Manchester, compared with the Liverpool schedule
rates is £11 us. per 100 bales, and in order to attract any c.i.f.
Egyptian cotton or even Egyptian spot cotton, Liverpool has to
grant rebates to that amount.
In recent years a more accommodating spirit has prevailed
between the two associations, and many matters of common
concern to the trade have been discussed by representatives of
both, with considerable benefit to the industry. There is, how-
ever, one point on which agreement hitherto has not been reached,
and that is the question whether raw cotton, lying in Manchester,
should be tenderable against Liverpool futures on the same terms
as cotton lying in Liverpool itself. The Liverpool Association
1 Statement published, June 1921, on behalf of the Manchester Cotton
Association.
160 ORGANISED PRODUCE MARKETS
insists that cotton to be tenderable must be on the spot in Liver-
pool ; while the Federation of Master Cotton Spinners' Associations
and the Manchester Cotton Association maintain that it is a great
injustice to the cotton mills to rule out the quite appreciable
stocks held in Manchester as possible tender against futures
contracts. Moreover, they point out that such a rule prevents
them taking full advantage of the two competitive raw cotton
markets and the two rival ports of Manchester and Liverpool.1
In the discussion on corners it was pointed out that any rule
limiting, either explicitly or implicitly, the quantity of produce
tenderable against futures is undesirable, and renders manipula-
tion easy. Therefore, on general grounds, the Liverpool Associa-
tion is in this question acting against public interest. That this
is so is further borne out by the traces of a squeeze that are often
apparent in the enhancement of the current month's futures
towards the end of the month, exactly parallel to the case of
Chicago wheat, where the limitation of tenderable grain to that
in specifically recognised elevators always produces the same effect.
The fear that the Liverpool broker would suffer by the change is
not well founded. He serves a useful purpose as agent and adviser
to the mills that employ him ; and his services are likely to be
needed equally, whether the cotton comes to Manchester or to
Liverpool.2 The outstanding claim made for the Manchester
Association is that it offers representation to the spinning interests
which are entirely neglected in the Liverpool Association.
A market in cotton, with dealings in both spot and deferred
delivery contracts but not in futures, has been in existence for
some years at Osaka in Japan. Its ordinary meetings consist of
two sessions, each lasting one hour, separated from one another
by an interval also of one hour. During a session four officials,
one representing the Government and the remainder representing
commercial interests, sit on a platform at the end of the market
room. Below them, on the floor, the brokeis take up their
positions hi a space marked off by a barrier from that occupied
by the general public. It is possible to communicate, across this
barrier, with intending buyers and sellers. Bids and offers, at
so many yen per bale, are made through the officials on the
platform by means oi a conventional code of signals ; and at the
1 In the autumn of 1921 the Manchester Ship Canal Company an-
nounced that if any cotton imported direct to Manchester is required for
tenders against futures contracts in Liverpool it will carry it free of cost
to Liverpool. It is anticipated that this action will prove a sound business
proposition in stimulating direct cotton importation by canal to Man-
chester.
* For the whole question of the relations of the Liverpool and Man-
chester Cotton Associations to one another, see a statement published
under the authority of the Manchester Association in the Manchester
Guardian of June 17, 1921.
SPOT AND C.I.F. BUSINESS 161
end of each period of ten minutes there is an interval of five or
six minutes which is utilised in completing the clerical work
involved in the transactions just concluded. There are, there-
fore, eight such periods on every market day. Where samples
are not exhibited sale is by description or by grade ; and disputes
are settled by an arbitration committee appointed by a society
to which all who handle cotton in Japan must subscribe. The
varieties dealt in are mainly American and East Indian. (Of the
total export of 276,926 tons from India in 1921 Japan received
l65,857 tons.) All cotton reaching Japan is sold in this Osaka
market ; but Kobe is the distributing centre and the port where
all the warehouses are situated.
On examining in greater detail than in Chapter VI. the wheat
trade between, say, America and Liverpool, three classes of
dealers can be distinguished through whose hands the grain may
pass on its way from the interior markets to the dockside in Eng-
land.1 Suppose that Kansas wheat is being dealt in, the natural
exporting point for which is one of the ports on the Gulf of Mexico
(Galveston, Port Arthur, or New Orleans). The first class consists
of those who buy wheat in centres like Kansas City, Wichita, and
Hutchinson for delivery at Gulf ports, i.e. for delivery " on track "
at a Gulf port, the charges up to this point consisting of the
freight rate from place of purchase and of weighing and inspection
fees on arrival at the Gulf. The second class includes those
dealers who take over the wheat at the Gulf and sell it delivered
in foreign countries. They are principally New York firms.
The third class embraces those who buy wheat in the interior
markets and sell it for delivery at foreign ports. This class also
buys wheat " delivered at the Gulf/' that is, purchases from the
first class, and may even, in some cases, buy it f .o.b. at the Gulf
as explained below.
When wheat arrives " on track," i.e. in railroad cars, at the
Gulf it must be taken into an elevator and perhaps stored for a
time before it can be loaded into the hold of a vessel. Loading
charges amount to about f of a cent per bushel, and other inciden-
tal expenses bring the figure up to i to i J cents. This operation,
which is called " fobbing," that is, placing the wheat f.o.b. (free
on board) ship, may be undertaken by firms of the first class
before they sell to the larger exporters ; but as a rule these small
houses sell their wheat on track and leave the fobbing to be
performed by the exporter proper.
Wheat is mixed in the Gulf elevators during the fobbing
operation, and this is done by forwarding agents on behalf of
1 For much valuable information concerning the American export
trade in wheat, see Kerr and Weld, " Prices of Wheat to Producers in
Kansas, etc.," House Document, 1271, 63rd Congress, 3rd Session, p. 23
et seq., Washington, 1915.
M
162 ORGANISED PRODUCE MARKETS
the smaller firms or by men specially maintained for the purpose
in the case of the larger firms. Those exporters who carry through
the complete work themselves, from buying in the interior
markets to delivery in Liverpool or elsewhere, have necessarily
to do their own fobbing, and to make allowance for its cost in
the price charged the foreign importer. If the wheat has been
bought " delivered at the Gulf " or f.o.b. from a dealer of the first
class, the broker who carries through the sale is paid J of a cent
per bushel brokerage. This transaction takes place usually in
New York or Chicago ; for these are the markets used by the
export houses at this stage, and a Kansas City firm, for instance,
may find that its broker has sold to another Kansas City house
which is exporting the wheat on a c.i.f . contract.
Practically all wheat imported by Liverpool buyers is bought
on c.i.f. contracts ; that is, insurance and freight charges are borne
by the American exporter. The latter, therefore, has to fix his
price sufficiently above the interior market price to cover all these
additional expenses and leave something over for profit.
Selling c.i.f. involves several considerable risks for the exporter,
only some of which can be insured against by hedging with futures
as described in a previous chapter. Suppose the exporter cables
an offer to a Liverpool firm. The Liverpool market is in being
while it is night in the American centre, and it will be the following
morning before an acceptance can be obtained. Meantime, what
has happened in Liverpool during its market session may influence
the market price in America on the date of receipt of acceptance ;
and thus the American merchant may have to buy his hedging
futures at a price which was probably forecasted more correctly
by the Liverpool house than by himself. Allowance, therefore,
has to be made for possible fluctuations of this kind when offers
are being made from America.
A second risk in the export business is the fluctuation of ocean
freight rates, as well as the occasional impossibility of obtaining
a ship or cargo space on any terms whatever ; while a third risk,
a very considerable one at present, is in the instability of foreign
exchange rates, whose fluctuations are often sufficiently great
completely to wipe out quite a large margin allowed for variation
and for profit. The sale usually takes place in terms of sterling
payable in London ; and if the rate of exchange varies between
the date of the wheat sale and the date of sale of the bill
of exchange, there is an unforeseen loss or gain to the ex-
porter.1
Yet, risky though this business may appear to be, and not-
withstanding the fact that it involves the tying up of much capital,
it is conducted on exceedingly small margins. Not more than
1 The recent development in banking, by which foreign exchange is
sold forward, may now eliminate this particular portion of the risk.
SPOT AND C.I.F. BUSINESS 163
2j to 3 cents per bushel are allowed as gross margin by the
exporter in making his bids, and out of this all the overhead
expenses of the firm must be met. These are estimated to amount
to one cent, leaving a net profit of ij to 2 cents per bushel, a
figure which may be exceeded on some occasions, but may not
be reached, even approximately, on others.
The table on p. 164 (taken from Kerr and Weld, op. cit.)
shows, in detail, a few actual transactions of a large exporting
house in July 1914, before normal transactions were upset by the
recent European War.
The grade of wheat in all eight cases was the same, viz. No. 2
Hard.
In each case the wheat was bought " delivered at the Gulf/'
and was sold to be delivered c.i.f . Liverpool. The f .o.b. charges
are rather low, ij to ij cents being considered more probable ;
but owing to the fact that interest charges on cost of carrying
may be included, it is impossible to quote this item accurately.
Insurance, etc., is also lower for this particular house than it is
in the case of most exporting houses ; for it includes marine in-
surance only, while all shipments to the Continent, and many to
the United Kingdom, carry in addition " insurance on out turn,"
that is, an insurance guaranteeing or protecting the delivery of
the full amount that has to be landed at the foreign port under
the contract.
United States wheat is exported mainly in the months of
August, September, and October. It is consequently available
on the Liverpool market in fairly large supply from September to
the end of the year. After that, its arrival is intermittent.
Canadian wheat begins to arrive in October, and is only in
moderate supply during the winter and spring ; but from June
until August it comes in larger quantities.
The fact that the wheat -producing countries have very different
climates, and the fact that some are located in the northern
hemisphere and some in the southern, cause the flow of wheat to
Liverpool to be fairly uniform throughout the year. Indeed, it
is possible to regard some of the exporting countries, in the matter
of supply, as complementary to others. For instance, Australian
wheat, which begins to arrive during March, and is in constant
supply until September, and Pacific Coast wheat (from Tacoma
and Chili) taken together make a continuous stream of arrivals
for most of the year ; and an additional advantage in this case is
the fact that the properties of these crops are very much alike.
Again, Argentina wheat comes at a time (March to October) when
the home-grown crops are approaching depletion ; while the
arrivals of Indian wheat between May and November also help
in just the same manner. Russian wheat, when it was available,
came from June until December in greatest abundance; but
i64
ORGANISED PRODUCE MARKETS
Si «
to o o
N to O to
O O M O
fiPPPPPPPO
III a'
to to O O to O
N N JO p JO vO N
CO CO N M ^ N M
JO JO «0 O O JO O
O O O O O O O
8
«« -SiOiOtOtOiotoioio
^bbbbbbbb
S-O "^ P P P P JO jo p JO
^
j; to «O to O O O iOO
^ ou flfx?>1f^PP!Oj-i —
(HW ^^opbbbbo
10 tO to 10
8 S-^ J2O 10 l^ tx
"Sp fx,OJ500^^ ^»^»
HO in'OO O >OtOO «OO
•*-» tx vO vO oo vO w vo Cx
v, '$* '<» '" O '*• ir> '-* 00
\j Q1* ^ O O^ ^ O^ O^ O^
^- IN" %• w"
II I = — ! 1 1 s
•^ <n
O\ H CO ^ H N tO»O
M M H M M H C4
fe
w N CO t- tO
SPOT AND C.I.F. BUSINESS 165
during the rest of the year arrivals from, the Black Sea used to
be fairly considerable.
When the import trade in grain developed after the repeal of
the Corn Laws, consignments by foreign houses for sale in England
formed a large proportion of the shipments. These houses were
few in number, being mainly old and well-known firms ; and they
sold directly, or by means of agents, in London especially, to their
importing clients. The cargoes were large, and, at first, it was
not the practice to subdivide them on sale into smaller units.
The difficulty of disposing of such large lots to single individuals
gradually brought about the custom of breaking up cargoes into
what are termed " parcels." A parcel may consist of 1,000 to
5,000 quarters of wheat, or even more, and it is dealt in on the
same terms as a cargo. The buyer takes up a c.i.f . contract, and
the procedure is in almost every respect the same as in the case
of a full cargo, the only difference being that a parcel of wheat or
flour bought abroad must be shipped to a definite home port, and
can be delivered at that port only and at no other. A cargo, on
the other hand, may be sent to a port of call to await orders to
discharge at any selected port at home or on the Continent.
Recent amalgamations in milling interests, and the resulting con-
centration of demand in the hands of fewer and larger companies,
are tending to destroy trade in parcels. In Liverpool, especially,
it is now quite common for a few large shippers to buy abroad
and, when the cargoes are due to arrive, to telephone offers round
to the milling firms in the neighbourhood. In this way, much
business is transacted without the intervention of brokers on the
exchange — a fact of some importance as indicating a subsidiary
consequence of the growth of combinations in the milling industry.
Examples of the standardised contract forms used in the
import trade by members of the Liverpool Corn Trade Associa-
tion, Limited, are given in Appendix IV. A few points call for
comment.
The methods employed for fixing quality have been already
discussed in Chapter II., but it is important to notice thct
the variation allowed by implication in the word " about " is
laid down in the conditions to be the equivalent of 3^. per
480 Ib. As regards quantity, the unit to which the price refers
is usually a quarter, though occasionally a ton ; and the total
quantity purchased is measured in quarters, or statute tons, or
metric tons (1,000 kilos) in the case of sale on the Continent.
The cental (100 Ib.) is also used as unit, both in Liverpool and on
the Pacific coast of the United States. The quarter is not a fixed
weight, but varies with the place of origin and kind of produce.
There is consequently much confusion in statistical returns
employing this unit ; but the British Government Wheat Com-
mission always used the quarter of 480 Ib. as unit in its sales of
166 ORGANISED PRODUCE MARKETS
passage c.i.f. wheat during the period of control arising out
of the war. It is to be hoped that uniformity may be attained
as a result of legislation now pending ; but the difficulties of
inducing foreign centres to alter their long-established customs
will be serious. A natural weight (so many Ib. per bushel, for
example) is often guaranteed, and both the London and Liver-
pool Associations have a specially designed machine for the
speedy and accurate determination of this figure. As wheat and
other grains may alter in weight during transport, the quantity
shipped must necessarily be susceptible of a margin (5 per cent,
more or less in the case of the River Plate form) ; but it is the
quantity delivered that determines the amount to be paid.
Under the paragraph " Policies," marine insurance is provided
for, and agreement reached as to whether " average " is for
seller's or buyer's account.1 Contracts for the carriage of goods
on Atlantic voyages frequently incorporate the provisions of the
Harter Act, a statute of the United States which prohibits clauses
in freight contracts that relieve the shipowner from the duty to
take care of the cargo and supply a seaworthy ship, but which
provides that if the shipowner has exercised due care to make the
vessel seaworthy he shall not be liable for damage or loss arising
from faults or errors in navigation, or in the management of the
vessel. The exact effect in English law of the incorporation of
this Act in a charterparty is obscure,2 but the general result
seems to be to render the shipowner liable to make good certain
loss not recoverable under the marine insurance policy, such as
damage to the cargo by sea-water. In the case of the River Plate
contract form, given in the Appendix, which, of course, contains
no reference to the Harter Act, there is a clause agreeing that
grain damaged by sea-water or otherwise is to be taken by buyer
with an allowance for deterioration, based on contract price, to be
fixed by arbitration in Liverpool. This condition is known as
" Rye terms/' and the contract form is headed accordingly.
Loss from this cause, however, is often provided for in other ways.
The Tale quale condition, for example, is that damage by sea
water or otherwise, if any, is to be taken as sound, while the S/D
condition prescribes that damage by sea-water, if any, is to be for
seller's account. Many variants of these conditions are found.3
1 For full discussion of average and average adjustment, see Arnould,
On the Law of Marine Insurance and Average ; or Scrutton, Chart erpar ties
and Bills of Lading.
2 See Arnould, op.cit., Section 918, p. 1155; and Scrutton, p. 100.
3 The adoption of the " The Hague Rules, 1921," which were drawn
up as a result of a meeting of the Maritime Law Committee of the Inter-
national Law Association held at Whitsuntide, 1921, may simplify the
whole question of shipowners' and cargo owners' liability in respect of
damage to goods in transit. These rules define the risks to be assumed by
sea-carriers under a bill of lading, and it is hoped that they will become
of universal application after January 1922.
CHAPTER XIII
MARKETING BY AUCTION
wholesale marketing and the distribution of certain articles
of produce which (unlike cotton, wheat, and maize) have never
become the subject Of dealings in highly organised markets are
effected in a variety of ways, of which sale by auction is one of
the most important. The extent to which auction sales of pro- i
duce have developed varies from country to country. They are
most widespread, probably, in the United States, where efforts
have been made to extend them to every kind of farm produce
in the large wholesale markets in the cities. In London they
form the normal method of wholesale dealing in imported \ypol
and tea, and in some other commodities which just fall short of]
fulfilling the conditions requisite for more highly organised.]
dealings on exchanges. ~
To be adapted for sale by auction, a commodity must, of
course, be sufficiently abundant in supply to attract a f air'number
of buyers ; indeed, the greater the degree of concentration of
supply at a single centre the greater the probable success of the
auctions, and the greater the number of buyers attracted to the
sales. Without a large number of competing buyers there cannot
be any success. Again, it is undesirable for sales by auction and
sales by private treaty to compete with one another to any extent ;
for the continual disappointment that must necessarily ensue,
owing to withdrawal of lots from auction, causes dissatisfaction
to buyers, with resulting discredit to the auction market. For
success, the auction system must dominate the trade, and attract
the greater part of the available supply of the commodity and a
large majority of the buyers. Hence, small consignments to
scattered markets never sell well by auction. Possibly this is one
reason why London's position as a distributing centre for wool and
for tea is unassailable, and why attempts to establish important
auction markets for these commodities elsewhere nearly always
meet with failure.
An interesting fact with regard to the commodities sold by
auction is that they are, as a rule, raised in districts remote from
the markets where they are sold in this way, and that attempts
to handle products raised close to the market have not often
167
168 ORGANISED PRODUCE MARKETS
succeeded. To such an extent is this the case that, in England,
home-grown wool is often sold in the country fairs and local
markets in the ordinary way, i.e. by bargaining between producers
and buyers representing the manufacturing interests ; while foreign
wools are almost invariably sold by auction in Liverpool or in
London. It would seem that direct business connections are
easily established between buyers anorprodocers-when there is
the possibility of intimate personal intercourse, and that the
custom has grown up of many producers disposing of their clips,
year after year, to the same buyers at, of course, the price set
by the local market at the time of sale- But the main reason for
• the difference is the difficulty in the local markets of collecting
the produce beforehand, and of entrusting its sale to one or two
firms or individuals, who could then invite bids from buyers and
^institute a sale by auction. There are too many small producers
to be considered in these local markets ; and unless they pool
their stocks, either by means of co-operative societies 1 or by
employing the same auctioneer or selling agent, they are unable
to offer to the buyers the united front which is needed on the part
/of suppliers, if sale by auction is to become general. The fewer
the individuals who control supply, and the fewer the sources of
that supply, the more easily are sales by auction brought about.
When supply has to come from abroad, it tends to get into the
hands of a comparatively small number of expert importers or
agents ; and the conditions required for auction sales are thus very
readily fulfilled.
For handling by means of auction sales commodities need not
be capable of that degree of standardisation that is required for
dealing by grade in ari~~orgariised market. The produce is in
every case easily accessible or actually on view at the time of
sale; and samples are usually obtainable a short time before.
Yet standardisation of grade and package is of considerable
importance, and, in the case~of wooTahd tea, it is enforced as far k
as circumstances permit.2 The more perishable the commodity j
the more necessary is standardisation^ for this purpose ; but it is *
only in the United States that much" progress has been madejn
the sale (by auction) of very perishable commodities in central
markets in the large cities.
The world's total annual wool supply 3 is not easy to estimlffe.
1 The Agricultural Organisation Society (A.O.S.) is fostering the
co-operative disposal of the English clip. It collects and classes the fleeces
at local depots, and then markets them at the local sales. Again, the
flockmasters in Cumberland and Westmorland are arranging to sell wool
in London by samples of 10 per cent, from each consignment, which usually
represents one farmer's clip from a particular breed.
* When the British Government controlled the wool market during
the war it attempted sales " on description," but without success.
3 See Dalgety's A nrntal for facts and information.
MARKETING BY AUCTION 169
It is produced under such varying conditions in so many different
countries in the world, and is spun and woven, in primitive
home industries as well as with the latest aids of science in well-
equipped factories, that it is not possible to make general state-
ments without very wide qualifications. Yet, as regards market-
ing, some facts stand out clearly ; and the bulk of the world's
output follows a similar course year by year.
Beginning with the United Kingdom, which, in the West
Riding of Yorkshire, possesses the world's most important woollen
manufacturing district, the home output may be subdivided into
the Northjrf England clip, the rest of England, the_Scottish, and
the Irishjclips. Each of these is marketed in a different manner.
The North of England wools are usually purchased direct from the
farmers after inspection on the farms by representatives of Brad-
ford wool merchants. The Scottish clip changes hands at a
series of sales and fairs, which begin at Leith in June, passing on
thence to Glasgow which is a dep6t for Cheviot and black-faced
wools. These faifs are later on linked up with those in the
middle and south of England, the series ending at Bristol in
mid- September. Practically the same small group of Yorkshire
merchants travel round to all ; but here and there a strong local
demand exists, in the West of England for example, and a district
may possibly be left with its own market to itself. Irish wools
are collected by the small country shopkeepers, who act as agents
for Bradford merchants, and who, until recent years, used to pay
the farmers in kind ; but the growing importance of the Irish
woollen mills and the increasing prosperity of the Irish farmers
are making a change in this respect.
Each of the sales or fairs offers a wool with special character- ^
istics of its own. The grades, therefore, are exceedingly numerous ;
but in a general way British wools may be classified into five
broad classes — Lustres, Demi-Lustres, Downs, Half-breeds, and
Mountain, each of which is again divisible into two chief sorts —
Long and Short.
The conditions of purchase at the fairs or sales at which the v'
Scottish and non-Northern English clips change hands are agreed
*oir periodically by the British Wool Federation, the County Wool
* Merchants' Association, the Wales and Border Counties Wool-
bi^rs' Association, the Auctioneers' Association, and the
National Farmers' Union. The following were those agreed on
for the 1920 clip : —
1. All wool to be sold by the pound, and no bids of less than \d.
to be taken.
2. All wool to be free of rent and at the auctioneer's risk until
delivered to the railway company or carrier. Each purchaser shall,
on the day of sale, give written instructions to the auctioneer for
forwarding the lots purchased by him, and should he not do so,
ORGANISED PRODUCE MARKETS
the aitctioneer shall be at liberty to forward it to the railway station:,
and to charge cost of storage and expenses to the buyer.
3. All wool to be weighed out.
4. An allowance of one-fourth shall be made for greys perceptible
through the fleece, blacks and greasy in washed clips, and for greys'
perceptible throughout the fleece, and blacks in greasy clips (whether
declared or not) ; also an allowance of is. 6d. each for cotts, or 25
per cent, on the whole lot complained of and found faulty. No
locks shall be packed in the fleece.
5. Ninepence per sheet shall be paid by the buyer for the hire
of same. The buyer shall return the sheets in good condition as
soon as emptied, and on no account shall they be used privately.
If sheets are not returned within four months of date of sale, the
auctioneers shall invoice them to buyers at £i per sheet, and 55.
each for lamb's wool bags, which sums shall be payable by the
buyer.
6. Errors in weight or description, greys, cotts, cast, and greasies
shall be rectified.
In case of errors in weight and description, a certificate by an
independent person agreed to by the auctioneer-and the buyer shall
be accepted by the auctioneer.
Full allowance shall also be made for unfair package (which
shall include clags, locks, tailing, or skin wool in either washed or
.unwashed fleeces).
7. All wool shall be exposed for sale in a manner which will
permit a full inspection.
8. Drafts of i Ib. per cwt. on gross weight shall be allowed by
.farmers and auctioneers.
Jhe Bradford selling terms to be as before.
Biftish wools are usually marketed by the " pack " of 240 jb.
Statistics of recent years indicate that from one-tentn~TxT6ne-
/fifth of the wool consumed in the United Kingdom is home grown,
and that Australia, New Zealand, and South Africa contribute
by far the larger amount of the balance. The position, therefore,
of Australasian wool in the London auctions is an exceedingly
"important one ; and in merinos it largely controls the market price.
Australasian wools are prepared and graded with considerable
*care. In shearing, it is the custom to separate off the inferior
portions of the fleece at the very outset, and to make up in
•differently marked packages what are called the "firsts/'
"seconds," "clothing/' and "combing," which are really the
:main body of the wool graded as to quality. When the Imperial
•Government purchased the several seasons' clips during the war,
iit was found necessary to recognise no less than 848 standards of
quality in Australasian wools alone. Accordingly, anything like
a general description of the classification is out of the question,
aiad probably of interest only to those engaged in the actual trade.
.Expert buyers who are able to estimate within one or two
per <cent. what the net yield will be from a mass of wool, grease,
MARKETING BY AUCTION
dirt, seed, and sand, or from unwashed fleeces, the products of
hot, dry countries are not many in number. It is calculated that
they do not amount to more than a few hundred men in England,
France, America, and Germany, taken together. Some of them
visit Australia once a year to attend the auctions there ; while the
rest gather every two months in the Wool Auction Room in
Coleman Street, London, E.G.
At one time, practically the whole of the Australasian clip
was sold in London. Now about one-half to two-thirds is sold ^
at home. There is still considerable discussion in the trade as to
the merits of the rival markets ; but generally the advantages and
disadvantages turn on the question of quick or later sale. Those *""
growers who wish a quick return, and are ready to forego the
chance of higher prices later on, will sell at home. Those who
think it worth while waiting for the later prices will consign their
produce to London. The auctions in Australia follow one another
in sequence in the chief coast towns, beginning with Sydney, and
passing on to Tasmania after Brisbane. A similar rotation takes
place in New Zealand. After purchase, the wool is shipped to
the buyers in Europe or America in the ordinary way.
If the sale takes 'place in London the buyers spend the /
mornings in the dock and wharf warehouses, sampling the bales
that have been sent there by the grower, or, more probably, by
the bank that has financed the import up to that point. The
auctions take place in the evenings, and are in the hands of a
small group of selling brokers (about ten firms) who share the
business among Iftenf. Bids ar£ made and taken with extra- */
ordinary rapidity ; and the fact that both buyers and sellers form
small groups well known to one another results in business being
done in a manner not readily comprehensible to an outsider. In
addition to Australian wool, very large quantities of foreign and
other wools find their way to London for sale by auction.1
The selling brokers are, as a rule, paid a commission of | per '
cent., which is an expense ultimately borne by the grower; and,
in addition, they receive from the purchasers a fee of is. for each
lot of wool that changes hands. ""Buying I>r61cers are employed
by those persons who do not buy in very large quantities.
They are members, as a rule, of wool-dealing firms ; but it is not
uncommon for members of the selling firms to act occasionally
in this capacity. Their fee is not standardised in the same way
as the selling broker's fee, but J per cent, is the average. Strict*/
cash terms are the rule — payment within seven days, the wool to
be removed from the warehouse within fourteen days. If it is
not removed within the period allowed the selling broker may
1 The London wool auctions, when attended by Continental buyers,
occasionally resemble the American exchanges in respect of animation
and excitement.
172 ORGANISED PRODUCE MARKETS
resell by auction or private contract, and debit the defaulting
buyer with the resulting expenses and losses.1
In Liverpool, East Indian wools, and a large variety of
miscellaneous wools, like Egyptian, River Plate, Mohair, and
•Alpaca, are auctioned at stated periods; while on the Continent,
Amsterdam, Havre, Hamburg, and Marseilles, are important
market centres! The Antwerp wool sales used to include the
bulk of the Spanish and Russian wools, and later, the South
American wools. Sales were held six times a year, in January,
March, April, June, September, and November, just a week before
the London sales, with the object of catching the Continental
buyers on their way to London.2 The conditions are very
similar to those prevailing in London.
One striking fact stands out in all these auction sales, and that
s is the very unequal demandsfpr sorts of wool between which there
is even only a small difference in quality. This seems to be
accounted for by the narrow range of requirements of the several
groups of consumers. Bradford buyers need sound lots embody-
ing little waste ; and the topmakers, or dealers, buy to make up
complex blends, and are ready to take lots of a mixed character.
German buyers require the finest merinos ; and American buyers,
on account of tariff restrictions, look for stuff on which there is
only a small loss in the scouring process. Hence wools, differing
in quality but slightly, are not substitutes for one another in the
same way as are different qualities of wheat and of cotton. This
fact, in conjunction with the almost unlimited rmmber^of varieties,
has an obvious bearing on the quesHorT wfiether it impossible or
not to establish an organised jnarj^e. t in raw wool, with dealings
in futures similar to the e'xistinglnstitutions in the case of wheat
and cotton.
Tops (i.e. wool combed ready for spinning) are sold in England
for deferred delivery, the topmaker undertaking to supply so
many packs per week or per month for a given period at a fixed
price. This imposes on the topmaker the necessity of laying in
and holding a sufficient quantity of raw wool if he is not prepared
to take the risk of his contract being rendered unprofitable by
price fluctuations in the London auctions or the country sales.
It was just under such conditions that futures markets were
evolved in wheat and in cotton ; and it is, therefore, natural to
inquire to what extent progress in that direction has taken place
in the case of the markets for w^ooj tops. In Bradford sugges-
tions for further organisation have been rejected ; but in Havre
1 Clapham, The Woollen and Worsted Industries, Chap. III.
2 The wool trade has not yet returned to the routine of pre-war days,
which is that here described. Discrepancies in detail, therefore, may be
detected between the text and present practice, but the general outline
is accurate.
MARKETING BY AUCTION 173
quotations for futures in raw wool are given from time to time,
and in some other Continental-centres there are organised markets \
for futures in tops. Yet it is true, on the whole, that neither in
raw wool nor in tops is there a market comparable in organisation
with even the least important of the main markets in grain or in
cotton. This may be ascribed to the fact, in addition to others
already referred to, that wool is combed into tops on commission,
and what is bought by the wool spinneT1s*not raw material, nke
the raw cotton of the cotton spinner, but tops, one stage removed
from original raw material.
Professional^ speculation or expert risk-taking in the wool
market is noi~~differentiated from the other functions of the
middleman. The class in the wool trade that might correspond
to the class of expert member of the cotton exchanges has to
assume responsibility for the performance of the first stage in the
manufacturing progessT That is sufficient to prevent it devoting
all its energies'to marketing and to developing the knowledge and
skill that the expert risk-taker requires for the performance of
his special duties.1
The United States is thej:hird largest wool-producing country */
in the world ; but as it is also one of the greatest of the world's
consumers it has to import an amount, on an average, equal to
about one-half of its own total output. The fact that it is not
an expecting country, and that, therefore, American bankers are
not in the habit of financing wool movements,2 has prevented
the development of wooPaucSooa "~sim3aT to those in Australia
and the other wool-producing_JBritish . Colonies. Therefore
American wool is not marketed in any systematic manner, though
attempts have been made recently to introduce improvement in
this direction.3
United States wools coming from the 'States west of the
Mississippi are known under the general term "territory," and they
offer many sharp contrasts to the so-called " fleece " wools of the
Eastern States. They are clipped from wool sheep, to a large
extent, as distinct from the mutton or cross-bred sheep of the
east ; and flocks are large, and flockmasters keen business men.
Consequently the characteristic form of sale is direct to buyers
sent out byjftejwoj)ynerd^^ or
1 There is a growing tendency, which is being encouraged by the
Bradford Chamber of Commerce, for wool dealers to settle disputes by
reference to arbitrators appointed by the Chamber: This movement will
inevitably lead to an increased degree of standardisation in marketing
conditions, a fact which may have far-reaching effects on the position of
middlemen in the wool trade.
2 The restrictions imposed by bankers on the methods of sale of wool
on which they have made advances have been an important consideration
in the establishment of the system of auction sales.
d?See Cherrington, " Some Aspects of the Wool Trade of the United
States," Quarterly Journal of Economics^ vol. xxv. pp. 337-56.
i;4 ORGANISED PRODUCE MARKETS
even sometimes by the mills on the Atlantic coast. These buyers
get no help in their difficult work from centralisjecLauctions or
exchanges, and each has to depend on his own individual inter-
preFatioh of the mass of information and estimates of clip available
to him. It is not surprising, therefore, that they occasionally
adopt reckless methods, and, as in 1909 for example, resort to
the risky practice of buying wool " on the sheep's back " months
before it is ready for shearing. An unusually heavy drop in
prices in the winter before, combined with a subsequent rise, led
many buyers to make large purchases of this kind, and to offer,
even in February, prices for ungrown wool that would be con-
sidered good in normal years for high-grade clips. This kind of
speculation is very unsafe, and meets with discouragement from
the stable elements in the trade.
Attempts at baling and grading and consequent sale by
sample have met with success in the case of wools grown in the
Pacific coast States ; but the most interesting development in the
way of marketing is that inJ£astexa-Qregon, where wool is sold on
" sealed ^bLdal'-snbmiUed by the buyers on appointed days.
Under this variant of the system of auction sales the submitted
bids are binding on the bidders, but the grower may refuse all
bids if he chooses to do so.
In 1894 a comprehensive attempt was made in New York to
alter American methods of wool selling and buying by the intro-
duction of the London system of public auctions.1 Rules were
'drafted similar to those prevailing in the London sales. Quota-
tions based on these sales were made public ; and an attempt was
made to group them under heads sufficiently descriptive to make
them serve the purpose of wool buyers generally. Lack of
uniformity, however, in American breeding and packing methods,
^ and rather excessive handling , costs lit the various transfers,
prevented the scheme being a success, and it was abandoned after
three years* trial.
Less ambitious attempts to introduce the auction system
were made at a later period 2 by the establishment of wjaxehouses
located at the eastern terminals of the trans-continental rail-
roads, and managed as co-operative storage and sales depots,
where growers were to offer their clips direct to the manu-
facturers. Notwithstanding a certain amount of support from
the Wool Growers' Associations, the auction bidding feature
failed altogether ; and sales are now made in the usual way to
the same buyers as previously. New warehouses erected at
Chicago and Boston, with space leased tomercKaTrtS'and dealers,
seem to have met with some success; but in these cases the
1 See National Association of Wool Manufacturers, Bulletin, September
1894, and December 1898.
a Ibid., December 1908, December 1909.
MARKETING BY AUCTION 175
companies have merely gone into the wool merchant business
themselves, and have not made any attempts to change the
ordinary methods, except in so far as they have imitated the
Bradford Conditioning House plan of testing by invariable
standard methods and basing sales by wool merchants on cer-
tificates of quality thus obtained.
South American wools are sold in Buenos Aires, Monte Video,
and Bahia Blanca from October to March. Sales take place by
auction, the unit of weight being 10 kilogrammes, with payment
at once in paper dollars. The buying is mainly on United States
account.
As a consequence of after- war effects, the wool trade is passing
through a crisis which cannot fail to leave permanent traces on
methods of marketing, as well as on the whole course of business
in the future. From 1917 to 1919, the British wool clips were
purchased by the Government ; and the detailed accuracy with .-
which they were graded taught farmers and others the value of L
proper care in the get-up of their produce for market. Moreover,
grades and types hitherto unsuspected were discovered in home-
grown wool, and this is expected to result in a higher standard of ^
blending. Australasian and South African wools were similarly
dealt with; and the resulting surplus of these supplies in the
autumn of 1920 afforded a difficult problem for both the Home
and Colonial Governments. There is a growing manufacturing ^
industry in Australia which may lead to a larger consumption of
raw wool in that part of the world ; but it is not anticipated that
there will be any less for export, for there are still almost unlimited
tracts of land available for the extension of sheep farming.
An association, the British Australian Wool Realisation
Association (commonly referred to as " Bawra "), has been formed
recently 1 to dispose of the very large quantities of Australasian
wools that have accumulated, owing to the shipping difficulties
during the war. It experimented with auction sales, in June
1921, of Australian wool in Liverpool, Hull, and other centres,
but apparently with little success as regards prices obtained ; for
it was part of its policy to try and maintain a high level of prices
and to withdraw all lots that did not reach a reserve price settled
before the sale. The home clip of 1921 was not in a position at
the opening of the season to command good prices ; and com-
petition from Canada was threatened in the British market.
Canada used to be a wool-importing country ; but much progress
has been made there in the growing and preparation of wool for
market, with the result that it is now in a position to consider
sending bales to the United Kingdom and the Continent for dis-
posal at the monthly auction sales at the centres here. Japan,
which is developing a large woollen industry and importing
J It began operations in January 1921.
176 ORGANISED PRODUCE MARKETS
machinery therefor from Yorkshire, is now a buyer of Australian
wool, and is likely to take a place of considerable importance, in
the future, in the world's trade in this commodity.1
During 1919 and 1920 the UnitedJStates Government con-
ducted auction^saTes of woot acquired Dyll for war purposes, and
there was much negotiation between the United Kingdom and
the United States regarding stocks and prices. British Govern-
ment wool was auctioned in Boston, sometimes with success,
sometimes without eliciting a bid. The large stocks in hand
have reacted seriously on the prices of the 1921 clip, and the
Federal Reserve Board has drafted special regulations to enable
its member banks to render wool growers exceptional aid in
tiding over the transition period. Rules have also been drawn
up dealing with the inspection and licensing of wool warehouses
V under the United States Warehouse Act, 1916, amended 1919.
This Act, which is not mandatory, and applies as well to ware-
houses other than those handling wool, was passed with a view
to bringing about the uniformity of warehouse receipts, and
making them of the highest possible value as collateral security
for loans advanced by bankers. By becoming one of the Federal
warehousing system, a warehouse acquires a better standing, and
is more highly regarded by bankers and depositors. In this way,
American bankers may be rendered less reluctant to make
K advances on the security of wool stocks, and one great obstacle
be removed from the path of United States wool merchants and
growers. The establishing of official Federal wool grades is also
foreshadowed when adequate experience hag-bgen-ofatamed in the
weighing and standardising of wool in tjiese licensed storehouses.2
"Hrhe predominant position of the UmteoTKIhgdom as a con-
/ sumer of tea, and the large exports from the British possessions
/ give the London tea auctions special importance in the marketing
and distribution of that commodity. It is one exceptionally well
1 As an example of reports of Australian auctions, the following,
referring to sales on Monday, June 13, 1921, may be of interest : —
" Sydney,
" Monday.
" At the wool sales held here to-day, 6,047 bales were offered of which
112 were sold. Private sales consiste'd of 4,468 bales. The market was
very firm. Competition was keen, especially for carbonising sorts among
Continental buyers. Japan continued to buy freely. Reuter."
" Melbourne,
" Monday.
" At to-day's wool sale, 2,421 bales were offered, out of which 2,278 were
sold. Competition was very keen. Continental operators took the bulk
at rates slightly above last week's closing prices."
An Australian bale weighs about 350 to 330 Ib.
2 Circular No. 150 of the United States Department of Agriculture,
issued July 1920.
MARKETING BY AUCTION 177
fitted for handling by the system of auction sales. It is an im- /
portant product reaching this country in large quantities at a/
time. It requires much expert knowledge on the part of dealers ;
and it is a commodity whose grades or qualities are very great in
number. Moreover, differences of taste in different parts of the
kingdom are very marked ; and one variety is not in any way a J
substitute for another, so that, somewhat as in the case of wool, /
there is often marked dissimilarity in the demand for qualities i
very closely allied to one another.
Teas are divided broadly into Indian, Ceylon, China, and Java \^
varieties. These in turn are subdivided into classes named, in^
some cases, after the district where the crop is grown. There are,
therefore, in the case of Indian teas, Darjeeling, Assam, Dooars,
Syhlet, Travancore, and Cachar among others ; while in the case
of China teas, the number of distinct varieties is almost beyond
reckoning. There are " Black Leafs " or Monings, which in-
cludes Kintuck, Keemun, Ningchow, and hosts of others ; and
" Red Leafs " or Kaisows, which include Panyong, Ching Wo,
Pecco Congou, etc. Then there are better known sorts, like
Lapsang, Souchong, and Oolong, in addition to fancy and green
teas like Caper and Scented Orange Pekoe and Green Fannings,
the latter coming from Ceylon. For blending purposes, even
soil and elevation of the garden where the tea is grown have to be
reckoned with ; and in the catalogues prepared for the auction
sales the name of the estate or garden, where possible, is always
added to the other information given.
When the tea reaches London it is at once stored in a public
bonded warehouse, where it is weigjjfid by the Customs authori-
ties and retained, pendin£_the sale and payment of .duty. The
importer, or his agent, tKen sel^^allsrcslrerrto "wnom instructions
are given to sell at the public sales in Mincing Lane. Occasionally
a sale by private contract is effected ; but public auction is the^
more usual method. The selling broker theri compiles and issueT
"catalogues to all the large wholesale buyers, indicating the teas
that are to be sold, the warehouse or warehouses where they are,
the garden or gardens where they have been grown, the quantity
and description of each grade, and the conditions of sale and pay-
ment. Notification at the same time is sent to the warehouse
that the tea is to be offered at a public sale ; and it is the duty of
the storekeeper to grant facilities to possible purchasers for the
sampling of the various brands. This is done by putting aside
representative packages of each lot. Samplers then go round
on behalf of the various large wholesale houses intending to
buy, and obtain a small sample, giving in return a packet of
equal weight and quality, so that the owner may suffer no
loss.
On obtaining these samples the tasters of the wholesale houses
178 ORGANISED PRODUCE MARKETS
begin their work and pass judgment on the qualities of the brands
offered for sale. In an ordinary season there may be as many as
1,200 different Indian teas to be sampled and valued in this
manner ; but it is not always necessary that the tasting process
should be carried through in every case. It may happen that
just common tea of no particular or special merit is required, and
in that case the buyer judges by the appearance of the leaf and
by smell, values " on the nose/' as the phrase is. When a decision
is finally reached orders are placed at once with the selling
brokers, so that the bids submitted may be " first in." This is to
avoid the difficulty that would arise at the public auction if
several buyers simultaneously made the same bid and none were
prepared to go higher.
At the actual sales the teas are sold at so much per lb.,
advances being made by \d. Procedure is rapid, and the very
full and comprehensive catalogues issued previously enable the
selling broker to dispense with all speech-making and the other
trappings of the popular auction-room. When the season is at its
height, Indian teas are sold twice a week, on Monday and on
Wednesday, Monday being the more important day. Ceylon
teas are sold on Tuesday, China teas on Wednesday, and Java teas
on Thursday. China teas differ so greatly in taste from Indian
that a different buyer is nearly always employed. There is,
therefore, no interference with the Indian sales that take place on
the same day.
Perhaps it is on account of its insignificance in comparison
with the coffee trade of New York, Havre, and other centres, that
the London coffee trade has hitherto failed to institute an ex-
change, and has contented itself with the system of auction sales ;
for (in the case of coffee) all the conditions requisite for the
successful conduct of an organised market are present, with the
single exception that, in London, the volume of dealings is too
small to occupy the full time of a sufficiently large body of experts,
and to pay the necessary expenses of maintaining a separate
organisation with all the equipment of committees and a clearing
house.1
When a coffee cargo reaches London it is placed in certain
specified public bonded wharves and warehouses and cleaned, if
necessary. It arrives, of course, in bags, but each parcel is
bulked separately so that one sample may be representative of the
whole. The samples taken vary in quantity according to the size
of the parcel, which is then refilled into the bags, the latter being
weighed at this stage for the Customs registration. The coffee
is now ready for sale. Occasionally there is purchase and sale by
private contract ; but the normal course is by public auction in
1 There is, however, some business in coffee futures conducted through
the medium of the London Produce Clearing House, Ltd. See Chap. XI.
MARKETING BY AUCTION 179
Mincing Lane.1 On the morning of the sale, or possibly on the
day preceding, the samples are shown in small trays in the brokers'
sale-rooms ; and specimens are given to the wholesale dealers for
roasting and tasting. The sales then take place at 1.30 p.m.
The comparatively small interval ot time allowed buyers for the
test of quality and the very great variety offered at a single sale
(often 150 to 200 different parcels being submitted) demand con-
siderable skill on the part of purchasers who, as a rule, select only
a few kinds by inspection before instituting the further test.
If the coffee is Brazilian, imported by way of New York, it has
already been carefully graded ; but as a rule coffee reaching
London comes direct from the place of origin. The method of
procedure at the auction sale itself is the same as in the case of tea.
Bids are in shillings and pence per cwt., payment within
days, brokerage i per cent, from both buyer and seller.
In the American States of Virginia, North Carolina, and South
Carolina, tobacco is sold by auction at quite an early stage in its
passage from producer to consumer.2 Warehouses have been
established at central points to which growers bring the tobacco
they have for sale. After being graded, it is piled in heaps on the
warehouse floor, where it can be inspected by prospective buyers.
Sales are held in the warehouses from time to time, and the
maximum fees charged by the proprietors are in one State, at
least (North Carolina), prescribed by law.
In the last few years there has been an extension of the auction
system to the more perishaWejarjnvproducts in terminal markets
established in cities in the United StaTelTand on the Continent.
In the former country, management is largely in the hands of
privately incorporated auction companies, though Government
action is not unknown ; but on the Continent control is always
vested exclusively in thejnunicipality iri whose area the market
is situated.
Where municipal or Government control exists, the sales are
conducted by officials who are forbidden to be interested finan-
cially, either directly or indirectly, in the trade of market com-
modities of any kind. Commission fees are definitely fixed at an
exceedingly reasonable level, and the advantages accruing, both
to producers and consumers, are claimed to be considerable.3
An American consul, writing of the Lyons market, says that
" fish and game are brought for sale from England, Germany, the
Netherlands, Russia, and from all parts of France. If a grocer
1 Most of the Brazilian cofiee, in contrast with other varieties reaching
London, is handled either on c.i.f. contracts or on contracts registered with
the London Produce Clearing House, Ltd.
2 Holmes, " Systems of Marketing Farm Products, and Demand for
such Products at Trade Centres," Report No. 98 of United States Depart-
ment of Agriculture, 1913.
3 See United States Special Consular Reports, vol. xliii.
iSo ORGANISED PRODUCE MARKETS
or butcher anywhere in France, in fact, anywhere in Europe out-
side of Lyons, has an overstock of any kind of provision, he is
always sure he can get rid of it at the central auction in Lyons.
Often a stock of provisions is sold here at private sale by corre-
spondence for and to parties outside the city." Another report
on the Berlin municipal market states that "the municipal sales
commissioners are bonded officials who are forbidden to be
interested, directly or inb!irecTIy7in the trade market wares of any
kind. They are responsible to the market hall management, and
are allowed to collect a certain fixed percentage on all sales made.
wThe primary purpose of these officers is to offer distant dealers
and producers opportunity to send in their wares, and have them
brought into the hands of Berlin dealers and consumers, through
v ,the agency of responsible middlemen and with the assurance of a
published and^steady price. A second or indirect purpose is that,
through their ^competition with tHTprfvale wholesale dealers and
through the daily publication of their report of the average whole-
sale prices for all wares and at all the halls, the municipal sales
commissioners may exQrcise_a-steadying influence upon the entire
wholesale business. Although it is estimated that they handle
only about one-fifth of the total wares received at the central
market-hall, it is, nevertheless, conceded that they indirectly
prevent extortion by the private wholesale dealer from the pro-
ducer or small dealer on the one hand, and from the consumer or
retailer on the other. Describing the results attained in Lyons,
the consul's report goes on to say that " this market is most em-
phatically favourable to the poorer classes. Many poor people
bid off a bunch of game or fish, dividing the expense among them-
selves, thus procuring a luxury that they could not otherwise
enjoy. It creates a centre in the city to which food comes from
t many points, largelyincreasing the supply. It reduces the prices
to retail dealers^in tEeTmarket, and Sharpens competition. The
auctions are always public, and the woman who buys from a small
dealer often knows just how much the dealer paid for the articles
in the market that morning."
About the years 1913 and 1914 there was considerable popular
agitation in the United States on the supposed wastefulness and
inefficiency of marketing methods, particularly' in respect of the
more perishable farm products. It was at this time that the New
York law was passed establishing a Department of Food and
Is Markets with power to institute auction markets in such cities of
the State as was deemed desirable. Goods consigned to such
S markets are, in accordance with the provisions of the law, to be
auctioned by licensed auctioneers, appointed by the department,
at commission rates fixea tfy that authority which is also to
receive 3 per cent, of the gross selling price as a contribution
towards the expenses -of management. The Mayor's Market
MARKETING BY AUCTION 181
Commission of New York City was also attracted at the same time
by the idea that auction sales would help to keep down prices to
the consumer ; and it recommended in its report in 1913 that " sales
at auction be made permissive in the several public markets/' and
that they be conducted by " bonded auctioneers, licensed by the
city, to whom goods could be consigned by persons who desired to
.sell their goods at auction." The commission did not think it •"
likely that a large percentage of the produce reaching the city
would be sold in this way ; but it considered that even a small
number of such sales would tend to steady prices and serve to fix
the market prices for each day hi the manner described in the
consular reports on the European markets. Difficulties not fore-
seen at the time have arisen to prevent the full realisation of the
elaborate schemes anticipated in these reports and legislation ; and
privately incorporated auction companies still do a very large
part of the wholesale distribution of fruit and other commodities
in the larger American cftiesr
These auction companies receive and inspect goods on their ^
arrival at the place of auction, divide them into lots, print and
circulate catalogues, and collect tEe "money from the buyers on
behalf of the sellers. Payments are prompt on every ^side, and
only to a very small extent is there any financing of producers or
owners of produce by the companies. They obtain^ tJtieirJnGome
from the commissions charged for selling and for whatever other
services they may render, such as unloading, preparing samples,
and printing catalogues. Many questions arise in connection
with their operation, such as, for example, the commission rates '
charged to large and to small consigners, secret rebates, the degree
of monopoly they are able to obtain, and the extent to which this
power enables them to raise charges for the extra handling they
may undertake of some classes of commodities. Again, the
question of ownership of .their shares has some bearing on their /
conduct ; for it is obvious that there are possibilities of abuse if the
chief purchasers at the sales are also their controlling share-
holders and managers. There is, therefore, some reason for the
opinion expressed by one large American merchant who writes,
" An auction company should be under public service regulation S
if it is to be successful in the smaller places where there is no com-
petition, and I believe in the larger places also the rates, rebates,
and all other practices should be open to the public and under
control of the municipality." l
In the United Kingdom publkL^uctionjeers of the type con-
templated in this American legislation, and actually in existence on
the Continent, are quite unknown. Many municipalities, however,
provide market places where stands or positions can be rented by
auctioneering firms ; and in some towns a fair amount of business^
1 Quoted from Weld, The Marketing of Farm Products, p. 141.
182 ORGANISED PRODUCE MARKETS
is done in this way. The Dublin cattle market is a case in point.
There, frequent auction sales are held, in the early morning, of live
fat cattle consigned from the rich grazing lands in the east of
Ireland. The buyers are mainly English dealers who ship their
purchases the same day to Birkenhead, which is an important
distributing centre in the meat trade for a very populous part of
England. But much business, even in cattle in Dublin, is done by
ordinary higgling ; and auction sales cannot be regarded as normal
in any municipal market in the United Kingdom.
APPENDIX I
THE CAPPER-TINCHER ACT (U.S.A.).
[PUBLIC — No. 66 — 67x11 CONGRESS.]
[H. R. 5676.]
AN Act Taxing contracts for the sale of grain for future delivery, and
options for such contracts, and providing for the regulation of boards
of trade, and for other purposes.
Be it enacted by the Senate and House of Representatives of the United
States of A merica in Congress assembled, That this Act shall be known by
the short title of " The Future Trading Act."
SECT. 2. That for the purposes of this Act " contract of sale " shall
be held to include sales, agreements of sale, and agreements to sell. That
the word " person " shall be construed to import the plural or singular and
shall include individuals, associations, partnerships, corporations and trusts.
That the word " grain " shall be construed to mean wheat, corn, oats, barley,
rye, flax, and sorghum. The term " future delivery," as used herein, shall
not include any sale of cash grain for deferred shipment or delivery. The
words " board of trade " shall be held to include and mean any exchange or
association, whether incorporated or unincorporated, of persons who shall
be engaged in the business of buying or selling grain or receiving the same
for sale on consignment. The act, omission, or failure of any official,
agent, or other person acting for any individual, association, partnership,
corporation, or trust within the scope of his employment or office shall be
deemed the act, omission, or failure of such individual, association, partner-
ship, corporation, or trust, as well as of such official, agent, or other person.
SECT. 3. That in addition to the taxes now imposed by law there is
hereby levied a tax amounting to 20 cents per bushel on each bushel
involved therein, whether the actual commodity is intended to be delivered
or only nominally referred to, upon each and every privilege or option for
a contract either of purchase or sale of grain, intending hereby to tax only
the transactions known to the trade as " privileges," " bids," " offers,"
" puts and calls," " indemnities," or " ups and downs."
SECT. 4. That in addition to the taxes now imposed by law there is
hereby levied a tax of 20 cents a bushel on every bushel involved therein,
upon each contract of sale of grain for future delivery except —
(a) Where the seller is at the time of the making of such contract the
owner of the actual physical property covered thereby, or is the grower
thereof, or in case either party to the contract is the owner or renter of
land on which the same is to be grown, or is an association of such owners,
or growers of grain, or of such owners or renters of land ; or
(b) Where such contracts are made by or through a member of a board
of trade which has been designated by the Secretary of Agriculture as a
" contract market," as hereinafter provided, and if such contract is evi-
denced by a memorandum in writing which shows the date, the parties to
such contract and their addresses, the property covered and its price, and
the terms of delivery, and provided that each board member shall keep such
memorandum for a period of three years from the date thereof, or for a
184 APPENDIX I
longer period if the Secretary of Agriculture shall so direct, which record
shall at all times be open to the inspection of any representative of the
United States Department of Agriculture or the United States Department
of Justice.
SECT. 5. That the Secretary of Agriculture is hereby authorised and
directed to designate boards of trade as " contract markets " when, and
only when, such boards of trade comply with the following conditions and
requirements : —
(a) When located at a terminal market upon which cash grain is sold
in sufficient volumes and under such conditions as fairly to reflect the
general value of the grain and the difference in value between the various
grades of grain, and having recognised official weighing and inspection
service.
(b) When the governing board thereof provides for the making and
filing, by the board or any member thereof, as the Secretary of Agriculture
may direct, of reports in accordance with the rules and regulations, and in
such manner and form and at such times as may be prescribed by the
Secretary of Agriculture, showing the details and terms of all transactions
entered into by the board, or the members thereof, either in cash trans-
actions consummated at, on, or in a board of trade, or transactions for
future delivery, and when such governing board provides, in accordance
with such rules and regulations, for the keeping of a record by the board
or the members of the board of trade, as the Secretary of Agriculture may
direct, showing the details and terms of all cash and future transactions
entered into by them, consummated at, on, or in a board of trade, such
record to be in permanent form, showing the parties to all such transactions,
any assignments or transfers thereof, with the parties thereto, and the
manner in which said transactions are fulfilled, discharged, or terminated.
Such record shall be required to be kept for a period of three years from the
date thereof, or for a longer period if the Secretary of Agriculture shall so
direct, and shall at all times be open to the inspection of any representative
of the United States Department of Agriculture or United States Depart-
ment of Justice.
(c) When the governing board thereof prevents the dissemination, by
the board or any member thereof, of false, misleading, or inaccurate report,
concerning crop or market information or conditions that affect or tend to
affect the price of commodities.
(d) When the governing board thereof provides for the prevention of
manipulation of prices, or the cornering of any grain, by the dealers or
operators upon such board.
(e) When the governing board thereof admits to membership thereof
and all privileges thereon on such boards of trade any duly authorised
representative of any lawfully formed and conducted co-operative associa-
tions of producers having adequate financial responsibility : Provided,
That no rule of a contract market against rebating commissions shall
apply to the distribution of earnings among the bond fide members of any
such co-operative association.
(/) When the governing board shall provide for making effective the
final orders or decisions entered pursuant to the provisions of paragraph (b)
section 6 of this Act.
SECT. 6. That any board of trade desiring to be designated a " contract
market " shall make application to the Secretary of Agriculture for such
designation and accompany the same with a showing that it complies with
the above conditions, and with a sufficient assurance that it will continue
to comply with the above requirements.
(a) A commission composed of the Secretary of Agriculture, the
Secretary of Commerce, and the Attorney-General is authorised to suspend
for a period not to exceed six months or to revoke the designation of any
board of trade as a " contract market " upon a showing that such board
APPENDIX 1 185
of trade has failed or is failing to comply with the above requirements or is
not enforcing its rules of government made a condition of its designation
as set forth in section 5. Such suspension or revocation shall only be after
a notice to the officers of the board of trade affected and upon a hearing :
Provided, That such suspension or revocation shall be final and conclusive
unless within fifteen days after such suspension or revocation by the said
commission such board of trade appeals to the circuit court of appeals for
the circuit in which it has its principal place of business by filing with the
clerk of such court a written petition praying that the order of the said
commission be set aside or modified in the manner stated in the petition,
together with a bond in such sum as the court may determine, conditioned
that such board of trade will pay the costs of the proceedings if the court so
directs. The clerk of the court in which such a petition is filed shall im-
mediately cause a copy thereof to be delivered to the Secretary of Agri-
culture, chairman of said commission, or any member thereof, and the said
commission shall forthwith prepare, certify, and file in the court a full and
accurate transcript of the record in such proceedings, including the notice
to the board of trade, a copy of the charges, the evidence, and the report
and order. The testimony and evidence taken or submitted before the
said commission duly certified and filed as aforesaid as a part of the record,
shall be considered by the court as the evidence in the case. The proceed-
ings in such cases in the circuit court of appeals shall be made a preferred
cause and shall be expedited in every way. Such a court may affirm or
set aside the order of the said commission or may direct it to modify its
order. No such order of the said commission shall be modified or set aside
by the circuit court of appeals unless it is shown by the board of trade that
the order is unsupported by the weight of the evidence or was issued
without due notice and a reasonable opportunity having been afforded to
such board of trade for a hearing, or infringes the Constitution of the
United States, or is beyond the jurisdiction of said commission : Provided
further, That if the Secretary of Agriculture shall refuse to designate as a
contract market any board of trade that has made application therefor,
then such board of trade may appeal from such refusal to the commission
described therein, consisting of the Secretary of Agriculture, the Secretary
of Commerce, and the Attorney General of the United States, with the
right to appeal as provided for in other cases in this section, the decision on
such appeal to be final and binding on all parties interested.
(b) That if the Secretary of Agriculture has reason to believe that any
person is violating any of the provisions of this Act, or is attempting to
manipulate the market price of any grain in violation of the provisions of
section 5 hereof, or of any of the rules or regulations made pursuant to its
requirements, he may serve upon such person a complaint stating his
charge in that respect, to which complaint shall be attached or contained
therein a notice of hearing, specifying a day and place not less than three
days after the service thereof, requiring such person to show cause why an
order should not be made directing that all contract markets until further
notice of the said commission refuse all trading privileges thereon to such
person. Said hearing may be held in Washington, District of Columbia, or
elsewhere, before the said commission, or before a referee designated by the
Secretary of Agriculture, who shall cause all evidence to be reduced to
writing and forthwith transmit the same to the Secretary of Agriculture
as chairman of the said commission. That for the purpose of securing
effective enforcement of the provisions of this Act the provisions, including
penalties, of section 12 of the Interstate Commerce Act, as amended,
relating to the attendance and testimony of witnesses, the production of
documentary evidence, and the immunity of witnesses, are made applicable
to the power, jurisdiction, and authority of the Secretary of Agriculture,
the said commission, or said referee in proceedings under this Act, and
to persons subject to its provisions. Upon evidence received the said
186 APPENDIX I
commission may require all contract markets to refuse such person all trading
privileges thereon for such period as may be specified in said order. Notice
of such order shall be sent forthwith by registered mail or delivered to the
offending person and to the governing boards of said contract markets.
After the issuance of the order by the commission, as aforesaid, the person
against whom it is issued may obtain a review of such order or such other
equitable relief as to the court may seem just by filing in the United States
circuit court of appeals of the circuit in which the petitioner is doing
business a written petition praying that the order of the commission be
set aside. A copy of such petition shall be forthwith served upon the
commission by delivering such copy to its chairman, or to any member
thereof, and thereupon the commission shall forthwith certify and file in
the court a transcript of the record theretofore made, including evidence
received. Upon the filing of the transcript the court shall have jurisdiction
to affirm, to set aside, or modify the order of the commission, and the
findings of the commission as to the facts, if supported by the weight of
evidence, shall in like manner be conclusive. In proceedings under para-
graphs (a) and (6) the judgment and decree of the court shall be final,
except that the same shall be subject to review by the Supreme Court upon
certiorari, as provided in section 240 of the Judicial Code.
SECT. 7. That the tax provided for herein shall be paid by the seller,
and such tax shall be collected either by the affixing of stamps or by such
other method as may have been prescribed by the Secretary of the Treasury
by regulations, and such regulations shall be published at such times and
in such manner as shall be determined by the Secretary of the Treasury.
SECT. 8. That any board of trade that has been designated a contract
market, in the manner herein provided, may have such designation vacated
and set aside by giving notice in writing to the Secretary of Agriculture
requesting that its designation as a contract market be vacated, which
notice shall be served at least ninety days prior to the date named therein,
as the date when the vacation of designation shall take effect. Upon
receipt of such notice the Secretary of Agriculture shall forthwith order the
vacation of the designation of such board of trade as a contract market,
effective upon the day named in the notice, and shall forthwith send a copy
of the notice and his order to all other contract markets. From and after
the date upon which the vacation became effective, the said board of trade
can thereafter be designated again a contract market by making applica-
tion to the Secretary of Agriculture in the manner herein provided for an
original application.
SECT. 9. That the Secretary of Agriculture may make such investiga-
tions as he may deem necessary to ascertain the facts regarding the opera-
tions of boards of trade and may publish from time to time, in his discretion,
the result of such investigation, and such statistical information gathered
therefrom, as he may deem of interest to the public, except data and
information which would separately disclose the business transactions of
any person, and trade secrets or names of customers : Provided, That
nothing in this section shall be construed to prohibit the Secretary of
Agriculture from making or issuing such reports as he may deem necessary,
relative to the conduct of any board of trade, or of the transactions of any
person found guilty of violating the provisions of this Act under the pro-
ceedings prescribed in section 6 of this Act : Provided further, That the
Secretary of Agriculture in any report may include the facts as to any
actual transaction. The Secretary of Agriculture, upon his own initiative
or in co-operation with existing governmental agencies, shall investigate
marketing conditions of grain and grain products, and by-products, in-
cluding supply and demand for these commodities, cost to the consumer,
and handling and transportation charges. He shall likewise compile and
furnish to producers, consumers, and distributors, by means of regular
or special reports, or by such methods as be may deem most effective,
APPENDIX II 187
information respecting the grain markets, together with information on
supply, demand, prices, and other conditions, in this and other countries
that affect the markets.
SECT. 10. That any person who shall fail to evidence any such contract
by a memorandum in writing, or to keep the record, or make a report, or
who shall fail to pay the tax, as provided in sections 4 and 5 hereof, or who
shall fail to pay the tax required in section 3 hereof, shall pay in addition
to the tax a penalty equal to 50 per centum of the tax levied against him
under this Act and shall be guilty of a misdemeanor, and upon conviction
thereof, be fined not more than $10,000 or imprisoned for not more than
one year, or both, together with the costs of prosecution.
SECT. ii. That if any provision of this Act or the application thereof
to any person or circumstances is held invalid, the validity of the remainder
of the Act and of the application of such provision to other persons and
circumstances shall not be affected thereby.
SECT. 12. That no tax shall be imposed by this Act within four months
after its passage, and no fine, imprisonment, or other penalty shall be
enforced for any violation of this Act occurring within four months after
its passage.
SECT. 13. The Secretary of Agriculture may co-operate with any
department or agency of the Government, any State, Territory, District,
or possession, or department, agency or political subdivision thereof, or
any person ; and shall have the power to appoint, remove, and fix the
compensation of such officers and employees, not in conflict with existing
law, and make such expenditures for rent outside the District of Columbia,
printing, telegrams, telephones, law books, books of reference, periodicals,
furniture, stationery, office equipment, travel, and other supplies and
expenses as shall be necessary to the administration of this Act in the
District of Columbia and elsewhere, and there is hereby authorised to be
appropriated, out of any moneys in the Treasury not otherwise appro:
priated, such sums as may be necessary for such purposes.
Approved, August 24, 1921.
APPENDIX II
EXAMPLE OF MARKET REPORT.
From the Manchester Guardian of June 21, 1921.
LIVERPOOL COTTON.
AMERICAN SPOT PRICES REDUCED 43 POINTS ; FULLY MIDDLING 7-69^. —
AMERICAN FUTURES BARELY STEADY ; 48 TO 39 POINTS LOWER —
GENERAL LIQUIDATION ON LABOUR OUTLOOK — CONSIDERABLE WEAK-
NESS IN AMERICAN MARKET — EGYPTIAN FUTURES WEAK, 80 TO 75
POINTS LOWER.
Liverpool, Monday.
CONSIDERABLE activity has again prevailed in the futures market, result-
ing in a severe depreciation of values since the close last week. American
weakness, caused largely through our home labour difficulties in addition
to domestic troubles in the United States, has proved too heavy a weight
for this market to sustain, and wholesale liquidation has fallen upon us
i88 APPENDIX II
from widespread interests. The complete inability of European mills to
consume anything approaching a normal quantity of the raw material
under present circumstances is amply demonstrated by the small spinners'
takings, according to last week's official statistics, which show that the
visible supply of American gained 7,000 bales on the week, against a loss
last year of 113,000 bates. Recent estimates of a carry-over of over ten
million bales have also confirmed the bearish tendency of the moment, and
the tone in Liverpool can only be described as distinctly nervous.
To-day's spot sales were estimated at 3,000 bales, including 2,300
American (300 for export), 50 Egyptian, 150 East Indian, and 500 Peruvian.
American was in retail request, and quotations were reduced 43 points ;
fully middling 7 "6gd. Egyptian was neglected, and quotations were reduced
50 points ; fully good fair Sakellaridis 15-50^. East Indian was quiet, but
in sympathy with American quotations were reduced 15 points ; fully good
fair Tinnivelly nominally 7-65^.
American futures opened at 10 points decline, and, after a momentary
period of steadiness during which values for late delivery recovered about
3 points, the market fell away rapidly, some 10 points below the opening
level. Manchester selling appeared to be primarily responsible for the
renewed set-back, and local liquidation of a scattered character added
considerably to the weak tone of the market. Spot inquiry was better
than in previous days, but no signs of real business were forthcoming, and
another disquieting day was recorded in salesmen's books. Midday rates
were called easy, from 22 points decline for nears to 14 points decline for
distant months. The afternoon session reflected real weakness throughout.
Interests in the manufacturing districts continued to sell heavily, assisted
by general realisations of long accounts from nearly every speculative
source. A loss of 10 points from noon values was followed by a temporary
recovery of 6 points, after which offers increased in volume, and the down-
ward movement was only checked when the price of July delivery touched
7 '3 id., or 50 points below last Friday's closing rates. The local professional
element were kept busy by their local efforts to liquidate purchases made on
the scale-down during the day, no relief of any kind being offered by steadily
declining values in the American markets. A little covering at 'the close
sufficed to prevent the decline from proceeding further, final prices being
barely steady from 48 points net decline for nears to 39 points net decline
for distant positions.
Egyptian futures closed weak, 80 to 75 points lower.
New York at our close was 43 to 39 points lower.
AMERICAN, BASIS FULLY MIDDLING, Low MIDDLING CLAUSE.
Value 12.15. Close. Prev. day.
June 7-44 7-18 7-66
July 7'59 7'33 7'8i
August 7-73 7-44 7-92
September 7-87 7-58 8-05
October 8-03 7-76 8'2O
November 8*12 7-86 8-28
December 8-21 7*96 8-36
January 8*27 8*01 8*41
February 8-32 8-06 8-46
March 8-38 8-12 8-51
April 8-42 8-16 8-56
May 8-47 8-21 8'6i
Striking prices, n ; June, 7*54 ; July, 7*69 ; August, 7*81 ; September,
7*95 ; October, 8'io ; November, 8*19 ; December, 8*28 ; January, 8*34 ;
February, 8*39 ; March, 8*45 ; April, 8*49 ; May, 8-54.
APPENDIX II
189
The following are the
futures during the day : —
June .
July . .
August
September
October .
November
highest and lowest quotations for American
[ighest.
Lowest.
Highest.
Lowest.
December
8'oo
8'00
772
7'3I
January
8'34
8-00
7-82
7'45
February
—
7*95
77°
March
8-44
8-14
8-12
773
April
—
8-09
8-09
May
8-52
8-22
EGYPTIAN DELIVERIES, BASIS F.G.F. SAKELLARIDIS.
Value i2'o. Close. Prev. day.
June 13-55 12-95 1375
July I3'55 12-95 1375
August 13*60 13*05 13*80
September 13-70 13-15 13-90
October I3'8o 13*25 14-00
November 13*80 13*25 14-00
December 13*85 13*30 14*05
January 13-90 *3'35 I4'io
Striking prices, n ; June, 13*75; July, 13*75; August, 13-80; Sep-
tember, 13*90 ; October, 14-00 ; November, 14*00 ; December, 14*05 ;
January, 14-10.
Business after 12.0 : July, 13*35 ' November, 13-60 50 25.*
Sales.
Imports. Gt. Britain.
To-day.
Prev.
this week.
To-day.
Total
week.
American
2,300
5°
500
150
—
18,37°
163
18,370
I63
Brazilian
Egyptian
West Indian, etc. .
African
East Indian, etc. .
Total
3,000
—
18,533
18,533
Total since Friday .
—
SPOT QUOTATIONS.
Ord.
G.O.
F.G.O.
L.M.
F.L.M.
American
. 4-04
4*79
5'54
6*04
6*49
i.e. 340 off
265 off
190 off
140 off
95 off
Mid.
F.M.
G.M.
F.G.M.
M.F.
American
. 7-04
7-69
8-09
8*79
9*99
40 off
25 on
65 on
135 on
255 on
1 Transactions of 100 bales only (American), or 50 bales only (Egyptian).
igo
APPENDIX III
BRAZILIAN SPOT QUOTATIONS.
M.F. Fair.
Pernam 4'94n 7'44n
Parahyba 4'94" 7'44n
Maceio 4'94n 7'44n
Ceara 4'94n 7'44n
Sao Paulo — 6-940
G.F.
9*94n
9'94n
9'94n
7'94n
EGYPTIAN SPOT TRADING VALUES FOR LIVERPOOL STANDARDS.
Fair. G.F. F.G.F. Good. Fine. Ex. fine
Upper . . 8'5on 9-50 10*50 11*50 12-50 13*50
Sakellaridis . io'75n 14*00 15*50 17*50 19*50 25-00
Brown .
8-500 lo-oon 11-50 12-50 14*50 16-00
M.G.
Surtee
Broach
No. i Oomra
Khandeish
Bengal
Scinde
Tinnivelly
G.F.
EAST INDIAN.
F.G.F. Good.
6-gon
4*25n 475n 5*25n
4*oon 4'5on
3*130 3*63n 4'ijn
7*6sn 7*gon
F.G.
575Q
5*oon
475n
4-630
Fine.
7-900
7-400
6-000
S'fine
8*150
7-650
6-250
5-000
4-880
ALEXANDRIA FUTURES.
Friday's close
To-day's opeoiog
close
Ashmo'ni.
June.
l6'00
Sakel.
July.
27*10
26*10
26*50
Ashmo'ni.
Oct.
18-40
17-90
1 8 *oo
Sakel.
Nov.
28.95
28-00
28-25
. 15-60
NOTICE. — Alexandria market closed on Saturday uotil further ootice.
APPENDIX III
EXAMPLES OF WAREHOUSE RECEIPTS AND WARRANTS.
(a) FORM of warehouse receipt issued by private elevators which have
been declared " regular " by the Winnipeg Graio Exchaoge, i,e. which have
giveo boods aod surety uodertakiog to comply with the by-laws of the
Exchaoge, aod are situated at Port Arthur or Fort William at the Head of
the Lakes.
[Face.}
No.
Elevator Company,
(Wiooipeg) 19
Bushels Ibs.
The Company, on this date
holds in store subject to the order of
(owner)
APPENDIX III
in its Private Terminal Elevator situated at
---- s ........... Bushels of ......................................
which has been weighed by a duly authorised weighmaster, appointed
under the Canada Grain Act. An equal quantity of grain of the same
kind will be delivered to the said owner, or his order, on surrender of
this receipt, properly endorsed and on payment of all proper charges
payable to this company in connection with the same.
........................ Elevator Company.
This receipt shall be registered by
the Board of Grain Commissioners as By ..................
to quantity.
[Back.]
The inspected grade called for by this receipt is ....................
Elevator Company.
By
This receipt shall be registered as to grade by the Winnipeg Grain
Exchange pursuant to the By-laws of the Exchange.
(6) Form of iron warrant referred to in Chapters IX and XI.
CONNAL & CO., LIMITED, WAREHOUSEKEEPERS, GLASGOW
AND MIDDLESBROUGH.
WARRANT No FOR •
Tons PIG IRON.
28
Tons.
Middlesbrough,
We have received into our Stores and entered in our Warehouse Books in
the name of and w.e
now hold to Order HUNDRED TONS PIG IRON of
No and we will deliver to Order, by endorsement
hereon, FREE ON BOARD at our Shipping Wharf or FREE ON TRUCKS at
our Stores, MIDDLESBROUGH, that quantity of Pig Iron, same Number and
Brand, on payment of the Charges noted at foot and return of this Warrant.
CHARGES—
Rent id. per Ton per Month of
4 weeks. Registration is. per CONNAL & CO., LIMITED,
Warrant. (Signature cancelled)
Rent to be paid every 12 months, and
if not paid when due, Interest at the WM. FLEMING Director.
rate of 5 per cent, per annum will be
charged.
Exd. and Entd. by
APPENDIX IV
APPENDIX IV
SPECIMENS OF THE CONTRACT FORMS IN USE IN THE
LIVERPOOL GRAIN TRADE.
That marked " No. 26 — Future Delivery Contract — Wheat (Liverpool
Grade) " is the futures contract form.
No. i. —SPOT CONTRACT.
THE LIVERPOOL CORN TRADE ASSOCIATION, LIMITED.
Liverpool 19
have this day ,
(On the terms of the Printed Rules of the Liverpool Corn Trade Association,
Limited, which contain a Domicile Clause as printed on the back hereof.)
THE FOLLOWING GOODS : —
Payment — Cash in seven days or before delivery if required, less three months
interest at 5 per cent, from date of
Buyer and seller agree that, for the purpose of proceedings, either legal
or by arbitration, this Contract shall be deemed to have been made in
England and to be performed there, any correspondence in reference to
the offer, the acceptance, the place of payment or otherwise notwithstand-
ing, and the Courts of England or Arbitrators appointed in England, shall,
except for the purpose of enforcing any award made in pursuance of the
Arbitration Clause hereof, have exclusive jurisdiction over all disputes
which may arise under this Contract. Such disputes shall be settled
according to the law of England whatever the domicile, residence, or place
of business of the parties to this contract may be or become. Any party
to this Contract residing or carrying on business elsewhere than in England
or Wales, shall, for the purposes of proceedings at law or in arbitration, be
considered as ordinarily resident or carrying on business at the offices of
the Liverpool Corn Trade Association, Limited, and if in Scotland, shall
be held to have prorogated jurisdiction as against himself to the English
Courts, or if in Ireland, to have submitted to the jurisdiction and to be
bound by the decision of the English Courts. The service of proceedings
upon any such party, by leaving the same at the offices of the Liverpool
Corn Trade Association, Limited, together with the posting of a copy of
such proceedings to his address abroad or in Scotland or Ireland, shall be
deemed good service, any rule of law or equity to the contrary notwith-
standing.
APPENDIX IV 193
LIVERPOOL CORN TRADE ASSOCIATION, LIMITED.
[Face] AMERICAN PARCEL CONTRACT, C.I.F. TERMS.
In force ist September, 1916. No. 7.
Liverpool, 19
BOUGHT from
SOLD to /
on the special conditions and rule endorsed hereon, and subject to such
Clearing House Regulations as are applicable to this Contract
: Official certificate of inspection to be final as to quality. Quality.
Of fair average quality of the season's shipments at time and place of ship"
ment.
+ About as per sample
The Buyer under this Contract shall not be entitled to reject a tender of a
higher grade of grain of the same colour and description.
The grain is not warranted free from defect, rendering the same unmerchant-
able, which would not be apparent on reasonable examination, any statute
or rule of law to the contrary notwithstanding.
Shipment in good condition from the Seaboard (Pacific coast excluded) Shipment.
as per Bill or Bills of Lading from American or Canadian Port or Ports
(Virginian ports excluded as a second port of loading) per first-class steamer
or steamers or motor vessel or vessels to
with option of calling at other ports.
Say units, at the price of
say Quantity.
Contract
per Ibs. shipped, including Freight and Price-
Insurance to
Seller has the option of shipping a further five per cent., more or less,
on Contract quantity, such excess or deficiency to be settled at the c. f. & i.
price on the date of shipment at the seaboard ; value to be fixed by arbitra-
tion, unless mutually agreed, but no claim shall be made for a less sum than
one pound sterling.
The unit of quantity under this Contract shall be Ibs.
If documents are tendered which do not provide for customary discharge
contain contrary stipulations as regards discharge and/or demurrage
Seller to be responsible to Buyer for all extra expenses incurred thereby.
The Buyer has the right to have the grain weighed by Approved Auto- Weighing.
matic Hopper Scale at the ship's side or at a public warehouse, but in the
latter case the Seller may require the weighing to take place at the ship's
side, when we shall pay the extra cost incurred.
In all cases in which the grain is weighed in drafts of not less than
2,000 Ibs., an allowance of 2 Ibs. per 2,000 Ibs. shall be made for draftage.
Payment : — Payment by Buyer's acceptance or adoption of Shipper's or Payment.
Seller's or Seller's Agent's draft or drafts payable in London, with shipping
documents attached as usual at 7 days' sight for all ports north of and
including Baltimore, at 14 days' sight for Virginian Ports, and at 30 days'
sight for all ports south of Chesapeake Bay.
Sellers have the option of tendering approved delivery order and/or letter
of insurance, in which case Buyers have the option of payment on arrival.
Buyer is entitled to discount from date of payment to due date of draft or
O
194 APPENDIX IV
drafts at the rate of one-half of one per cent, per annum above the advertised
rate of interest for short deposits allowed by the leading Joint Stock Banks
in London. Documents must be taken up by Buyer within three days from
date of arrival of vessel at destination. If Bills of Lading are not to hand
at the time of the arrival of the vessel the Seller on application must provide
the necessary document to enable Buyer to obtain delivery, and payment
must be made in exchange therefor. No obviously clerical errors in the
documents shall entitle the Buyer to reject them or delay payment, but
Seller shall be responsible for all loss or expense which such error may cause
Buyer.
Policies. Seller to give Policies and/or Certificates of Insurance, free of war risk,
for two per cent, over invoice amount, and any amount over this to be for
Seller's account in case of total loss only. Insurance to be effected with
approved English and/or American Underwriters and/or Companies, but for
whose solvency Seller is not responsible, and all claims to be payable in
London and/or Liverpool. Policies and/or Certificates of Insurance to cover
the risks under the " Harter Act."
[THESE TEMPORARY WAR CLAUSES FORM PART OF THIS CONTRACT.]
Clause recommended by the Board to be attached to Contract No. 7 American
Parcel Contract c.i.f. Terms.
Payment : — Payment by Buyer's acceptance or adoption of Shipper's or
Seller's or Seller's Agent's draft or drafts payable in London, with shipping
documents attached as usual at 7 days' sight for all ports north of and
including Baltimore, at 14 days' sight for Virginian Ports, and at 30 days'
sight for all ports south of Chesapeake Bay. Sellers may tender, instead
of Bills of Lading, Ship's or approved Delivery Order in which case the
Buyers have the option of payment on arrival of vessel. Sellers may also
tender instead of Policy or Policies of Insurance, Certificate or Letter of
Insurance. Buyer is entitled to discount from date of payment to due
date of draft or drafts at the rate of one-half of one per cent, per annum
above the advertised rate of interest for short deposits allowed by the
leading Joint Stock Banks in London. Documents must be taken up by
Buyer within three days from date of arrival of vessel at destination. If
Bills of Lading are not to hand at the time of the arrival of the vessel the
Seller on application must provide the necessary document to enable Buyer
to obtain delivery, and payment must be made in exchange therefor. No
obviously clerical errors in the documents shall entitle the Buyer to reject
them or delay payment, but Seller shall be responsible for all loss or
expense which such error may cause Buyer.
Sellers to give Policies and/or Certificates and/or Letters of Insurance,
free of war risk, for two per cent, over invoice amount, and any amount
over this to be for Seller's account in case of total loss only. Insurance to
be effected with approved English and/or American Underwriters and/or
Companies, but for whose solvency Seller is not responsible, and all claims
to be payable in London and/or Liverpool. Policies and/or Certificates
and/or Letters of Insurance to cover the risks under the " Harter Act."
Any deficiency in the out-turn exceeding one per cent, of Bill of Lading
quantity to be refunded by Seller.
In case of Sea Accidents (pumping up grain excepted) causing a de-
ficiency on Invoice Weight, Provisional Invoice quantity to be final, except
when such deficiency cannot be accounted for by the nature of the accident,
and is not recoverable from Underwriters.
Prohibition. Should Shipment be prevented by prohibition of export, blockade, or
hostilities, this Contract, or any unfulfilled part thereof, shall be at an end.
If the grain shipped, or any part thereof, is not in accordance with the
APPENDIX IV 195
Contract as regards quality, the Arbitrators shall award that it be taken
with an allowance or be invoiced back to the Seller at such price as they
shall determine, not being more than 5 per cent, in excess of the market
price of the grain contracted for on the day of arbitration.
to pay Brokerage of Brokerage.
Contract cancelled or not cancelled.
Buyer and Seller agree that, for the purpose of proceedings, either legal
or by arbitration, this Contract shall be deemed to have been made in
England and to be performed there, any correspondence in reference to the
offer, the acceptance, the place of payment or otherwise notwithstanding,
and the Courts of England or Arbitrators appointed in England, shall,
except for the purpose of enforcing any award made in pursuance of the
Arbitration Clause hereof, have exclusive jurisdiction over all disputes
which may arise under this Contract. Such disputes shall be settled accord-
ing to the law of England whatever the domicile, residence, or place of
business of the parties to this contract may be or become. Any party to
this Contract residing or carrying on business elsewhere than in England
or Wales, shall, for the purposes of proceedings at law or in arbitration, be
considered as ordinarily resident or carrying on business at the offices of
the Liverpool Corn Trade Association, Limited, and if in Scotland, shall be
held to have prorogated jurisdiction as against himself to the English Courts,
or if in Ireland, to have submitted to the jurisdiction and to be bound by
the decision of the English Courts. The service of proceedings upon any
such party, by leaving the same at the offices of the Liverpool Corn Trade
Association, Limited, together with the posting of a copy of such proceedings
to his address abroad or in Scotland or Ireland, shall be deemed good
service, any rule of law or equity to the contrary notwithstanding.
All disputes from time to time arising out of this Contract, whether
arising between the parties hereto, or between one of the parties hereto and
the Trustee in Bankruptcy of the other party, shall be referred according
to the Liverpool Arbitration Rule endorsed on this Contract, and this
stipulation may be made a rule of any of the Divisions of His Majesty's
High Court of Justice in Ireland, on the appli cation of either contracting
party, for the purpose of enforcing an award against a party residing or
carrying on business in Ireland.
Strike. — i . Should shipment of the goods or of any part thereof be pre-
vented at any time during the last twenty-eight days of guaranteed time
of shipment, or at any time during guaranteed contract period, if such be
less than twenty-eight days, by reason of riots, strikes or lockouts at port
or ports of loading, or elsewhere preventing the forwarding of the goods to
such port or ports, then the Shipper shall be entitled at the termination of
such riots, strikes or lockouts to as much time for shipment from such port
or ports as was left for shipment under the contract prior to the outbreak
of the riots, strikes or lockouts, and in the event of the time left for shipment
under the contract being seven days or less, an additional seven days shall
be allowed for shipment. In no case less than fourteen days in all shall be
allowed. In case of non-shipment under above circumstances, and if
Shipper has claimed an extension under paragraph 2 of this Clause, the date
of default shall be similarly deferred.
2. Shipper shall give notice by cable not later than two days (Sundays
and holidays excepted) after the last day of guaranteed time of shipment,
if he intends to claim an extension of time for shipment under the above
clause. Such notice shall state the port or ports from which shipment was
intended to be made, and if such extension is claimed the shipment shall
only be laade from such port or ports. All such notices shall be passed on
in due course.
3. If the Shipper gives the notice above referred to he shall forthwith
apply to the North American Export Grain Association and request them
to cable immediately to the Liverpool Corn Trade Association confirming
196
APPENDIX IV
the existence of such riots, strikes or lockouts, and in due course to cable
the dates of commencement and termination thereof. The Shipper agrees
to comply with all requirements of the North American Export Grain
Association to ensure such cables being sent.
4. A certificate of the North American Export Grain Association
certifying the existence and duration of the riots, strikes or lockouts causing
the delay and/or prevention shall be attached to the shipping documents
and be accepted as final. If a certificate is issued too late to be attached
to the shipping documents then a notification by cable from the North
American Export Grain Association to the Liverpool Corn Trade Association
that such certificate has been issued shall be deemed equivalent to a cer-
tificate attached to shipping documents always provided that such notifica-
tion shall have been received by the Liverpool Corn Trade Association not
later than the date of arrival of documents in Liverpool.
The Arbitration to be held in LIVERPOOL.
+ N.B. The Clauses in Italics are alternative.
[Back'] Contract No. 7 (PARCEL).
CONDITIONS.
Appro- i. NOTICE OF APPROPRIATION with vessel's name, shall be
priation, delivered by Seller or his Agent to Buyer within five days after the date of
sailing from the last port on the same seaboard, but in no case later than
seven days from the last day of the period of shipment named in the
Contract. The Notice shall be deemed to be under reserve for telegraphic
errors or delays only, and without prejudice to this Contract. Notice to
the Broker or Agent shall be deemed a Notice within the terms of this
Contract. In case of Re-Sales, all Notices shall be accepted by Buyer if
passed on in due course. Buyer shall on demand give Seller written receipt
for notice of appropriation.
2. BILL OF LADING to be considered proof of date of shipment in
the absence of evidence to the contrary. Any separate parcel shipped at
the seaboard in partial execution of this Contract shall, except as regards
terms of payment, be considered as if shipped under a separate Contract.
3. NOTICE TO RETIRE DOCUMENTS shall be given by Buyer to
Seller, before i o'clock on the day previous to the day of payment, except
on Saturdays when the time shall be n o'clock.
Notice or declaration required to be made under this Contract cannot be
made on any of the following non-business days : — Sundays, Good Friday,
Easter Monday, Whit Monday, the first Monday in August, Christmas Day,
and the next week-day following, and any other days proclaimed as Bank
Holidays, and cannot be made to any party whose place of business is
within the area of the Liverpool Telephone Exchange on any business day
before 10 a.m. or after 5.30 p.m., and Saturdays i p.m.
Strike. STRIKE. If the contract terms require shipment from some particular
port, and shipment is prevented or delayed by reason of riot, strike, or
lockout at such port, then this contract shall be deemed to be extended to
the number of days that such riot, strike or lockout exists, provided notices
of the outbreak and termination of riots, strikes, or lockouts be cabled by
the Shipper to his Buyer (such notice to be passed on in due course) and
confirmed by cable by the North American Export Grain Association to
the Liverpool Corn Trade Association within three days of each event.
EXTENSION OF SHIPMENT. The period herein specified within
which Bills of Lading must be dated shall be deemed to include an additional
period not to exceed eight days, when so desired by the Shipper, provided
he gives his Buyer notice of his intention to claim additional days by cable
sent not later than the business day following the last day included in the
originally stipulated period for shipment ; such notice shall be passed on
by other Sellers to their Buyers respectively in due course after receipt.
Proof of
Shipment.
Retirement
of Docu-
ments.
APPENDIX IV 197
Such notice need not state the number of additional days claimed by the
Seller and the Seller may ship at any time within eight additional days.
The Seller, however, shall make an allowance to the Buyer, to be deducted
in the invoice from the contract price, based on the number of days by which
the originally stipulated period is exceeded, as follows : —
For i, 2 or 3 additional days . . i per cent, of the gross c.i.f. price.
For 4, 5 or 6 additional days . . 2 per cent, of the gross c.i.f. price.
For 7 or 8 additional days ... 3 per cent, of the gross c.i.f. price.
If, however, after having given notice to the Buyer as above, the Seller fails
to make shipment within such eight days, then the contract shall be deemed
to have called for shipment during the originally stipulated period plus
eight days, at contract price less 3 per cent., and any settlement for default
shall be calculated on that basis.
4. (a) IF THE SELLER SHALL MAKE DEFAULT in shipping or Default,
declaring shipment, or in tendering the documents required by this Contract,
the contract shall be closed by invoicing back the goods contracted for at
such price as the Arbitrators shall determine, and this shall apply whether
the price so determined be higher or lower than the Contract price.
(6) IF THE BUYER DEFAULTS in the fulfilment of Contract or
Award, the Seller, at his discretion, shall, after giving notice in writing,
have the right of re-sale, and the defaulter shall make good the loss, if any,
by such re-sale on demand.
(c) IF, BEFORE THE MATURITY OF THIS CONTRACT, EITHER
PARTY SHALL SUSPEND PAYMENT, OR BECOME BANKRUPT
OR INSOLVENT, or become lunatic, or insane, or die without leaving
executors or others willing and able forthwith to take over the liability
attached to such party under the Contract, or be declared a defaulter by
the Clearing House Committee, the Contract shall forthwith be closed at the
market price then current for similar goods, or, at the option of the other
party, at a price to be ascertained by re-purchase or re-sale, as the case may
be, before the expiration of the following business day, and shall be entitled
to be paid by the party so suspending payment or committing an act of
bankruptcy, or to prove against his estate, whether wound up in bankruptcy
or otherwise, for the loss, if any, or shall account for the profit, if any, on
such re-sale or re-purchase, any rule of law or equity to the contrary
notwithstanding .
5. The word " ABOUT " when referring to Quality, shall mean the
equivalent of threepence per 480 Ibs.
6. When Buyer requires ARBITRATION on quality he shall make his Claims for
claim and nominate his Arbitrators within three business days after final Arbitration,
discharge of the shipment. When the subj ect matter and terms of Contract
are identical, except as to price, all Arbitrations shall be held as between
the first Seller and the last Buyer, as though they were contracting parties,
and the awards made in pursuance thereof, subject to the right of appeal as
provided by the Arbitration Rule, shall be binding on all intermediate parties.
7. ARBITRATION on quality having been claimed in accordance with Finality
the terms of this Contract, the parties claiming must proceed with the Rule-
Arbitration within 28 days of final discharge when sold on sample, or when
sold fair average quality within 28 days of the publication in the Trade
Lists that the Standard has been, or will not be made up. After the ex-
piration of these limits, claims for quality to be void, unless the delay is,
in the opinion of the Arbitrators, considered justifiable. No claim for
shortage shall be made after the expiration of 28 days from the receipt of
the official weights.
8. REGISTRATION. — Either party to this Contract, whether a
member or non-member of the Association, shall have the right at any time
during its currency, to register it at the Clearing House, but it shall not be
subject to Calls for Margin.
ig8 APPENDIX IV
ARBITRATION RULE OF THE LIVERPOOL CORN TRADE
ASSOCIATION, LIMITED,
AS APPLIED TO THIS CONTRACT.
All disputes arising out of transactions connected with the Trade,
except such as arise out of the business of the Clearing House, shall be
referred to two arbitrators, one to be chosen by each party in difference,
the said arbitrators having power to call in a third in case they shall deem
it necessary. In the event of one of the parties appointing an arbitrator
and the other refusing, or for three days after notice in writing of the
appointment neglecting to do so (such notice to be delivered personally or
left at the usual place of business of such other party), or in case the
arbitrators appointed by the parties shall not within seven days after their
appointment agree to an award, or appoint a third arbitrator, or, after the
appointment of such third arbitrator, in case of the death, refusal to act, or
incapacity of any one or more of such three arbitrators, or in any case in
which the Clearing House Regulations may so provide, then, upon applica-
tion of either of the disputing parties, the question in dispute shall stand
referred to two arbitrators to be nominated by the President for the time
being of the Association, or by the Vice-President in case of the absence of
the President, his illness, or interest in the matter in dispute ; and in case
of the absence of the Vice-President, his illness, or interest in the matter in
dispute, then the Directors, on the application of either of the disputing
parties, shall appoint two arbitrators ; and in case the two arbitrators
appointed, whether by the President, the Vice-President, or the Directors,
shall not within seven days after their appointment agree to an award, or
choose a third arbitrator, then the Directors shall appoint a third arbitrator,
and shall, in the case of the death, refusal to act, or incapacity of any such
three arbitrators, from time to time substitute a new arbitrator or arbitra-
tors in the place of the arbitrator or arbitrators so dying, refusing or
incapacitated.
In case either party shall be dissatisfied with any award of arbitrators,
a right of appeal shall lie to the Directors, provided it be claimed not later
than seven running days after the date of the award.
The arbitrators appointed shall in all cases be members of the Associa-
tion, and no person having any interest in the matter in dispute shall be
competent to act as an arbitrator.
The award of any two arbitrators in writing signed by them (subject
only to the right of appeal hereinafter mentioned) shall be conclusive and
binding upon all disputing parties, both with respect to the matter in dis-
pute, and all fees and expenses of the reference and award. Every award
shall be written on a form to be settled by the Directors and supplied by
the Association at a charge (to be fixed by the Directors) not exceeding ten
shillings.
No arbitrator shall be entitled to demand a higher fee than £5 55., nor
shall such fee be less than £i is. for every requisite sitting.
Where an appeal is claimed the appellant shall pay to the Association
as a fee for the investigation, the sums following : —
Members. Non-Members.
For appeals in respect of quantities not
exceeding 250 tons £500 ^7 10 o
For appeals in respect of quantities ex-
ceeding 250 tons £10 o o £15 o o
When any question of quality and/or condition is involved, the Directors
shall not hear the appeal, but shall appoint a Special Appeal Committee of
six to hear and determine the matter. Directors and other Members of the
Association shall be eligible for appointment on such Special Appeal Com-
mittee. In case of the death, refusal or neglect to act or incapacity of not
APPENDIX IV 199
more than two Members of the Special Appeal Committee, the remaining
Members shall forthwith fill up the vacancy or vacancies so occurring. In
case of the death, refusal or neglect to act or incapacity of more than two
Members of the Special Appeal Committee, the Directors shall fill up the
vacancies so occurring. The Special Appeal Committee shall confirm the
award appealed from and the appeal fees shall follow the award unless two-
thirds of the Members hearing such appeal shall decide to vary such award.
The Special Appeal Committee shall have power to award by whom the
Arbitrators' fees and any legal or other expenses incurred by the Association
shall be borne, but no award shall be made in respect of such fees and ex-
penses except by the vote of two-thirds of the Members hearing the case.
In appeals (other than quality and/or condition) the Directors shall
decide all questions, including the payment of Arbitrators' fees and any
legal or other expenses incurred by the Association, by a majority of votes,
and in the event of an equality of votes, the Chairman shall have a second
or casting vote.
If the Directors or the Special Appeal Committee, as the case may be,
shall see fit to state in the form of a special case for the opinion of the Court
any question of law arising in the course of the reference, or if they shall be
directed so to do, the Association shall be entitled to an addition to their
fee not exceeding £i 5 for every requisite sitting. The Arbitrators, Director
or Special Appeal Committee, as the case may be, shall have power from
time to time to make interim awards.
An award signed by the Chairman of the meeting which shall hear such
appeal, and countersigned by the Secretary or his substitute, shall be
deemed to be the award of the Directors or the Special Appeal Committee,
as the case may be, and shall in all cases be final.
No party shall have the right to be heard on appeal until he has paid the
fees and other arbitrators' expenses payable by him on the award in respect
of which the appeal is made.
No Director having any interest in the matter in dispute shall vote on
the question of the appointment of arbitrators, or, in the case of an appeal,
sit or vote on the hearing of such appeal, or on the appointment of any
Special Appeal Committee ; nor shall the arbitrators whose decision is
appealed against, vote on the hearing of this appeal.
Neither contracting party, nor Trustee in Bankruptcy, or other person
claiming under either of them, shall bring any action against the other of
them in respect of any dispute until such dispute has been settled by arbitra-
tors, the Directors, or the Special Appeal Committee, as the case may be,
and it is expressly agreed that the obtaining of an award shall be a condition
precedent to the right of either contracting party to sue the other in respect
of any such dispute.
For the purpose of enforcing any award, the provisions of the Arbitration
Act, 1889, or any statutory modification or re-enactment thereof shall
apply in England, and the provisions of any Scotch or Irish Act dealing
with arbitrations or the procedure thereon shall apply respectively in Scot-
land and Ireland, and any award may if necessary be made a Rule of Court
in Ireland, or an Order of the Court of Session in Scotland.
If the Directors or the Special Appeal Committee as the case may be
shall state a Special Case for the opinion of the Court, the party at whose
request or instance the Case is to be stated shall deposit with the Association
the sum of £i oo as security for the fees, costs and expenses of the Directors,
or the Special Appeal Committee, and the Association of and incidental to
stating and setting down such Special Case.
If the party requiring the Case to be stated shall neglect or fail to make
such deposit within seven days after the Directors or the Special Appeal
Committee have agreed or been directed to state a Case, the Directors or
the Committee, as the case may be, shall be entitled to proceed with their
award without stating such case, and in any order directing the Directors
200 APPENDIX IV
or Committee to state a Special Case the party requiring the Case to be
stated shall consent to abide by the provisions of this paragraph and to
make the said deposit within the time aforesaid. If at any time after the
Directors or the Special Appeal Committee have agreed or been directed
to state a Special Case, but before a final award has been made, the parties
in difference shall settle their dispute, the Directors or the Committee as
the case may be shall satisfy themselves that such dispute is settled and
thereupon the Directors or the Committee and the Association shall be
entitled to payment of their fees, costs and expenses in connection with the
Special Case out of the said deposit and the Association shall account for
the balance, if any, to the party by whom the deposit was paid. If the
matter in dispute shall not be settled between the parties but a final award
shall be made, the manner in which the said deposit shall be dealt with shall
be in the discretion of the Directors or the Committee making the award.
No. 18.— SHIPMENT AND DELIVERY CONTRACT.
THE LIVERPOOL CORN TRADE ASSOCIATION, LIMITED.
Liverpool 19
We have this day sold to on the terms of the
Printed Rules of the Liverpool Corn Trade Association, Limited,
To be delivered ex quay and/or store at Seller's option, in fair merchant-
able condition ; a slight dry warmth not to be objected to.
Particulars of shipment "shall be declared by the first Seller to his Buyer
before the vessel named has appeared in the Bill of Entry, unless the vessel
brings its own advices, in which case an extra day shall be allowed. In case
of re-sale a copy of first declaration shall be accepted by Buyer if passed on
in due course.
Ship damaged or sea water damaged goods may be rejected, and the
Contract, so far as regards the quantity rejected, shall be at an end.
In the event of the goods declared, or any part thereof, being prevented
from arriving by perils of the seas, the Contract, so far as regards such goods,
shall be at an end.
In case of prohibition of export, blockade or hostilities preventing ship-
ment, this Contract, or any unfulfilled part thereof, shall be at an end.
Bill of Lading to be considered proof of date of shipment in the absence
of evidence to the contrary.
Any separate parcel declared in partial execution of this Contract, shall
be considered as if shipped under a separate Contract.
If the goods tendered, or any part thereof, are not in accordance with the
Contract as regards quality and/or condition, the Arbitrators shall award
that the goods be taken with an allowance or be invoiced back to the Seller
at the market price of the goods contracted for on the day of arbitration,
with or without a penalty, not exceeding 5 per cent, on such price, according
to the special circumstances of the case.
Payment — as per Rule 8, allowing interest equal to three months from
date of being ready for delivery.
This Contract is made between yourselves and ourselves and not by or with
any person, whether disclosed or not, on whose instructions or for whose benefit
the same may have been entered into.
APPENDIX IV 201
No. 1 8. —SHIPMENT AND DELIVERY CONTRACT.
THE LIVERPOOL CORN TRADE ASSOCIATION, LIMITED.
Liverpool 19
We have this day bought from on the terms of
the Printed Rules of the Liverpool Corn Trade Association, Limited,
To be deli vered ex quay and/or store at Seller's option, in fair merchant-
able condition ; a slight dry warmth not to be objected to.
Particulars of shipment shall be declared by the first Seller to his Buyer
before the vessel named has appeared in the Bill of Entry, unless the vessel
brings its own advices, in which case an extra day shall be allowed. In case
of re-sale a copy of first declaration shall be accepted by Buyer if passed on
in due course.
Ship damaged or sea water damaged goods may be rejected, and the
Contract, so far as regards the quantity rejected shall be at an end.
In the event of the goods declared, or any part thereof, being prevented
from arriving by perils of the seas, the Contract, so far as regards such goods,
shall be at an end.
In case of prohibition of export, blockade or hostilities preventing ship-
ment, this Contract, or any unfulfilled part thereof, shall be at an end.
Bill of Lading to be considered proof of date of shipment in the absence
of evidence to the contrary.
Any separate parcel declared in partial execution of this Contract, shall
be considered as if shipped under a separate Contract.
If the goods tendered, or any part thereof, are not in accordance with the
Contract as regards quality and/or condition, the Arbitrators shall award
that the goods be taken with an allowance or be invoiced back to the Seller
at the market price of the goods contracted for on the day of arbitration, with
or without a penalty not exceeding 5 per cent, on such price, according to
the special circumstances of the case.
Payment — as per Rule 8, allowing interest equal to three months from
date of being ready for delivery.
This Contract is made between yourselves and ourselves and not by or with
any person, whether disclosed or not, on whose instructions or for whose benefit
the same may have been entered into.
Amended igth December, 1892.
No. 20.— EAST INDIA WHEAT SHIPMENT AND DELIVERY
CONTRACT.
{Face]
THE LIVERPOOL CORN TRADE ASSOCIATION, LIMITED.
Liverpool ig
We have this day sold to on the terms of
the Printed Rules of the Liverpool Corn Trade Association, Limited, and
the Rules endorsed hereon about
• of fair average quality of the season's shipment at
time and place of shipment Crop
at per 100 IDS
London Standard.
202 APPENDIX IV
Any percentage of Barley, Pulse and/or other feeding stuffs up to two per
cent, to be taken and paid for as Wheat ; any quantity in excess of two per
cent, to be allowed for by Seller at one half settling price. Any percentage
of dirt, non-farinaceous seeds or other extraneous matter up to 2 j per cent,
to be allowed for by Seller at settling price, and any quantity in excess of
2£ per cent, at double settling price. Settlement for differences and allow-
ances shall be made between First Seller and Last Buyer ; intermediate
provisional invoices shall be final.
For the purpose of determining the quantity of such percentages as
above, the Buyer or his Agent has the right to select one bag in every
thousand ; provided that of each separate mark not less than five nor more
than sixty bags are to be selected, any Wheat for shipper's account remain-
ing unsold of such mark being excluded. After selection the bags are to be
enclosed in dust-proof covers, which are to be sealed by Buyer and Seller or
their Agents at time of discharge, and dealt with in accordance with the
rules adopted by the Liverpool Corn Trade Association.
One analysis only to be made of bags of the same mark in any vessel,
exclusive of any unsold Wheat for Shipper's account, and every Receiver
thereof to abide by the result of such analysis.
The certificate of analysis of the said Association or its duly appointed
Analyst to be final.
shipment from
via to LIVERPOOL and/or BIRKENHEAD, per steamer or
steamers,
To be delivered, ex quay and/or store, at Seller's option, in fair merchant-
able condition ; a slight dry warmth and slight weeviUing not to be objected
to. Importer's bags for Seller's account.
Particulars of shipment shall be declared by the first Seller to his Buyer
within 25 days from the date of sailing of the vessel. Every declaration
shall be deemed to be under reserve for errors or delay in telegraphic trans-
mission, and should such telegraphic information be delayed beyond the
25 days or be lost by causes out of Seller's control, then the Seller to have
24 hours after the receipt of the necessary particulars in Liverpool or London
for making appropriation. In case of re-sales, a copy of first declaration
shall be accepted by Buyers if passed on in due course.
Ship damaged or sea water damaged Grain may be rejected, and the
Contract, so far as regards the quantity rejected, shall be at an end.
In the event of the Grain declared, or any part thereof, being prevented
from arriving by perils of the seas, the Contract, so far as regards such
Grain, shall be at an end.
In case of prohibition of export, blockade or hostilities preventing ship-
ment, this Contract, or any unfulfilled part thereof, shall be at an end.
Seller to pay Brokerage of per cent. Contract
cancelled or not cancelled.
Bill of Lading to be considered proof of date of shipment in the absence
of evidence to the contrary.
Any separate parcel declared in partial execution of this Contract, shall
be considered as if shipped under a separate Contract.
If the Grain tendered, or any part thereof, is not in accordance with the
Contract as regards quality and/or condition, the Arbitrators shall award
that the Grain be taken with an allowance or be invoiced back to the Seller at
the market price of the Grain contracted for, on the day of arbitration, in
either case with or without a penalty, not exceeding 5 per cent, on such
price, according to the special circumstances of the case.
If at the time of tender the Standard for the month's shipment has not
been made up, the Arbitrators may decide on the last previous available
standard, or on such other evidence as they may think fit, whether or not
the Grain is to be invoiced back to the Seller, but the price at which it is to
be invoiced back shall stand over until the standard for the month in which
APPENDIX IV 203
the Grain was shipped has been made up, and shall then be decided by
arbitration, according to the price of the day of the former arbitration.
Any claim of the Buyer to an allowance from the Contract price shall also
stand over, and be decided by arbitration in like manner.
Payment — as per Rule 8, allowing interest equal to three months from
date of being ready for delivery.
This Contract is made between yourselves and ourselves and not by or with
any person, whether disclosed or not, on whose instructions or for whose benefit
the same may have been entered into.
Amended igth December, 1892.
[Back]
RULES FOR SAMPLING AND ANALYSIS.
1 . The bags of Grain selected in the manner provided by this Contract
shall be sent by the Buyer or his Agent without delay to the Liverpool Corn
Trade Association, or to any person or Company appointed and authorised
by the said Association.
As soon as practicable after the receipt thereof the whole of the contents
of the bags shall be passed through an approved machine by the Association
or by any person or Company appointed and authorised by them, and a
sample of convenient size taken therefrom, which shall be analysed by the
Association.
Where the machine is not owned and controlled by the Association at any
port, the Buyer and Seller or their Agents have the right to be present
during the reducing operation.
2. The Association shall pass a portion of the surplus Grain over a
screen approved by them, and place the same into bags for inspection,
arbitration, and standard purposes.
3. After providing the necessary samples, all surplus Grain shall be sold
by the Association, and the proceeds credited to the First Seller of the cargo
or parcel.
4. Upon the application of the Buyer or his Agent, the Association shall
supply the requisite number of dust-proof covers, but anyone to whom such
covers are sent shall pay the carriage thereon, and shall be liable to pay the
value thereof if the same are not returned within one month.
5. Neither the Association nor their officers shall be liable for any
damage sustained by reason of the loss or destruction of or damage to any
samples sent to them or in their custody.
6. The analysis fees together with any charges incurred by the Associa-
tion on samples sent for analysis shall be borne and paid as to one half by
the Seller and one half by the Buyer, and if there be more than one Buyer of
Grain of the same mark in any ship he shall contribute his due proportion
of the said fees and charges.
No. 20.— EAST INDIA WHEAT SHIPMENT AND DELIVERY
CONTRACT.
[Face}
THE LIVERPOOL CORN TRADE ASSOCIATION, LIMITED.
Liverpool 19
We have this day bought from on the terms of
the Printed Rules of the Liverpool Corn Trade Association, Limited, and
the Rules endorsed hereon about
204 APPENDIX IV
of fair average quality of the season's shipment at
time and place of shipment Crop
at per 100 Ibs
London Standard.
Any percentage of Barley, Pulse and/or other feeding stuffs up to two per
cent, to be taken and paid for as Wheat ; any quantity in excess of two per
cent, to be allowed for by Seller at one half settling price. Any percentage
of dirt, non-farinaceous seeds or other extraneous matter up to 2 J per cent,
to be allowed for by Seller at settling price, and any quantity in excess of
•2.\ per cent, at double settling price. Settlement for differences and allow-
ances shall be made between First Seller and Last Buyer ; intermediate
provisional invoices shall be final.
For the purpose of determining the quantity of such percentages as
above, the Buyer or his Agent has the right to select one bag in every
thousand ; provided that of each separate mark not less than five nor more
than sixty bags are to be selected, any Wheat for shipper's account remain-
ing unsold of such mark being excluded. After selection the bags are to be
enclosed in dust-proof covers, which are to be sealed by Buyer and Seller or
their Agents at time of discharge, and dealt with in accordance with the
rules adopted by the Liverpool Corn Trade Association.
One analysis only to be made of bags of the same mark in any vessel,
exclusive of any unsold Wheat for Shipper's account, and every Receiver
thereof to abide by the result of such analysis.
The certificate of analysis of the said Association or its duly appointed
Analyst to be final.
shipment from
via to LIVERPOOL and/or BIRKENHEAD, per steamer or
steamers
To be delivered, ex quay and/or store, at Seller's option, in fair merchant-
able condition ; a slight dry warmth and slight weevilling not to be objected
to. Importer's bags for Seller's account.
Particulars of shipment shall be declared by the first Seller to his Buyer
within 25 days from the date of sailing of the vessel. Every declaration
shall be deemed to be under reserve for errors or delay in telegraphic trans-
mission, and should such telegraphic information be delayed beyond the
25 days or be lost by causes out of Seller's control, then the Seller to have
24 hours after the receipt of the necessary particulars in Liverpool or London
for making appropriation. In case of re-sales, a copy of first declaration
shall be accepted by Buyers if passed on in due course.
Ship damaged or sea water damaged Grain may be rejected, and the
Contract, so far as regards the quantity rejected, shall be at an end.
In the event of the Grain declared, or any part thereof, being prevented
from arriving by perils of the seas, the Contract, so far as regards such
Grain, shall be at an end.
In case of prohibition of export, blockade or hostilities preventing ship-
ment, this Contract, or any unfulfilled part thereof, shall be at an end.
Seller to pay Brokerage of per cent. Contract
cancelled or not cancelled.
Bill of Lading to be considered proof of date of shipment in the absence
of evidence to the contrary.
Any separate parcel declared in partial execution of this Contract, shall
be considered as if shipped under a separate Contract.
If the Grain tendered, or any part thereof, is not in accordance with the
Contract as regards quality and/or condition, the Arbitrators shall award
that the Grain be taken with an allowance or be invoiced back to the Seller
at the market price of the Grain contracted for, on the day of arbitration, in
either case with or without a penalty, not exceeding 5 per cent, on such
price, according to the special circumstances of the case.
If at the time of tender the Standard for the month's shipment has not
APPENDIX IV 205
been made up, the Arbitrators may decide on the last previous available
standard, or on such other evidence as they may think fit, whether or not
the Grain is to be invoiced back to the Seller, but the price at which it is to
be invoiced back shall stand over until the standard for the month in which
the Grain shipped has been made up, and shall then be decided by arbitra-
tion, according to the price of the day of the former arbitration. Any claim
of the Buyer to an allowance from the Contract price shall also stand over,
and be decided by arbitration in like manner.
Payment — as per Rule 8, allowing interest equal to three months from
date of being ready for delivery.
This Contract is made between yourselves and ourselves and not by or with
any person, whether disclosed or not, on whose instructions or for whose benefit
the same may have been entered into.
Amended isth March, 1916.
[Back]
RULES FOR SAMPLING AND ANALYSIS.
1. The bags of Grain selected in the manner provided by this Contract
shall be sent by the Buyer or his Agent without delay to the Liverpool Corn
Trade Association, or to any person or Company appointed and authorised
by the said Association.
As soon as practicable after the receipt thereof the whole of the contents
of the bags shall be passed through an approved machine by the Association
or by any person or Company appointed and authorised by them, and a
sample of convenient size taken therefrom, which shall be analysed by the
Association.
Where the machine is not owned and controlled by the Association at
any port, the Buyer and Seller or their Agents have the right to be present
during the reducing operation.
2. The Association shall pass a portion of the surplus Grain over a screen
approved by them, and place the same into bags for inspection, arbitration
and standard purposes.
3. After providing the necessary samples, all surplus Grain shall be sold
by the Association, and the proceeds credited to the First Seller of the cargo
or parcel.
4. Upon the application of the Buyer or his Agent, the Association shall
supply the requisite number of dust-proof covers, but anyone to whom such
covers are sent shall pay the carriage thereon, and shall be liable to pay the
value thereof if the same are not returned within one month.
5. Neither the Association nor their officers shall be liable for any
damages sustained by reason of the loss or destruction of or damage to any
samples sent to them or in their custody.
6. The analysis fees together with any charges incurred by the Associa-
tion on samples sent for analysis shall be borne and paid as to one half by
the Seller and one half by the Buyer, and if there be more than one Buyer of
Grain of the same mark in any ship he shall contribute his due proportion of
the said fees and charges.
206
APPENDIX IV
THE LIVERPOOL CORN TRADE ASSOCIATION, LIMITED.
[Face-]
No. 26. — FUTURE DELIVERY CONTRACT — WHEAT (LIVERPOOL
GRADE).
Amendment
ist Sept.,
1920.
Liverpool 19
We have this day SOLD to
on the terms of the Printed Rules of the Liverpool Corn Trade
Association, Limited, say about
Centals Wheat, as endorsed hereon, at per 100 Ibs.,
subject to mutual allowances for superiority or inferiority as fixed by
the Grading Committee, but not exceeding one penny per cental, to
be delivered during ex store in Liverpool, or,
at Seller's optioa, in Birkenhead at an allowance to the Buyer of
halfpenny
one farthing per Cental.
The Certificate of the Grading Committee shall accompany the
tender of the goods, and as between Buyer and Seller shall be final
as to grade, and as between them shall not be affected by the result
of any review of the Certificate under the provisions of the Bye-Laws
as to grading.
The Wheat at time of tender to be in fair merchantable condition
(a slight dry warmth not to be objected to).
Payment — as per Rule 8, allowing interest equal to three months
from date of being ready for delivery.
This Contract is made between yourselves and ourselves and not by
or with any person, whether disclosed or not, on whose instructions or for
whose benefit the same may have been entered into.
Amended
May, 1912.
[Back] AMERICAN RED WHEAT.
Spring Wheat. If of the type known as Manitoba, basis of weight 60 Ibs.
If of the type known as Northern (grown in the United States), basis of
weight 59 Ibs.
Any other type of Spring Wheat, basis of weight 60 Ibs.
Soft Winter Wheat, free from garlic, basis of weight, 61 Ibs.
Hard Winter Wheat, basis of weight, 6o£ Ibs.
ARGENTINE WHEAT.
Rosario — Santa Fe type, basis of weight, 59^ Ibs.
Bahia Blanca type, basis of weight, 6o£ Ibs.
AUSTRALIAN WHEAT.
Victorian \
South Australian > basis of weight, 6o£ Ibs.
New South Wales )
No Wheat shall be graded which, in the opinion of the Grading Committee,
has any defect which would render it unsuitable for general milling
purposes.
Subject always to this proviso, basis Wheat may contain some heated,
sprouted, frosted and/or smutted grains, and a proportionately increased
quantity may be allowed if warranted by an improvement in weight
or in other respects.
APPENDIX IV 207
No Wheat weighing more than one pound per imperial bushel under the
basis weight shall be graded.
No Wheat which complies with the weight requirements shall be rejected on
account of the presence of heated, sprouted, frosted and/or smutted
grains or other defects if, in the opinion of the Grading Committee, it is
not more than one penny per cental inferior to basis quality.
The allowances, if any, shall be in gradations of not less than one halfpenny
per cental.
The basis of weight as hereinbefore provided is per imperial bushel at time
of grading.
Spring Wheats must be reasonably hard of their respective types, and all
descriptions of Wheat must be reasonably clean of their respective
types.
American Red Wheat must be Wheat grown East of the Rocky Mountains
in the United States of North America and/or Canada, except where
otherwise provided.
THE LIVERPOOL CORN TRADE ASSOCIATION, LIMITED.
[Face]
No. 26. — FUTURE DELIVERY CONTRACT — WHEAT (LIVERPOOL
GRADE).
Liverpool 19
We have this day BOUGHT from
on the terms of the Printed Rules of the Liverpool Corn Trade
Association, Limited say about
Centals Wheat, as endorsed hereon, at per 100 Ibs.,
subject to mutual allowances for superiority or inferiority as fixed by
the Grading Committee, but not exceeding one penny per cental, to
be delivered during ex store in Liverpool, or, at
Seller's option, in Birkenhead at an allowance to the Buyer of
halfpenny
one farthing per Cental.
The Certificate of the Grading Committee shall accompany the Amendment
tender of the goods, and as between Buyer and Seller shall be final Ist Sept..
as to grade, and as between them shall not be affected by the result I920'
of any review of the Certificate under the provisions of the Bye-Laws
as to grading.
The Wheat at time of tender to be in fair merchantable condition
(a slight dry warmth not to be objected to).
Payment — as per Rule 8, allowing interest equal to three months
from date of being ready for delivery.
This Contract is made between yourselves and ourselves and not by
or with any person, whether disclosed or not, on whose instructions or for
whose benefit the same may have been entered into.
•jjj Amended isth May, 1912.
r**
[Back] AMERICAN RED WHEAT.
Spring Wheat. If of the type known as Manitoba, basis of weight, 60 Ibs.
If of the type known as Northern (grown in the United States), basis of
weight, 59 Ibs.
Any other type of Spring Wheat, basis of weight, 60 Ibs,
208 APPENDIX IV
Soft Winter Wheat, free from garlic, basis of weight, 61 Ibs.
Hard Winter Wheat, basis of weight, 6o| Ibs.
ARGENTINE WHEAT.
Rosario — Santa Fe type, basis of weight, 59^ Ibs.
Bahi a Blanca type, basis of weight, 6o£ Ibs.
AUSTRALIAN WHEAT.
Victorian \
South Australian [ basis of weight, 6o£ Ibs.
New South Wales )
No Wheat shall be graded which, in the opinion of the Grading Committee,
has any defect which would render it unsuitable for general milling
purposes.
Subject always to this proviso, basis Wheat may contain some heated,
sprouted, frosted and/or smutted grains, and a proportionately
increased quantity may be allowed if warranted by an improvement
in weight or in other respects.
No Wheat weighing more than one pound per imperial bushel under this
basis weight shall be graded.
No Wheat which complies with the weight requirements shall be rejected
on account of the presence of heated, sprouted, frosted and/or smutted
grains or other defects if, in the opinion of the Grading Committee, it
is not more than one penny per cental inferior to basis quality.
The allowances, if any, shall be in gradations of not less than one half-
penny per cental.
The basis of weight as hereinbefore provided is per imperial bushel at time
of grading.
Spring Wheats must be reasonably hard of their respective types, and all
descriptions of Wheat must be reasonably clean of their respective
American Red Wheat must be Wheat grown East of the Rocky Mountains
in the United States of North America and/or Canada, except where
otherwise provided.
LIVERPOOL CORN TRADE ASSOCIATION, LIMITED.
RIVER PLATE PARCEL CONTRACT, C.I.F. TERMS.
[Face]
RYE TERMS.
In force ist September, 1920. No. 28.
Liverpool 19
BOUGHT from
SOLD to
on the conditions and rule endorsed hereon and subject to such clearing
house Regulations as are applicable to this Contract
+ of fair average quality of the season's shipments at time of shipment of the
undermentioned weight
+ about as per sample
due allowance being made for handling and smallness of same.
APPENDIX IV 209
The grain is not warranted free from defect, rendering the same un-
merchantable, which would not be apparent on reasonable examination,
any statute or rule of law to the contrary notwithstanding.
Shipment in good condition, in bags and/or bulk (any portion in bags Shipment.
per 480 Ibs. extra) per
first-class classed not lower than Ai in red English,
5/6 ii French Veritas, or equal classification in Austrian, Norwegian,
Italian, or other equal register (Greek and Turkish sailing vessels excepted)
from a port or ports in the Argentine Republic and /or Uruguay
as per Bill or Bills of Lading dated or to be dated
about say about Quantity.
(reckoning provisionally 1,016 kilos, equal to 2,240 Ibs. English), at the Contract
price of say
per 480 Ibs. delivered sound (subject to any country
damaged grains in the fair average quality of the season's crop) gross weight,
as , including Freight and Insurance to
The whole Parcel to be weighed in drafts of not less than three bags, or Weighing,
not less than five cwts. per draft, or, at Buyer's option, ex ship at even
weights of not less than 240 Ibs. per draft, or, if discharged on the Continent,
not less than 100 kilos. Seller shall have the right of supervision both as to
the weighing and delivery. Should the parcel be discharged on the
Continent, the out-turn to be computed at 1,016 kilos, equal to 2,240 Ibs.
English.
The Buyer has the right to have the grain weighed by Approved
Automatic Hopper Scale at the ship's side, or, if discharged in the port of
Liverpool, at a public warehouse, but in the latter case the Seller may
require the weighing to take place at the ship's side, when he shall pay the
extra cost incurred.
In all cases in which the grain is weighed in drafts of not less than
2,000 Ibs., an allowance of 2 Ibs. per 2,000 Ibs. shall be made for draftage.
If a natural weight is guaranteed at time of discharge the Rules adopted
by the Liverpool Corn Trade Association in reference thereto shall apply to
this Contract.
Any deficiency on Bill of Lading weight to be refunded by Seller, and
any excess over Bill of Lading weight to be paid for by Buyer.
Vessel to be discharged afloat, and according to the custom of the port.
No charge for dunnage. If documents are tendered which do not provide1
for discharging as above or contain contrary stipulations as regards dis-
charge and/or demurrage Seller to be responsible to Buyer for all extra
expenses incurred thereby.
Should the Parcel form part of a larger quantity, loose collected,
damaged and sweepings to be shared pro-rata.
Slight dry warmth not injuring the grain not to be objected to, but grain
damaged by sea water or otherwise to be taken by Buyer with an allowance
for deterioration, based on Contract price, to be fixed by Arbitration in
Liverpool. Samples to be taken and sealed jointly by Buyer's and Seller's
agents at port of discharge.
Payment by Cash in Liverpool or London at Seller's option in exchange Payment,
for shipping documents, on or before the arrival of the vessel, less discount
at the rate of one half of one per cent, per annum above the advertised rate
of interest for short deposits allowed by the leading Joint Stock Banks in
London, for the unexpired time of ninety days from the arrival of Bill or
Bills of Lading in due course in Europe, or, at Seller's option, by Buyer's
acceptance of Skipper's or Seller's draft, domiciled in London, at ninety
days from date of arrival of Bill or Bills of Lading in due course in Europe,
with Documents attached as usual, but payment in no case later than the ....
prompt. The Seller shall provide separate Bills of Lading and Certificates
210 APPENDIX IV
or approved letters of insurance for each 250 tons, but the Seller has the
option on the arrival of the vessel of tendering a delivery order and letter of
insurance for each 250 tons, in which case the Buyer may deposit the amount
of his invoice in the Clearing House, and the amount so deposited shall be
retained until delivery of the goods The Seller shall be entitled to receive
payment on account as delivery proceeds, such payment being calculated
on the quantity delivered during the preceding day as certified by himself
and the last Buyer. No obviously clerical errors in the documents shall
entitle the Buyer to reject them or delay payment, but Seller shall be
responsible for all loss or expense which such error may cause Buyer.
Policies Seller to give Policies and/or Certificates of Insurance (duly stamped)
or approved letters of insurance for two per cent, over the invoice amount ;
any amount over this to be for Seller's account in case of total loss only.
Insurance (including war risk) to be effected with approved English Under-
writers and/or Companies, or with Foreign Underwriters and/or Companies
paying losses on gold basis in England, and on Lloyd's conditions,
guaranteed by approved English Companies. Seller not to be responsible
for the solvency of Underwriters and/or Companies.
All Average to be for Seller's account, Buyer in such case to return
Policies to Seller, and to furnish him with the usual documents required by
Average Adjusters for preparation of Average Statement on settlement of
final invoice. Should Average Statement be made up on the Continent,
the deficiency or surplus account shall be settled as soon as the out-turn is
ascertained, and the final account on Buyer handing back to Seller the
Policy or Policies of Insurance, and the Average Statement.
The usual River Plate Strike Clause applies to this Contract.
Prohibition. Should shipment be prevented by prohibition of export, blockade, or
hostilities, this Contract, or any unfulfilled part thereof, shall be at an end.
Brokerage. Seller to pay Brokerage of Con-
tract cancelled or not cancelled.
Buyer and Seller agree that, for the purpose of proceedings, either legal
or by arbitration, this Contract shall be deemed to have been made in
England and to be performed there, any correspondence in reference to the
offer, the acceptance, the place of payment or otherwise notwithstanding,
and the Courts of England or Arbitrators appointed in England, shall, except
for the purpose of enforcing any award made in pursuance of the Arbitration
Clause hereof, have exclusive jurisdiction over all disputes which may arise
under this Contract. Such disputes shall be settled according to the law of
England whatever the domicile, residence, or place of business of the parties
to this contract may be or become. Any party to this Contract residing or
carrying on business elsewhere than in England or Wales, shall, for the
purposes of proceedings at law or in arbitration, be considered as ordinarily
resident or carrying on business at the offices of the Liverpool Corn Trade
Association, Limited, and if in Scotland, shall be held to have prorogated
jurisdiction as against himself to the English Courts, or if in Ireland, to have
submitted to the jurisdiction and to be bound by the decision of the English
Courts. The service of proceedings upon any such party, by leaving the
same at the offices of the Liverpool Corn Trade Association, Limited,
together with the posting of a copy of such proceedings to his address
abroad or in Scotland or Ireland, shall be deemed good service, any rule of
law or equity to the contrary notwithstanding.
Difference in quality shall not entitle the Buyer to reject, except under
the award of Arbitrators or the Special Appeal Committee on Appeal.
All disputes from time to time arising out of this Contract, whether
arising between the parties hereto, or between one of the parties hereto and
the Trustee in Bankruptcy of the other party, shall be referred according to
the Liverpool Arbitration rule endorsed on the Contract, and this stipula-
tion may be made a rule of any of the divisions of His Majesty's High Court
of Justice in Ireland, on the application of either contracting party, for the
APPENDIX IV 211
purpose of enforcing an award against a party residing or carrying on
business in Ireland.
The Arbitration to be held in LIVERPOOL.
+ N.B. — The Clauses in Italics are alternative.
Contract No. 28 (PARCEL).
[Back] CONDITIONS.
1. DECLARATION AND PROVISIONAL INVOICE.
(a) Notice of appropriation with vessel's name shall be sent by the Appro-
Seller or his Agent to the Buyer within 14 days from the date PnatloQ
of sailing or reported departure by Lloyd's List of the vessel
from Argentina or Uruguay, but in no case later than 21 days
from the last day of the period of shipment named in the
Contract. Buyer shall on demand give Seller written receipt
for notice of appropriation.
(b) Provisional Invoice, based on Bill of Lading or shipping invoice
weight, with ship's name, and date of Bill of Lading shall be
furnished by the Seller to his Buyer within seven days after date
of sale or arrival of the documents in due course in Europe.
Notice or Tender to the Broker or Agent shall be deemed a
notice or tender within the terms of this Contract.
(c) In case of Re-sales, all Invoices, Notices, Declarations or Tenders
shall be accepted by Buyer if passed on in due course.
2. BILL OF LADING to be considered proof of date of shipment in the Proof of
absence of evidence to the contrary. Each shipment by separate vessel to Shipment,
be considered a separate contract.
3. NOTICE TO RETIRE DOCUMENTS shall be given by Buyer to Retirement
Seller, before i o'clock on the day previous to the day of payment, except of ®°CUm
on Saturdays when the time shall be 1 1 o'clock.
Notice or declaration required to be made under this Contract cannot
be made on any of the following non-business days : — Sundays, Good
Friday, Easter Monday, Whit Monday, the first Monday in August,
Christmas Day, and the' next week day following, and any other days pro-
claimed as Bank Holidays, and cannot be made to any party whose place of
business is within the area of the Liverpool Telephone Exchange on any
business day before 10 a.m. or after 5.30 p.m., and Saturdays i p.m.
4. (a) IF THE SELLER SHALL MAKE DEFAULT in shipping or Default.
declaring shipment, or in tendering the documents required by this
Contract, the contract shall be closed by invoicing back the goods
contracted for at such price as the Arbitrators shall determine,
and this shall apply whether the price so determined be higher or
lower than the Contract price.
(b) IF THE BUYER DEFAULTS in the fulfilment of Contract or
Award, the Seller, at his discretion, shall, after giving notice in
writing, have the right of re-sale, and the defaulter shall make
good the loss, if any, by such re-sale on demand.
(c) IF, BEFORE THE MATURITY OF THIS CONTRACT, EITHER
PARTY SHALL SUSPEND PAYMENT, OR BECOME BANK-
RUPT OR INSOLVENT, or become lunatic, or insane, or die
without leaving executors or others willing and able forthwith to
take over the liability attached to such party under the Contract,
or be declared a defaulter by the Clearing House Committee, the
Contract shall forthwith be closed at the market price then current
for similar goods or, at the option of the other party, at a price to
be ascertained by re-purchase or re-sale, as the case may be, before
the expiration of the following business day, and shall be entitled
to be paid by the party so suspending payment or committing an
212 APPENDIX IV
act of bankruptcy, or to prove against his estate, whether wound
up in bankruptcy or otherwise, for the loss, if any, or shall account
for the profit, if any, on such re-sale or re-purchase, any rule of
law or equity to the contrary notwithstanding.
5. ANY COMMISSION ON FREIGHT to be for Seller's benefit, but
any discount for payment of freight in cash to be for account of
Buyer.
6. ANY REDUCTION ON FREIGHT OR INSURANCE for ending
voyage at any particular port to be for Buyer's benefit, but any return of
premium of insurance for not going to the Continent to be for Seller's
account.
7. PROMPT SHIPMENT shall mean within twenty-one running days
from date of Contract.
8. The word " ABOUT," when referring to Quality shall mean the
equivalent of threepence per 480 Ibs., and when referring to Quantity shall
mean five per cent., more or less. If the quantity named in this Contract
is not fixed but is modified by the word " about " provisional and final
settlements shall be made for the named quantity at Contract price, and
for any variation within the prescribed limits from the named quantity at
the market value of the goods on the day the vessel's name appears in the
Bill of Entry.
Claims for 9. When Buyer claims ARBITRATION for quality and/or condition
Arbitration. Upon samples drawn and sealed, he shall, if he is the last Buyer, appoint
his Arbitrator and give notice of such appointment to his Seller not later
than ten running days after final discharge of shipment, but if he is an inter-
mediate Buyer, then in due course after receiving notice from his Buyer.
If the claim is for condition, the Seller, if he is the original Seller, shall
appoint and instruct his Arbitrator within three business days after receipt
of Buyer's nomination ; and if he is an intermediate Seller, then in due
course after receipt of nomination from his Seller. If the arbitration is
delayed by either party without reasonable cause, the Arbitrators shall
take such delay into account in making their award.
RuEr I0- ARBITRATION ON QUALITY having been claimed in accordance
with the terms of this Contract the parties claiming must proceed with the
Arbitration within 28 days of final discharge when sold on sample, or when
sold fair average quality within 28 days of the publication in the Trade List
that the Standard has been, or will not be made up. After the expiration
of these limits, claims for quality to be void, unless the delay is, in the
opinion of Arbitrators, considered justifiable. In all arbitrations on quality
of wheat the allowance (if any) already made for deficiency in guaranteed
natural weight shall be taken into consideration. The Seller shall not be
required to make any allowance for inferiority amounting to less than 3^.
per quarter, but this stipulation shall not apply if the inferiority amounts
to 3*1. per quarter or over.
In case of re-sale where the first Seller's price is different to that of the
last Buyer, settlement for any allowance in respect of natural weight shall
be based upon the market value of the goods on the day the vessel's name
appears in the Bill of Entry.
11. For purposes of arbitration and natural weight allowances Sellers
shall not be required to draw separate sealed samples from parcels of less
than 500 tons, when such parcels form part of a larger quantity.
12. REGISTRATION. Either party to this Contract, whether a
member or non-member of the Association, shall have the right at any time
during its currency to register it at the Clearing House, but it shall not be
subject to Calls for Margin.
APPENDIX IV 213
ARBITRATION RULE OF THE LIVERPOOL CORN TRADE
ASSOCIATION, LIMITED,
AS APPLIED TO THIS CONTRACT.
All disputes arising out of transactions connected with the Trade, except
such as arise out of the business of the Clearing House, shall be referred to
two arbitrators, one to be chosen by each party in difference, the said
arbitrators having power to call in a third in case they shall deem it neces-
sary. In the event of one of the parties appointing an arbitrator and the
other refusing, or for three days after notice in writing of the appointment
neglecting to do so (such notice to be delivered personally or left at the usual
place of business of such other party), or in case the arbitrators appointed
by the parties shall not within seven days after their appointment agree to
an award, or appoint a third arbitrator, or, after the appointment of such
third arbitrator, in case of the death, refusal to act, or incapacity of any one
or more of such three arbitrators, or in any case in which the Clearing House
Regulations may so provide, then, upon application of either of the disputing
parties, the question in dispute shall stand referred to two arbitrators to be
nominated by the President for the time being of the Association, or by the
Vice- President in case of the absence of the President, his illness, or interest
in the matter in dispute ; and in case of the absence of the Vice-President,
his illness, or interest in the matter in dispute, then the Directors, on the
application of either of the disputing parties, shall appoint two arbitrators ;
and in case the two arbitrators appointed, whether by the President, the
Vice-President, or the Directors, shall not within seven days after their
appointment agree to an award, or choose a third arbitrator, then the
Directors shall appoint a third arbitrator, and shall, in the case of the death,
refusal to act, or incapacity of any such three arbitrators, from time to time
substitute a new arbitrator or arbitrators in the place of the arbitrator or
arbitrators so dying, refusing or incapacitated.
In case either party shall be dissatisfied with any award of arbitrators,
a right of appeal shall lie to the Directors, provided it be claimed not later
than seven running days after the date of the award.
The arbitrators appointed shall in all cases be members of the Associa-
tion, and no person having any interest in the matter in dispute shall be
competent to act as an arbitrator.
The award of any two arbitrators in writing signed by them (subject
only to the right of appeal hereinafter mentioned) shall be conclusive and
binding upon all disputing parties, both with respect to the matter in
dispute, and all fees and expenses of the reference and award. Every award
shall be written on a form to be settled by the Directors and supplied by the
Association at a charge (to be fixed by the Directors) not exceeding ten
shillings.
No arbitrator shall be entitled to demand a higher fee than £5 55., nor
shall such fee be less than £i is. for every requisite sitting.
Where an appeal is claimed the appellant shall pay to the Association
as a fee for the investigation, the sums following : —
Members. Non-Members.
For appeals in respect of quantities not
exceeding 250 tons £500 £7 10 o
For appeals in respect of quantities
exceeding 250 tons £10 o o -£15 o o
When any question of quality and/or condition is involved, the Directors
shall not hear the appeal, but shall appoint a Special Appeal Committee of
six to hear and determine the matter. Directors and other Members of the
Association shall be eligible for appointment on such Special Appeal Com-
mittee. In case of the death, refusal or neglect to act or incapacity of not
214 APPENDIX IV
more than two Members of the Special Appeal Committee, the remaining
Members shall forthwith fill up the vacancy or vacancies so occurring. In
case of the death, refusal or neglect to act or incapacity of more than two
Members of the Special Appeal Committee, the Directors shall fill up the
vacancies so occurring. The Special Appeal Committee shall confirm the
award appealed from and the appeal fees shall follow the award unless two-
thirds of the Members hearing such appeal shall decide to vary such award.
The Special Appeal Committee shall have power to award by whom the
Arbitrators' fees and any legal or other expenses incurred by the Association
shall be borne, but no award shall be made in respect of such fees and
expenses except by the vote of two-thirds of the Members hearing the case.
In appeals (other than quality and/or condition) the Directors shall
decide all questions, including the payment of Arbitrators' fees and any
legal or other expenses incurred by the Association, by a majority of votes,
and in the event of an equality of votes, the Chairman shall have a second
or casting vote.
If the Directors or the Special Appeal Committee, as the case may be,
shall see fit to state in the form of a special case for the opinion of the Court
any question of law arising in the course of the reference, or if they shall be
directed so to do, the Association shall be entitled to an addition to their
fee not exceeding £15 for every requisite sitting. The Arbitrators, Directors
or Special Appeal Committee, as the case may be, shall have power from
time to time to make interim awards.
An award signed by the Chairman of the meeting which shall hear such
appeal, and countersigned by the Secretary or his substitute, shall be
deemed to be the award of the Directors or the Special Appeal Committee,
as the case may be, and shall in all cases be final.
No party shall have the right to be heard on appeal until he has paid the
fees and other arbitrators' expenses payable by him on the award in respect
of which the appeal is made.
No Director having any interest in the matter in dispute shall vote on
the question of the appointment of arbitrators, or, in the case of an appeal,
sit or vote on the hearing of such appeal, or on the appointment of any
Special Appeal Committee ; nor shall the arbitrators whose decision is
appealed against, vote on the hearing of this appeal.
Neither contracting party, nor Trustee in Bankruptcy, or other person
claiming under either of them, shall bring any action against the other of
them in respect of any dispute until such dispute has been settled by
arbitrators, the Directors, or the Special Appeal Committee, as the case may
be, and it is expressly agreed that the obtaining of an award shall be a
condition precedent to the right of either contracting party to sue the other
in respect of any such dispute.
For the purpose of enforcing any award, the provisions of the Arbitra-
tion Act, 1889, or any statutory modification or re-enactment thereof shall
apply in England, and the provisions of any Scotch or Irish Act dealing with
arbitrations or the procedure thereon shall apply respectively in Scotland
and Ireland, and any award may if necessary be made a Rule of Court in
Ireland, or an Order of the Court of Session in Scotland.
If the Directors or the Special Appeal Committee as the case may be
shall state or be directed to state a Special Case for the opinion of the Court,
the party at whose request or instance the Case is to be stated shall deposit
with the Association the sum of £100 as security for the fees, costs and
expenses of the Directors, or the Special Appeal Committee, and the
Association of and incidental to stating and setting down such Special Case.
If the party requiring the Case to be stated shall neglect or fail to make
such deposit within seven days after the Directors or the Special Appeal
Committee have agreed or been directed to state a Case, the Directors or the
Committee, as the case may be, shall be entitled to proceed with their award
without stating such case, and in any order directing the Directors or
APPENDIX V
215
Committee to state a Special Case the party requiring the Case to be stated
shall consent to abide by the provisions of this paragraph and to make the
said deposit within the time aforesaid. If at any time after the Directors or
the Special Appeal Committee have agreed or been directed to state a Special
Case, but before a final award has been made, the parties in difference shall
settle their dispute, the Directors or the Committee as the case may be shall
satisfy themselves that such dispute is settled and thereupon the Directors
or the Committee and the Association shall be entitled to payment of their
fees, costs and expenses in connection with the Special Case out of the said
deposit and the Association shall account for the balance, if any, to the party
by whom the deposit was paid. If the matter in dispute shall not be settled
between the parties but a final award shall be made, the manner in which the
said deposit shall be dealt with shall be in the discretion of the Directors or
the Committee making the award.
APPENDIX V
SPECIMENS OF THE CONTRACT FORMS IN USE IN THE
LIVERPOOL COTTON MARKET.
Form 56 is Ike futures contract form in the case of American cotton.
LIVERPOOL COTTON ASSOCIATION, LIMITED.
[Face] CONTRACT FORM i.
CONTRACT NOTE FOR SPOT COTTON (" FIXED PRICE ").
(ist June, 1912.)
Liverpool, 19
Messrs
Dear Sirs,
We have this day
the following COTTON :-
Mark.
Number
of Bales.
Description.
Ship.
Price.
Rule 365. — Payment for all descriptions of Cotton, except Sea Island
growths and Egyptian, shall be made in cash within ten days from Invoice
2i6 APPENDIX V
date, or before delivery, if required. Payment for all Sea Island growths
and Egyptian shall be made in cash, less one-and-half per cent, discount,
within ten days from Invoice date, or before delivery, if required, provided
no other terms of payment have been specially arranged between buyer
and seller at the time the Contract is made.
This contract shall not be cancelled on any ground and is subject to
the " Rules of the Liverpool Cotton Association " whether endorsed hereon
or not, and in case of any question or dispute the matter shall be settled in
accordance with such Rules.
Yours faithfully,
[Back]
LIVERPOOL COTTON ASSOCIATION, LIMITED.
CONTRACT FORM i.
332. — If any bale or bales are found to be not equal to the selling
sample they shall be exchanged once at the option of the seller. If the
seller does not exercise this option, or if any bale or bales thus substituted
are not equal to the selling sample, the buyer shall have the right to invoice
back the inferior bales according to the provisions of Rule 570 ; and if
the quantity of such inferior bales exceeds 10 per cent, of the Contract the
buyer shall have the option of invoicing back the whole Contract under the
provisions of Rule 570.
337. — Cotton must be taken by the buyer within ten days from Invoice
date. In default, the seller may, after due notice, weigh it over at the
expense and risk of the buyer, who shall pay to the seller all reasonable
charges incurred, including fire insurance and warehouse rent from the
tenth day.
338. — When receiving Cotton from the warehouse or quay the buyer,
before weighing, shall have the right to demand the removal of double
canvas put on after arrival at Port of Discharge.
348. — The allowance for the weight of bands, ropes, or wires, upon bales
of American and unpressed Brazilian Cotton, shall be arrived at by weighing
10 (or 20 if required by either party) of such bands, ropes, or wires, as shall
be agreed upon between the representatives of the buyer and seller at the
scale as being of an average weight ; and such shall be weighed so as to
express the weight of same in pounds and quarters of a pound. The whole
number of bands, ropes, or wires, upon each lot shall be counted, and the
allowance made in respect of them shall be in proportion to the weight as
above ascertained of the 10 or 20 bands, ropes, or wires, which have been
weighed as above.
349. — The buyer shall have a right to claim, at the time of delivery, that
the actual tare shall be ascertained in his presence, which shall then "be the
tare allowed in the invoice, and any subsequent claim cannot then be
enforced. If at the time of delivery the actual tare be not ascertained,
the buyer shall afterwards be entitled to recover for insufficient allowance
for canvas, provided the deficiency amounts to £ Ib. per bale on each lot,
as defined in Rule 315, but not otherwise. Such claims must be properly
substantiated and be made within ten days and three months from Invoice
date. When a lot of Cotton has been divided on re-sale, the original seller
shall only be liable to pay claims for deficient allowance for canvas when
it amounts to £ Ib. per bale on the whole lot.
350. — When Cotton is overtared, the buyer shall be allowed to retain the
excess canvas, without making any allowance to the seller for the same.
351. — The actual tare (exclusive of draft) shall be ascertained as follows :
— When the lot numbers 50, or less, 5 bales ; when more than 50, up to 70
inclusive, 7 bales ; and more than 70, 10 bales ; or more or less, as may be
APPENDIX V 217
agreed upon, shall be taken indiscriminately, stripped of their canvas, and
tared as follows : — For American Cotton the tare shall be ascertained by
weighing the canvas separately, and also collectively ; but the allowance
for canvas made on the invoice shall in no case exceed the rate as ascer-
tained by the latter mode. The allowance shall be calculated at the exact
relative proportion of the weight of the bales stripped to the total weight
of the whole lot. The allowance for canvas must be calculated on the
weight of the bales after the weight of the bands has been deducted, and
before the allowance for draft has been deducted. In other growths the
tare shall be ascertained by weighing the canvas, bands or ropes, and bars
separately, and also collectively ; but the tare allowed in the invoice shall
in no case exceed the rate as ascertained by the latter mode. The allowance
shall then be calculated on the whole lot in the exact relative proportion of
the number of bales stripped to the total number of bales. Mended bales
of all descriptions shall be tared separately.
352. — When Cotton is not sold with actual tare and actual tare shall
have been demanded and it shall prove not to exceed the customary
allowance for tare, the whole expense of taring shall be borne by the buyer,
otherwise it shall be borne by the seller.
353. — -The canvas used for mending Cotton in Liverpool shall not exceed
2£ Ibs. per yard, and should it be found that heavier canvas has been used
the seller shall be liable for all expense which the buyer may incur in estab-
lishing his claim for such excess.
369. — If any buyer fail to fulfil his Contract before noon of the day after
the expiration of ten days from Invoice date, the seller shall be at liberty
after giving twenty-four hours' notice in writing, to re-sell the Cotton, and
the buyer shall made good the loss resulting from the re-sale of such Cotton,
upon a statement of the ascertained loss being rendered to him.
375. — Claims for falsely-packed, damaged, or unmerchantable Cotton,
and for stones, etc., will be allowed at the value of the sound Cotton at the
date of return, if such return be made and the claim sent in within ten days
and three months from Invoice date, such claims if allowed shall bear
interest from the tenth day after the date of claim.
376. — In claims for falsely-packed Cotton the bales shall, if possible, be
returned entire, and not the inferior portion only ; but if only a part of the
bale be returned it shall not invalidate the claim. In claims for damaged
Cotton, stones, etc. found in any bale, the unmerchantable portion only
shall be returned, with a certificate stating the marks and numbers on the
bales complained of, and the quantity found in each bale, but the absence
of the marks and numbers of the bales shall not necessarily invalidate the
claim. Bales are not to be considered falsely-packed, more especially in
the lower grades, when only a slight irregularity exists, which has been
fairly represented in the selling or arbitration samples.
377. — In the event of any portion of the Cotton being country damaged
or damaged by or from the effects of salt water, or from any accident of the
voyage, or damaged by or in consequence of fire, and thereby rendered
unmerchantable, such portion shall be invoiced back, as provided for in
Rule 570.
378. — -Reasonable charges for carriage, cartage, porterage, etc., shall be
allowed in reference to Cotton returned, but not for expenses incurred out
of Great Britain.
382. — If in the opinion of two qualified persons Cotton turns out at
time of delivery to be damp or wet, and if such arbitrators consider an
allowance of at least 10 Ibs. per bale of 480 Ibs. average net weight, if
American Cotton, to be due thereon (and this shall be the ratio in cases of
damp occurring in growths other than American), the buyer shall have the
option of closing the whole of the Contract, or any bale, or bales, under the
provisions of Rule 570.
384. — Claims for errors in weight and insufficient tare shall be allowed
218
APPENDIX V
at the original invoice price, if made within ten days and three months from
the Invoice date, provided they are properly substantiated.
385. — Claims for clerical errors in invoices shall be allowed when properly
substantiated.
LIVERPOOL COTTON ASSOCIATION, LIMITED.
CONTRACT FORM 2.
CONTRACT NOTE FOR SPOT COTTON (" ON CALL.")
(gth October, 1913.)
Liverpool, 19
Messrs.
Dear Sirs,
We have this day
the following COTTON at the
Delivery or Deliveries ($$(i
of CM
• ^ • ....................
P) V*
*on\or " off" the Seller's price of the
n, F.G.O.C.) in Liverpool at the
Rule 365. — Payment for all descriptions of Cotton except Sea Island
growths shall be made in cash within ten days from Invoice date, or before
delivery, if required. Payment for all Sea Island growths shall be made in
cash less one-and-a-half per cent, discount within ten days from Invoice
date, or before delivery if required. In the case of all Sea Island and
Egyptian growths special terms of payment may be arranged between
buyer and seller at the time the Contract is made.
This contract shall not be cancelled on any ground and is subject to the
" Rules of the Liverpool Cotton Association," whether endorsed hereon or
not, and in case of any question or dispute the matter shall be settled in
accordance with such Rules.
Yours faithfully,
APPENDIX V
219
[Face] LIVERPOOL COTTON ASSOCIATION, LIMITED.
CONTRACT FORM 3.
CONTRACT No
(FoR DEFERRED DELIVERY OF SPOT COTTON
FOR FORWARD DELIVERY OF COTTON
TE:
j FOR SHIPMENT OF COTTON
{ FOR COTTON " To ARRIVE "
(ztfh April, 1913-)
Liverpool, 19
" SPOT "
TERMS
(" FIXED
PRICE.")
Messrs.
Dear Sirs,
We have this day
the following COTTON :—
(a) In case any bales are found to be not equal to the selling sample
or quality contracted for, the seller shall have the following
options : —
(i.) Such bales may be exchanged once immediately or
(ii.) A second tender may be made at any time within
the period allowed for each delivery under the
Contract, but this provision shall not be applicable
where the Contract provides for the delivery to be
at buyers' option or
(iii.) Such bales may be invoiced back according to the
provisions of Rule 570.
(b) Should any lot prove inferior to the buyer to
have the option of accepting the Cotton or invoicing it back to
the seller according to the provisions of Rule 570. For the
purpose of this rule each bales shall be considered a
separate contract.
Rule 365. — -Payment for all descriptions of Cotton except Sea Island
growths shall be made in cash within ten days from Invoice date, or before
delivery, if required. Payment for all Sea Island growths shall be made in
cash less one-and-a-half per cent, discount within ten days from Invoice
220 APPENDIX V
date, or before delivery if required. In the case of all Sea Island and Egyp-
tian growths special terms of payment may be arranged between buyer and
seller at the time the Contract is made.
This contract shall not be cancelled on any ground and is subject to the
" Rules of the Liverpool Cotton Association," whether endorsed hereon or
not, and in case of any question or dispute the matter shall be settled in
accordance with such Rules.
Yours faithfully,
No penalty.
[Back]
LIVERPOOL COTTON ASSOCIATION, LIMITED.
CONTRACT FORM 3.
398. — When Cotton in the warehouse has been declared against Contracts
Nos. 3 and 4 and suffers loss or damage by, or in consequence of fire, before
it shall have been delivered to the buyer, the seller shall notify the same to
> the buyer without delay. The Contract for any portion so lost or damaged
shall be closed in accordance with Rule 570.
399. — In the event of loss in transit or of loss or damage by, or in con-
sequence of fire, after the Cotton shall have been landed, and before it shall
have been weighed over to the buyer, the Contract for any portion so lost
or damaged shall be closed at the value of the quality specified as the basis
of the Contract, on the day the buyer is notified of such loss or damage.
337. — Cotton must be taken by the buyer within ten days from Invoice
date. In default, the seller may, after due notice, weigh it over at the
expense and risk of the buyer, who shall pay to the seller all reasonable
charges incurred, including fire insurance and warehouse rent from the
tenth day.
338. — When receiving Cotton from the warehouse or quay the buyer,
before weighing, shall have the right to demand the removal of double
canvas put on after arrival at Port of Discharge.
348. — The allowance for the weight of bands, ropes, or wires, upon bales
of American and unpressed Brazilian Cotton, shall be arrived at by weighing
10 (or 20 if required by either party) of such bands, ropes, or wires, as shall
be agreed upon between the representatives of the buyer and seller at the
scale as being of an average weight ; and such shall be weighed so as to
express the weight of same in pounds and quarters of a pound. The whole
number of bands, ropes, or wires, upon each lot shall be counted, and the
allowance made in respect of them shall be in proportion to the weight as
above ascertained of the 10 or 20 bands, ropes, or wires, which have been
weighed as above.
349. — The buyer shall have a right to claim, at the time of delivery,
that the actual tare shall be ascertained in his presence, which shall then be
the tare allowed in the invoice, and any subsequent claim cannot then be
enforced. If at the time of delivery the actual tare be not ascertained, the
buyer shall afterwards be entitled to recover for insufficient allowance for
canvas, provided the deficiency amounts to \ Ib. per bale on each lot, as
defined in Rule 315, but not otherwise. Such claims must be properly
substantiated and be made within ten days and three months from Invoice
date. When a lot of Cotton has been divided on re-sale, the original seller
shall only be liable to pay claims for deficient allowance for canvas when
it amounts to \ Ib. per bale on the whole lot.
350. — When Cotton is overtaxed, the buyer shall be allowed to retain
the excess canvas, without making any allowance to the seller for the
same.
351. — The actual tare (exclusive of draft) shall be ascertained as follows :
— When the lot numbers 50, or less, 5 bales ; when more than 50, up to 70
inclusive, 7 bales ; and more than 70, 10 bales ; or more or less, as may be
APPENDIX V 221
agreed upon, shall be taken indiscriminately, stripped of their canvas, and
tared as follows : — For American Cotton the tare shall be ascertained by
weighing the canvas separately, and also collectively ; but the allowance
for canvas made on the invoice shall in no case exceed the rate as ascer-
tained by the latter mode. The allowance shall be calculated at the exact
relative proportion of the weight of the bales stripped to the total weight
of the whole lot. The allowance for canvas must be calculated on the
weight of the bales after the weight of the bands has been deducted, and
before the allowance for draft has been deducted. In other growths the
tare shall be ascertained by weighing the canvas, bands or ropes, and bars
separately, and also collectively ; but the tare allowed in the invoice shall
in no case exceed the rate as ascertained by the latter mode. The allow-
ance shall then be calculated on the whole lot in the exact relative proportion
of the number of bales stripped to the total number of bales. Mended bales
of all descriptions shall be tared separately.
352. — When Cotton is not sold with actual tare and actual tare shall
have been demanded and it shall prove not to exceed the customary
allowance for tare, the whole expense of taring shall be borne by the buyer,
otherwise it shall be borne by the seller.
353. — The canvas used for mending Cotton in Liverpool shall not exceed
2j Ibs. per yard, and should it be found that heavier canvas has been used
the seller shall be liable for all expense which the buyer may incur in estab-
lishing his claim for such excess.
369. — If any buyer fail to fulfil his Contract before noon of the day after
the expiration of ten days from Invoice date, the seller shall be at liberty
after giving twenty-four hours' notice in writing, to re-sell the Cotton, and
the buyer shall make good the loss resulting from the re-sale of such Cotton,
upon a statement of the ascertained loss being rendered to him.
375. — Claims for falsely-packed, damaged, or unmerchantable Cotton,
and for stones, etc., will be allowed at the value of the sound Cotton at the
date of return, if such return be made and the claim sent in within ten days
and three months from Invoice date, such claims if allowed shall bear
interest from the tenth day after the date of claim.
376. — In claims for falsely-packed Cotton the bales shall, if possible, be
returned entire, and not the inferior portion only ; but if only a part of
the bale be returned it shall not invalidate the claim. In claims for damaged
Cotton, stones, etc., found in any bale, the unmerchantable portion only
shall be returned, with a certificate stating the marks and numbers on the
bales complained of, and the quantity found in each bale, but the absence
of the marks and numbers of the bales shall not necessarily invalidate the
claim. Bales are not to be considered falsely-packed more especially in
the lower grades, when only a slight irregularity exists, which has been
fairly represented in the selling or arbitration samples.
377. — In the event of any portion of the Cotton being country damaged
or damaged by or from the effects of salt water, or from any accident of
the voyage, or damaged by or in consequence of fire, and thereby rendered
unmerchantable, such portion shall be invoiced back, as provided for in
Rule 570.
378. — Reasonable charges for carriage, cartage, porterage, etc., shall be
allowed in reference to Cotton returned, but not for expenses incurred out
of Great Britain.
382. — If in the opinion of two qualified persons Cotton turns out at time
of delivery to be damp or wet, and if such arbitrators consider an allowance
of at least 10 Ibs. per bale of 480 Ibs. average net weight, if American Cotton,
to be due thereon (and this shall be the ratio in cases of damp occurring in
growths other than American), the buyer shall have the option of closing
the whole of the Contract, or any bale, or bales, under the provisions of
Rule 570.
384. — Claims for errors in weight and insufficient tare shall be allowed
222 APPENDIX V
at the original invoice price, if made within ten days and three months
from the Invoice date, provided they are properly substantiated.
385. — Claims for clerical errors in invoices shall be allowed when properly
substantiated.
LIVERPOOL COTTON ASSOCIATION, LIMITED.
[Face] CONTRACT FORM 5&.
BALES.
AMERICAN COTTON DELIVERY CONTRACT NOTE.
(Adopted 2.7th January, 1919.)
(For trading from $rd February for delivery in May and onwards.)
Liverpool, 101
Messrs
DEAR SIRS,
We have this day from ^ou'
to be DELIVERED ex Warehouse in Liverpool during
Ibs. AMERICAN COTTON net
weight to be contained in AMERICAN BALES, more or less,
of any grade not lower than LOW MIDDLING (equal in colour to the stan-
dard and fair staple), or if tinged or stained, of any grade which (irrespective
of allowance to Seller for staple) is at least equal in value to LOW MIDDLING
(equal in colour to the standard and fair staple) at the price of
pence per Ib. for FULLY MIDDLING (equal in colour to the standard and
fair staple), with additions or deductions for such other qualities as are
within the Contract according to their value as compared with the spot
value of FULLY MIDDLING (equal in colour to the standard and fair
staple) on the day the Cotton is tendered.
There shall not be more than one tender nor more than three lots for
each 48,000 Ibs., and each 48,000 Ibs. shall be treated as a separate Contract.
The additions or deductions for quality shall be settled by arbitration, but
any lot not in accordance with the Contract, or any bales below, or of less
value than LOW MIDDLING (equal in colour to the standard and fair
staple) may be returned by the Buyer under the provisions of Rule 261.
In the event of Cotton of staple better than i^ths inch being tendered,
the seller shall make an allowance to the buyer of 20 per cent, of the excess
value of such Staple Cotton over i^ths inch.
The Contract, of which this is a note, is made between ourselves and
yourselves and not by or with any person, whether disclosed or not, on
whose instructions or for whose benefit the same may have been entered into.
This Contract is on " Settlement terms," and is therefore subject to
Weekly Payments as provided for in the Rules.
In the event of the Seller failing to tender against this Contract, it shall
be closed by being invoiced back to the Seller at the Spot price of Fully
Middling on the last business day of the month plus an allowance of -ffad. per
Ib. The invoicing back price including the allowance shall, however, under
no circumstances exceed the Official Value of Fully Middling by more than
10 per cent. The Official Value of Fully Middling shall be based on the
prices ruling in the following group of three Atlantic Markets — Augusta,
Norfolk and Savannah — -or the following group of three Texas Markets —
Dallas, Galveston and Houston — whichever group is the lower, and shall be
calculated in the same way as the Official Value was during the operation of
the Emergency Contract (2$th September, 1917).
This Contract shall not be cancelled on any ground and is subject to the
" Rules of the LIVERPOOL COTTON ASSOCIATION, LTD." and in case of any
APPENDIX V 223
question or dispute the matter shall be settled in accordance with the Rules
as in force at the date of this Contract.
The Contract, of which the above is a note, was made on the date
specified, within the business hours fixed in the Rules.
Yours faithfully,
[Back]
LIVERPOOL COTTON ASSOCIATION, LIMITED.
CONTRACT FORM 56.
502. — The seller shall tender the Cotton, with particulars of marks,
number of bales and ship's name, to the buyer not later than noon on the
last day available for delivery under the Contract, and shall be able to give
immediate delivery. If he fail to do so the Contract shall be closed by
being invoiced back at a price to be fixed by Arbitration or Appeal, which
shall be not below nor more than ^d. (±d.) per Ib. above the official mid-
day spot quotation of the Cotton contracted for.
263. — If it be decided by Arbitration or Appeal that an attempt has
been made to evade the terms of the Contract in respect of the quality or
quantity of the Cotton tendered, then the Buyer shall have the option of
taking the Cotton at the allowances fixed by Arbitration or Appeal or of
invoicing the Contract back to the Seller at a price to be fixed by Arbitra-
tion or Appeal on the basis of any value ruling for Spot or Futures between
the day of tender and the day of Arbitration or Appeal, plus a penalty not
exceeding -f^d. (£d.) per Ib.
522. — There shall not be more than one tender for each 48,000 Ibs. ;
the buyer shall not be required to receive this weight from more than two
warehouses, nor to receive more than three lots, nor to receive any bale
weighing less than 300 Ibs. gross, or more than 672 Ibs. gross. Slight
variations in marks shall not be deemed material.
523. — Subject to the provisions of Rule 263, settlement shall be made
for any variation from the weight specified on the face of the Contract, not
exceeding 100 Ibs. on each 48,000 Ibs., on the basis of the spot quotation
on the day of Arbitration or Appeal of the Cotton contracted for. Should
the variation in weight be more than 1000 Ibs. and not more than 3000 Ibs.
then settlement for the whole difference shall be made, if an excess, at
-ffisd. per Ib. below — if a deficiency, at -Jfod. per Ib. above the spot value
on the day of Arbitration or Appeal of the Cotton contracted for ; but if
the variation be more than 3000 Ibs. then settlement for such whole differ-
ence shall be made at a price to be decided by arbitration, which shall, if a
deficiency, be not less than ^d. per Ib. nor more than f^d. per Ib. above
— if an excess, not less than /&jd. per Ib. nor more than T&d. per Ib. below
the spot value on the day of Arbitration or Appeal of the Cotton contracted
for ; or, the buyer shall have the option of returning the whole excess to the
nearest bale, at the seller's expense, at the spot value on the day of Arbitra-
tion or Appeal of the Cotton contracted for, such option to be declared not
later than the day following that on which the weighing-over is completed.
503. — The Cotton shall be taken from the warehouse with customary
allowances of tare and draft, and the invoice shall be dated on the day of
tender. All Cotton tendered shall be weighed over and invoiced to the
buyer.
336. — All Cotton shall be delivered in merchantable condition to the
buyer.
375. — Claims for falsely-packed, damaged, or unmerchantable Cotton
and for stones, etc., will be allowed at the value of the sound Cotton at the
date of return, if such return be made and the claim sent in within ten days
and three months from Invoice date, such claims if allowed shall bear
interest from the tenth day after the date of claim.
224 APPENDIX V
504. — 'In the event of loss or damage by, or in consequence of fire, after
the Cotton shall have been declared, and before it shall have been weighed
over to the buyer, the Contract for any portion so lost or damaged shall be
closed at the spot value of the quality specified as the basis of the Contract on
the day the buyer is notified of such loss or damage, as provided in Rule 570.
260. — Applications for Arbitration, with regard to quality on Docket
Cotton, shall be made within seven days of date of tender, in the manner
provided in Rule 667.
261. — In Arbitrations or Appeals on American Cotton tendered on a
" docket," due regard shall be given to any exceptional qualities of the
Cotton tendered — whether for or against — but if the Cotton tendered or
any lot included in it (or any bale or bales in a lot which is otherwise in
accordance with the Contract) be below or of less value than Low Middling
(equal in colour to the standard fair staple), the buyer shall have the option
of taking such lot, bale or bales, at the allowances fixed by Arbitration or
Appeal, or of invoicing it back to the seller at the spot value in accordance
with Rule 570. The Arbitrators or Appeal Committee may, if they see fit,
impose a penalty not exceeding ffid. per Ib. and in that case such penalty
shall be added to the spot value.
524. — -All payments shall be made, in cash, before delivery, within ten
days from Invoice date.
505. — Payments on account before weighing shall be based on the
Contract weight plus or minus allowances for quality in accordance with
Rule 668.
369. — If any buyer fail to fulfil his Contract before noon on the day after
the expiration of ten days from Invoice date the seller shall be at liberty,
after giving twenty-four hours' notice in writing, to resell the Cotton, and
the buyer shall made good the loss resulting from the resale of such Cotton,
upon a statement of the ascertained loss being rendered to him.
509. — When the subject matter and terms of Contracts are identical
except as to price, all Arbitrations shall be held in accordance with the
Rules as between the First Seller and Last Buyer as though they were
contracting parties, and any award made in pursuance thereof, subject to
the right of Appeal as provided by the Rules, shall be binding on all inter-
mediate parties, subject to the provisions of Rules 690 to 692.
LIVERPOOL COTTON ASSOCIATION, LIMITED.
AMERICAN COTTON. PORT AND/OR CUSTODY BILL OF LADING.
COST, FREIGHT AND INSURANCE CONTRACT NOTE.
(25th August, 1919.)
[Face] CONTRACT FORM 10.
Liverpool, ,
MESSRS
DEAR SIRS,
We have this day .
Bales COTTON, averaging, per
100 Bales gross, 50,000 Ibs. for all descriptions excepting Texas, Arkansas
and Memphis Cotton, which shall average 53,000 Ibs. and all other Gulf
Cotton, including Alabama and Oklahoma, which shall average 51,000 Ibs.
per 100 bales gross (a variation of 5 per cent, allowed), Cost, Freight and
Insurance, for
APPENDIX V 225
(a) at per Ib.
OR
(b) at points the Seller's price of
delivery (Fully Middling American, L.M.C.) in Liverpool at the
time of call. The Cotton to be called in accordance with the
provisions of Rule 442, as endorsed hereon, and in lots of not
less than 100 bales, unless otherwise mutually agreed.
To be invoiced at American actual gross weight, less an allowance of
six per cent.
(a) Gross landing weight guaranteed to be within one per cent, of
gross invoice weight.
OR
(b) Net weight (that is actual weight of bales, less bands and 3^ per
cent, allowance for Canvas after deduction of bands) guaranteed
by Sellers equal to Net American invoice weight. Settlement
to be made with mutual allowances as to weight.
To be shipped during
per
from to
via
Invoice with full particulars to be rendered to the buyer within four
weeks of the date of Bill of Lading.
Marine Insurance (covering risk to Mill or Warehouse but not covering
war risk) shall be provided by the seller with including
particular average and country damage, and covering 5 per cent, in excess
of Invoice cost, or in the case of Cotton sold on " Call" 5 per cent, in excess
of market value up to the " Call " price, in accordance with Rule 442. Any
amount over this shall be for seller's account in case of total loss only. The
cost of stamping documents to be borne by the seller.
After the date of the " Call " Marine Insurance on any increase in value
over and above the " Call " price is at buyer's risk.
In case of any casualty occurring after declaration has been made (the
Cotton not having been " Called " previously), the seller shall immediately
notify the buyer, in writing, of the same, and the " Call" shall be made not
later than noon of the first business day following such notification.
(1 ) Reimbursement by M Drafts upon
M at days' sight
for Invoice amount. The buyer guarantees the due protection of the Drafts
on presentation and payment at maturity.
(2) The due date of Invoice shall be the 75th day after date of Bill of
Lading, payable in Liverpool.
(a) Payment shall be made in exchange for Shipping Documents on, or
(at buyer's option) before arrival of the Vessel or Vessels ; or,
failing previous arrival, not later than due date, by cash, less
customary rebate for any prepayment.
OR
(b) Payment shall be made in exchange for delivery of the Cotton as it
may arrive (the buyer paying all Liverpool charges) by cash, less
customary rebate for any payment made before due date, or plus
interest at 5 per cent, per annum, for any payment made there-
after. If any Cotton declared under this Clause be lost in transit,
the Contract for such Cotton shall be completed by the seller
collecting for the buyer the excess agreed to be insured over invoice
amount. In the event of damage, covered by Marine Insurance
Policy, the seller shall collect the amount of same from the Under-
writers, on buyer's account.
No allowance to seller. Should arbitration be demanded by the buyer
the Cotton shall be subject to mutual allowances, except in the case of
average shipment. Should any lot prove inferior to
Q
226 APPENDIX V
the buyer to have the option of accepting the Cotton,
or of returning it to the seller, under the provisions of Rule 468.
This Contract shall not be cancelled on any ground, and is subject to the
" Rules of the LIVERPOOL COTTON ASSOCIATION, LTD.," whether endorsed
hereon or not, and in case of any question or dispute the matter shall be
settled in accordance with such Rules as in force at the date of this Contract.
No penalty. Yours faithfully,
[Back]
LIVERPOOL COTTON ASSOCIATION, LIMITED.
CONTRACT FORM 10.
298. — " Prompt " or " Immediate " shipment or sailing means shipment
or sailing not earlier than date of Contract nor later than 14 days after.
299. — " Shipping or shipped " means shipment within 14 days either
before or after the date of Contract.
303. — A " Port Bill of Lading " means a Bill of Lading which is signed
on behalf of the ship by the captain or duly authorised agent of the ship,
both vessel and Cotton being in port and the Cotton itself having been
actually delivered to the captain, the shipowner or the authorised agent in
the port of shipment.
304. — A " Custody Bill of Lading " is a Bill of Lading which is signed
when the Cotton is in the port and duly delivered to the captain, the ship-
owner or the authorised agent, and a master's or agent's receipt must be
furnished proving that the Cotton has been actually shipped within three
weeks from date of Bill of Lading. Substitution of another vessel of
different ownership for the one named in the Bill of Lading is only
permissible in case the named vessel is lost or in case of accident or other
unforeseen event of force majeure.
431. — The Bill of Lading, duly signed, shall be accepted as evidence
of the shipment stipulated for in the Contract.
432. — Should the seller fail, within the specified time, to render invoice
or to make complete and correct declaration of marks and ships' names,
or particulars contained in Bill of Lading, the buyer shall have the right
of closing the Contract (i.e. by invoicing it back to the seller) under the
provisions of Rule 570, provided he exercises this right within 14 days from
the expiration of the specified time. If the seller renders invoice or makes
the required declaration after the expiration of the specified time, the buyer
must declare his intention to close the Contract not later than the next
business day following the seller's declaration. Slight variations in marks
shall not be deemed material.
Should the buyer (a) in case of Interior Shipments within six weeks of
receipt of invoice or (b) in case of shipment from a Port within four weeks
of receipt of invoice, be able to prove that the particulars as stated in the
Bill of Lading are incorrect and/or not in accordance with the terms of the
Contract, the matter shall be referred to arbitration, and it shall be at
the discretion of the arbitrators to decide either that the buyer shall accept
the Contract at an allowance as fixed by the arbitrators, or that the buyer
shall have the option of closing the Contract under the provision of Rule 570
or of accepting it at an allowance as fixed by the arbitrators.
433. — It shall not be deemed an infringement of the Contract if the
Cotton, or any portion, is shut out from the vessel or vessels named provided
the Bill of Lading conforms with the definitions in Rules 303 or 304. This
shall apply only to Contracts for shipment and not to Contracts made for
sailing or clearance.
436. — Should the variation in weight on American or East Indian Cotton
exceed 5 per cent., then the difference in excess thereof shall be settled for
at the market value on the last day of lading of the Cotton contracted for.
APPENDIX V 227
435. — Gross landing weight shall be ascertained by weighing the Cotton
at Port of Discharge on arrival, before sampling (or if already sampled an
allowance to be made for the samples drawn).
(a) In case of sea or country damage, condemned bales shall be
accounted for at the average invoice weight, but bales that will
mend shall be weighed and the customary allowances deducted
from gross landing weight for water in pickings and rags.
(b) Allowance shall be made for ship's pickings.
(c) Any bales condemned or not delivered and " No Mark " bales com-
pulsorily received from the ship shall be calculated as delivery at
the average gross invoice weight in respect of guaranteed weight,
and at the average grade of " Marked " bales.
(d) Claims for loss in weight or variation in weight or country damage
shall be made within 28 days from last day of landing, but if more
than 25 per cent, of the Cotton requires picking and mending,
claims may be sent in within 42 days from the last day of landing .
Claims for loss in weight shall be made at the Invoice price.
(e) When Contracts for American and Egyptian Cotton are made for
shipments, sailings or deliveries of specified quantities during
various months, each month's shipment, sailing or delivery shall
form one weight settlement, even if shipped or arriving by more
than one vessel, except as regards any portion of the Contract of
which the invoice weights have been ascertained at port of arrival.
(g) When 95 per cent, of the Cotton contracted for has arrived, claims
for loss in weight may be made subject to a final weight adjustment
upon arrival of the balance of the Cotton.
451. — The following additional Clauses apply to c.i.f. Contracts made
with the i per cent, franchise clause : —
(a) In determining any loss in weight, allowance shall be made for
missing bands.
(b) Should the weight of bands as ascertained at the time of weighing
(see Rule 348) exceed 900 Ibs.=4o8 kilos per each 100 bales then
the buyer shall have the right to deduct such excess from the
landing weight. The seller is not entitled to any allowance for
bands should the weight be less than 900 Ibs.
(c) When the American Invoice weight is not obtainable and in conse-
quence thereof the Invoice weight has to be ascertained at port of
arrival, 3 Ibs. per bale shall be allowed to the seller for slipping of
bands and canvas at time of compressing.
(d) No claims shall be made for variation in weight under Rule 436 for
any excess of landing over Invoice weight.
(e) Claims for loss in weight shall be made at the invoice price subject to
deduction of 6 per cent, tare, minus i per cent, guarantee clause,
equal to 5 per cent, on difference in weight.
467. — Claims for allowances for internal damp shall be made within
28 days from the last day of landing. Claims for external damp, not
recoverable under Rule 435 (a), shall be made at the time of weighing and
deducted from the landing weight.
450. — Should the weight of canvas on any lot or mark exceed 3^ per
cent, of the weight after deduction of actual weight of bands, then the buyer
shall have the right to claim for such excess at the invoice price.
473. — If on arrival in Liverpool, the actual tare be not ascertained, the
buyer shall afterwards be entitled to recover for insufficient allowance,
provided the deficiency amounts to £-lb. per bale on any entire shipment as
defined in Rule 435 (e), but not otherwise. Such claims must be properly
substantiated, and be made within two months from last day of landing.
If a portion of the Cotton has been tared on arrival, then any claim for
overtare made on such portion shall be included in calculating the minimum
deficiency of £-lb.
228 APPENDIX V
434. — Falsely-packed or unmerchantable Cotton, together with the
original tares, shall, if required by seller, be returned to the Port of Discharge
at the buyer's expense. Claims, if properly substantiated, shall be allowed
at the value of the sound Cotton on the day of return, if such return be made
and the claim sent in within three months from last day of landing.
438. — When Cotton shall arrive by more than one vessel, there shall be
a separate Arbitration for each shipment unless otherwise agreed.
470.— "-Application for Arbitration with regard to quality on American
and East Indian Cotton shall be made within ten days from the last day of
landing, and the Arbitration shall proceed within fourteen days from the
date of such application, unless otherwise mutually agreed by buyer and
seller, on the basis of the difference between grades or values ruling on the
tenth day from the last day of landing unless the Arbitration has been held
prior to that date.
245. — Arbitration, upon Cotton sold to average any particular grade,
shall be settled by classing the different lots, placing grades or fractions of
grades above, against grades or fractions of grades below, and passing what-
ever part turns out an average of the grade guaranteed, making an allowance
on the remainder.
246. — When Cotton is sold equal to either a type, or sample, of uncom-
pressed Cotton, the re-drawn samples shall be exposed to the air for 24 hours
before the Arbitration takes place. An allowance for " Bloom " shall be
made between the selling type or sample and the re-drawn samples ; should
the latter be below the guarantee clause an allowance for " Bloom " shall be
made in valuing the type or sample.
468. — If, under the guarantee clause on the face of the Contract, the
buyer exercises his option of invoicing back any portion, such Cotton shall
be returned at re-weights and on such conditions as apply to spot sales,
except that cash shall be paid before delivery, the buyer having paid all
landing and warehousing charges.
442. — If Cotton is sold on " c.i.f." terms " On Call," the call must be
made not later than the next business day but one after the declaration of
marks and ships' names ; in default thereof the price for the uncalled Cotton
shall be fixed on the basis of the official closing- values on that day : should
however the seller agree, the call may be extended at the request of the
buyer, in which case the buyer shall undertake to pay to the seller the
insurance premium necessary to cover any increased value from the date of
declaration to the date of call. The extension of call shall in no case extend
beyond the tenth day after the last day of landing.
[Face]
LIVERPOOL COTTON ASSOCIATION, LIMITED.
AMERICAN COTTON. THROUGH (CONFERENCE) BILL OF LADING
COST, FREIGHT AND INSURANCE CONTRACT NOTE.
(25th August, 1919-)
CONTRACT FORM u.
Liverpool
MESSRS
DEAR SIRS,
We have this day ,
Bales COTTON, averaging, per
100 Bales gross, 50,000 Ibs. for all descriptions excepting Texas, Arkansas
and Memphis Cotton, which shall average 53,000 Ibs. and all other Gulf
Cotton, including Alabama and Oklahoma, which shall average 51,000 Ibs.
APPENDIX V 229
per too bales gross (a variation of 5 per cent, allowed), Cost, Freight and
Insurance, for *
(a) at per Ib.
OR
(b) at points the Seller's price of
delivery (Fully Middling American, L.M.C.) in
Liverpool at the time of call. The Cotton to be called in accord-
ance with the provisions of Rule 442, as endorsed hereon, and in
lots of not less than 100 bales, unless otherwise mutually agreed.
To be invoiced at American actual gross weight, less an allowance of
six per cent.
(a) Gross landing weight guaranteed to be within one per cent, oi
gross invoice weight.
OR
(b) Net weight (that is actual weight of bales, less bands and 3^ per
cent, allowance for Canvas after deduction of bands), guaranteed
by Sellers equal to Net American invoice weight. Settlement to
be made with mutual allowances as to weight.
To be shipped during
per Rail and/or Steamer from in the Interior
of the United States of America to and thence to
Invoice with full particulars contained in Through Bill of Lading to be
rendered to the buyer within four weeks of the date of Bill of Lading.
Marine Insurance (covering risk to Mill or Warehouse but not covering
war risk) shall be provided by the seller with including
particular average and country damage, and covering 10 per cent, in excess
of Invoice cost, or in the case of Cotton sold on " Call " 10 per cent, in excess
of market value up to the " Call " price, in accordance with Rule 442. Any
amount over this shall be for seller's account in case of total loss only. The
cost of stamping documents to be borne by the seller.
After the date of the " Call " Marine Insurance on any increase in value
over and above the " Call " price is at buyer's risk.
In case of any casualty occurring after declaration has been made (the
Cotton not having been " Called " previously), the seller shall immediately
notify the buyer, in writing, of the same, and the " Call " shall be made not
later than noon of the first business day following such notification.
(1) Reimbursement by M Drafts upon
M at days' sight
for Invoice amount. The buyer guarantees the due protection of the
Drafts on presentation and payment at maturity.
OR
(2) The due date of Invoice shall be the 75th day after date of Bill of
Lading, payable in Liverpool.
(a) Payment shall be made in exchange for Shipping Documents on, or
(at buyer's option) before arrival of the Vessel or Vessels ; or,
failing previous arrival, not later than due date, by cash, less
customary rebate for any prepayment.
OR
(b) Payment shall be made in exchange for delivery of the Cotton as it
may arrive (the buyer paying all Liverpool charges) by cash, less
customary rebate for any payment made before due date, or plus
interest at 5 per cent, per annum, for any payment made thereafter.
If any Cotton declared under this Clause be lost in transit, the
Contract for such Cotton shall be completed by the seller collecting
for the buyer the excess agreed to be insured over invoice amount.
In the event of damage, covered by Marine Insurance Policy, the
230 APPENDIX V
seller shall collect the amount of same from the Underwriters, on
buyer's account.
No allowance to seller. Should arbitration be demanded by the buyer
the Cotton shall be subject to mutual allowances, except in the case of
average shipment. Should any lot prove inferior to
the buyer to have the option of accepting the Cotton, or
of returning it to the seller, under the provisions of Rule 468.
This Contract shall not be cancelled on any ground, and is subject to the
" Rules of the LIVERPOOL COTTON ASSOCIATION, LTD.," whether endorsed
hereon or not, and in case of any question or dispute the matter shall be
settled in accordance with such Rules as in force at the date of this Contract.
No Penalty. Yours faithfully,
[Back]
LIVERPOOL COTTON ASSOCIATION, LIMITED.
CONTRACT FORM u.
298. — " Prompt " or " Immediate " shipment or sailing means shipment
or sailing not earlier than date of Contract nor later than 14 days after.
299. — •" Shipping or shipped " means shipment within 14 days either
before or after the date of Contract.
304 (a). — A Through (Conference) Bill of Lading which carries out the
essential conditions of an agreement the form of which has been deposited
with the Directors and signed for the purpose of identification by the
President and the Chairman of the Liverpool Cotton Bills of Lading Con-
ference (1907) Committee, and which Bill of Lading is signed by the
Authorised Agent or representative of the Railroad Company or other
Inland Carrier after due delivery of the Cotton to the issuing Railroad or
Carrier, or to a Compress or Warehouse Company which has executed the
usual contract and bond with the Railroad, or which is made agent of such
Railroad for the receipt of the Cotton and is under bond. The Directors
shall have power from time to time to approve and agree to any alterations
in the above mentioned agreement, but no Bill of Lading which does not
comply with the essential conditions of the said agreement or of such agree-
ment as may from time to time be approved for the purpose by the Directors
shall be deemed to comply with this definition.
A Through (Conference) Bill of Lading shall be headed : —
Through Bill of Lading issued under agreement with the Liverpool
Cotton Bills of Lading Conference (1907) Committee and the
American Bankers' Association.
431. — The Bill of Lading, duly signed, shall be accepted as evidence of
the shipment stipulated for in the Contract.
432. — -Should the seller fail, within the specified time, to render invoice
or to make complete and correct declaration of marks and ships' names, or
particulars contained in Bill of Lading, the buyer shall have the right of
closing the Contract (i.e. by invoicing it back to the seller) under the pro-
visions of Rule 570, provided he exercises this right within 14 days from the
expiration of the specified time. If the seller renders invoice or makes the
required declaration after the expiration of the specified time, the buyer
must declare his intention to close the Contract not later than the next
business day following the seller's declaration. Slight variations in marks
shall not be deemed material.
Should the buyer (a) in case of Interior Shipments within six weeks of
receipt of invoice or (6) in case of shipment from a Port within four weeks of
receipt of invoice, be able to prove that the particulars as stated in the Bill
of Lading are incorrect and/or not in accordance with the terms of the
Contract, the matter shall be referred to arbitration, and it shall be at the
discretion of the arbitrators to decide either that the buyer shall accept the
APPENDIX V 231
Contract at an allowance as fixed by the arbitrators, or that the buyer shall
have the option of closing the Contract under the provision of Rule 570 or of
accepting it at an allowance as fixed by the arbitrators.
436. — Should the variation in weight on American or East Indian Cotton
exceed 5 per cent., then the difference in excess thereof shall be settled for
at the market value on the last day of landing of the Cotton contracted for.
435- — Gross landing weight shall be ascertained by weighing the Cotton
at Port of Discharge on arrival, before sampling (or if already sampled an
allowance to be made for the samples drawn).
(a) In case of sea or country damage, condemned bales shall be
accounted for at the average invoice weight, but bales that will
mend shall be weighed and the customary allowances deducted
from gross landing weight for water in pickings and rags.
(b) Allowance shall be made for ship's pickings.
(c) Any bales condemned or not delivered and " No Mark " bales com-
pulsorily received from the ship shall be calculated as delivery at
the average gross invoice weight in respect of guaranteed weight,
and at the average grade of " Marked " bales.
(d) Claims for loss in weight or variation in weight or country damage
shall be made within 28 days from last day of landing, but if more
than 25 per cent, of the Cotton requires picking and mending,
claims may be sent in within 42 days from the last day of landing.
Claims for loss in weight shall be made at the Invoice price.
(e) When Contracts for American and Egyptian Cotton are made for
shipments, sailings or deliveries of specified quantities during
various months, each month's shipment, sailing or delivery shall
form one weight settlement, even if shipped or arriving by more
than one vessel, except as regards any portion of the Contract of
which the invoice weights have been ascertained at port of arrival.
(g) When 95 per cent, of the Cotton contracted for has arrived, claims
for loss in weight may be made subject to a final weight adjustment
upon arrival of the balance of the Cotton.
451. — The following additional Clauses apply to c.i.f. Contracts made
with the i per cent, franchise clause : —
(a) In determining any loss in weight, allowance shall be made for
missing bands.
(b) Should the weight of bands as ascertained at the time of weighing
(see Rule 348) exceed 900 Ibs.=4o8 kilos per each 100 bales then
the buyer shall have the right to deduct such excess from the
landing weight. The seller is not entitled to any allowance for
bands should the weight be less than 900 Ibs.
(c) When the American Invoice weight is not obtainable and in conse-
quence thereof the Invoice weight has to be ascertained at port of
arrival, 3 Ibs. per bale shall be allowed to the seller for clipping of
bands and canvas at time of compressing.
(d) No claims shall be made for variation in weight under Rule 436 for
any excess of landing over Invoice weight.
(e) Claims for loss in weight shall be made at the invoice price subject to
deduction of 6 per cent, tare, minus i per cert, guarantee clause,
equal to 5 per cent, on difference in weight.
467. — Claims for allowances for internal damp shall be made within
28 days from the last day of landing. Claims for external damp, not
recoverable under Rule 435 (a), shall be made at the time of weighing and
deducted from the landing weight.
450. — Should the weight of canvas on any lot or mark exceed 3^ per
cent, of the weight after deduction of actual weight of bands, then the buyer
shall have the right to claim for such excess at the invoice price.
473. — If on arrival in Liverpool, the actual tare be not ascertained, the
buyer shall afterwards be entitled to recover for insufficient allowance,
232 APPENDIX V
provided the deficiency amounts to £-lb. per bale on any entire shipment as
defined in Rule 435 (e), but not otherwise. Such claims must be properly
substantiated, and be made within two months from last day of landing.
If a portion of the Cotton has been tared on arrival, then any claim for
overtare made on such portion shall be included in calculating the minimum
deficiency of £-lb.
434. — Falsely-packed or unmerchantable Cotton, together with the
original tares, shall, if required by seller, be returned to the Port of Dis-
charge at the buyer's expense. Claims, if properly substantiated, shall be
allowed at the value of the sound Cotton on the day of return, if such return
be made and the claim sent in within three months from last day of landing.
438. — When Cotton shall arrive by more than one vessel, there shall be a
separate Arbitration for each shipment unless otherwise agreed.
470. — Application for Arbitration with regard to quality on American
and East Indian Cotton shall be made within ten days from the last day of
landing, and the Arbitration shall proceed within fourteen days from the
date of such application, unless otherwise mutually agreed by buyer and
seller, on the basis of the difference between grades or values on ruling the
tenth day from the last day of landing unless the Arbitration has been held
prior to that date.
245. — Arbitration, upon Cotton sold to average any particular grade,
shall be settled by classing the different lots, placing grades or fractions of
grades above, against grades or fractions of grades below, and passing
whatever part turns out an average of the grade guaranteed, making an
allowance on the remainder.
246. — 'When Cotton is sold equal to either a type, or sample, of uncom-
pressed Cotton, the re-drawn samples shall be exposed to the air for 24 hours
before the Arbitration takes place. An allowance for " Bloom " shall be
made between the selling type or sample and the re-drawn samples ; should
the latter be below the guarantee clause an allowance for " Bloom " shall be
made in valuing the type or sample.
468. — If, under the guarantee clause on the face of the Contract, the
buyer exercises his option of invoicing back any portion, such Cotton shall
be returned at re-weights and on such conditions as apply to spot sales,
except that cash shall be paid before delivery, the buyer having paid all
landing and warehousing charges.
442. — If Cotton is sold on " c.i.f." terms " On Call " the call must be
made not later than the next business day but one after the declaration of
marks and ships' names ; in default thereof the price for the uncalled
Cotton shall be fixed on the basis of the official closing values on that day ;
should however the seller agree, the call may be extended at the request of
the buyer, in which case the buyer shall undertake to pay to the seller the
insurance premium necessary to cover any increased value from the date of
declaration to the date of call. The extension of call shall in no case extend
beyond the tenth day after the last day of landing.
INDEX
ACT, Canada Grain, 17 n., 22, 92
Capper-Tincher, U.S.A., 101 n.,
124, 183 sgq.
Cotton Futures, U.S.A., 17 n.,
61 sq., 75, 124
Exchanges (Germany), 122, 127,
134 sqq.
Federal Grain Inspection, 34
Harter, 166, 194
Sale of Goods, n sq.
Warehouse, U.S.A., 176
Acts, anti-option, 122
anti- trust, 117
Aden, 10
African cotton, 22, 189 ; wool, 170,
i?5
Agricultural Returns, 68 n.
Organisation Society, 166 n.
Agriculture, International Institute
of, 69 sq. ; Ministry of, 68 ;
United States Department of,
13, 15, 17, 62, 65, 67, 79, 87 n.,
91 n., 176 n., 179 n., 183 sqq.
Alexandria cotton market, 32 n.,
124 n., 157, 190
America, see United States.
Amsterdam, 41, 172
Antwerp, 6, 41, 56, 172
Appeal Committees, 35, see also
Contract forms, Appendices IV.
and V.
Arbitrage, 47 n., 49 sq., 130, 145
Arbitration Committees, 31, 33, 35,
36, 161, 173 ; see also Condi-
tions on contract forms in
Appendices IV. and V.
Argentina, 32, 33, 163, 206, 208,
209, 211 ; see also Buenos
Aires.
Arnould, 166 n.
" Arrive, To," 10, 88, 159, 219
Association, see Buenos Aires, Liver-
pool, London, Manchester.
Auction sales, Chap. XIII. ; wool,
1 68 sqq. ; tea, 176 sq. ; coffee,
178 sq. ; tobacco, 179 ; in
municipal markets, 179 sqq.
Australia, inspection of wine in
South, 17 n., 100 ; wheat,
163, 206, 208 ; wool, 170 sqq.
Average crop condition, 65, 66
" Averages " in spot cotton, 158
BALLS, W. L., 70 n.
Baltic Mercantile and Shipping
Exchange, 30
Bankers' Magazine, 12 n., 57 n.
Banks, 82, 83, 90, 134, 136, 155,
162, 171, 173, 176, 194, 209 ;
see also Cotton Bank.
Barley, 27, 68, 87, 137
Barnes, J. H., 91 n.
Basis contract, 68 ; in cotton
futures' prices, 84 ; weight of
wheat, 94, 206, 208
" Bawra," 175
" Bears," 45, 100, 102, 109 ; see
also Short selling.
Berlin Bourse, 7, 33, 134 sqq. ;
municipal market, 180
Birkenhead, 182, contract forms,
Appendix IV.
Board of Trade, see Chicago, Du luth,
Kansas City.
Boll weevil, 19 n., 67
Boston, U.S.A., 173, 174, 176
Bourse, see Berlin, Paris.
Bradford Conditioning House, 6,
175,
Chamber of Commerce, 12, 173 n.
wool trade, 169, 172
Bradstreet's, 57 n., 78 n., 93 n.
Brazil, 22, 83, 149 sqq., 179 n., 189,
190, 216, 220
Bremen, 31, 34
British Columbia, 16
Broker denned, 28 ; in Germany,
33, 158, 160, 171, 177, 179
Brokerage, 28, 39, 171, 178, 179
Broomhall's Agency, 69, 74
Bucket shop, 118 sq. ; definition,
118; origin of term, 118 n. ;
legislation concerning, 118,
119 n.
233
234
INDEX
Buenos Aires Grain Association,
32; clearing house, 55; wool
auctions, 175
Bufialo, 13, 37
Bulbs, speculation in, 41
" Bulls," 100, 102, 109
Butter, Danish, 17 n., 74
CALIFORNIA, 16, 17 n., no n., 123
" Call," 45 sqq., 183
Call board method in price quota-
tions, 72
" Call, on," 72, 157 sq., 218, 225,
228, 229, 232
Canada, 9, 17, 38, 69, 73, 92, 139 ;
grain grading, 13, 23 ; wool,
175 ; see also Act, Winnipeg.
Carolina, 179
Carver, T. N., 17 n.
" Cash " grain in Winnipeg, 38 n.,
73
Cattle, 182
Census of crops, U.S.A., 65 ;
Canada, 68 ; England, 68
Ceylon tea, 177, 178
Chamber of Commerce, see Brad-
ford, Milwaukee, Minneapolis,
New York.
Chapman, Sir S., and Knoop, D.,
127 n., 142, 143
Charter, 3, 34
Charterparty, 10, 166
Cherington, P. T., 5 n., 173 n.
Chicago Board of Trade, 13, 37, 38,
39, 43, 49, 51, 55, 60, 87, 89,
100, 101, 104, 105, 114, 116,
123, 129, 133 n., 138 ; member-
ship and organisation, 34 sq. ;
clearing house, 51 sq. ; corners
on, 114
China tea, 177, 178
C.i.f. contract, 29, 79, 157, Chap.
XII. ; forms, Appendices IV.
andV.
Clapham, J. H., 6 n., 172 n.
Clearing house, 32, Chap. V. ;
London Produce, Ltd., 27 n.,
56, 147 sqq., 178 n., 179 n.
Cleveland iron, 151, 152
Coal, grading of, 6
Coffee, 5, 41 ; grading, 15, 26 sq.,
148 sq. ', consumption, 37 ; " va-
lorisation," 149 sqq. ; London
auctions, 178 sq. ; see also New
York Coffee Exchange.
Coleman Street, E.C., 171
Commercial differences, 60 sqq.
Commission men, 29, 87 ; rates, 3,
39, 15^, 179
" Compress point," 155, 156
Conant, L. Jn., 61 n.
Conference, World Cotton, 1921,
18 n., 19 n., 70 n., 82 n., 157 n.
Consular reports, 179 n.
Continental Produce Exchanges, 3,
4, 33, 34 » municipal markets,
179 sq.
Contract, Chaps. II., IV., XII. ;
forms, Appendices III., IV.,
V. ; " basis," 58 ; see also
Futures, Hedging, c.i.f.
" Contract grade," 43, 135
" Contract market," 183 sq.
Co-operative Co., Farmers', 87, 168-
Copper, 6, 7
Corn Trade Association, see Liver-
pool, London.
Corn Trade News, 69, 74
Corner, 43, 58, 112, sqq., ; in cotton,
113, 115 ; in wheat, 113, 114 ;
in iron warrants, 115 sq.
Corporations, U.S. Bureau of, 61,
104 sq.
Cotton Bank, Liverpool, 31, 32, 33,
57. 58
Exchanges, see Alexandria, Bre-
men, Havre, Liverpool, Man-
chester, New York, New Or-
leans, Osaka.
Futures Act, U.S.A., 17 n., 61
Grading, 18 sqq. ; staple, 19,
59, 62, 63, 222
Crop Estimates, Chap. VI.
Crop Reporter, Monthly, 66, 67
Cunningham, W., 106 n.
Custis, V., 1 6 n.
DELIVERY period, 43, 138
Denmark, 17 n., 74
Description, selling by, 168 n.
Differences, commercial and fixed,
60 sqq.
" Docket " cotton in Liverpool, 58
Dresden, 4
Dublin cattle market, 182
Duluth Board of Trade, 13, 37, 87,
89, 91, 113
Economist, The, 151 n.
Egyptian cotton, 14, 21, 43, 83,
142, 157, 159, 189 ; wool, 172
Elevators, grain, in U.S.A., 86 sqq.,
139, 161 ; Canada, 92 sq., 139
Emery, H. C., 98 n., 100 n., 127 n.
Estimates, crop, Chap. VI.
Evils of speculation, Chap. IX.
Exchange, Foreign, 56, 57, 156, 162
INDEX
235
Exchange, Produce, see Association,
Board of Trade, Chamber of
Commerce, St. Louis, New
York, New Orleans, Winnipeg,
Chaps. I., III. ; Stock, see
Bourse, London, New York.
Exchanges Act (Germany), 122, 127,
134 sqq.
Export grain Association, North
American, 8, 195, 196 ; trade
in cotton and wheat, Chap. XII.
FALMOUTH, 10
Farmers and speculation, 78, 132
sq. ; elevators, 86 sq. ; co-
operative Co.'s, 87
Fashion and wool trade, 5
Federal Reserve Board, 77, 176
Federations of market authorities, 8
Flax, 87
F.o.b. and " Fobbing," 161
Forestalling, 105
France, 3, 34, 37 ; see also Havre,
Lyons, Marseilles, Paris, Rou-
baix.
Frankfort-on-Main, 4, 34
Fruit, 4, 1 6, 17 n.
Fuchs, 97 n.
Fungibility, 4
Futures, Chaps. IV., XI. ; 14, 22,
23» 38» *72 '• defined, 44 ;
legitimate uses of, Chap. VII. ;
and gambling, 99 ; multiplica-
tion of, 100 n., 101 ; as price
basis, 61, 157 ; legality of,
104 ; and spot prices, 138 sqq. ;
see also Hedging.
GALVESTON, 60, 161
Gambling, 99 sq., 101 sq., 120, 121,
136; see also Evils of specula-
tion.
Germany, 3, 33, 37, 134 sqq., 180 ;
see also Berlin, Bremen, Frank-
fort, Hamburg, Leipzig.
Gin, cotton, 154, 155
Glasgow iron market, 151 sqq.
Governments and exchanges, 3, 17,
34, 134 sqq. ; see also Act.
Gradation of price movements,
131 sq.
Grading, Chap. II. ; 2, 4, 6 ; cotton,
13, 18 sqq. ; wheat, 14, 22 sqq. ;
fruit, 17 n. ; coffee, 26 sq.t 148 ;
maize, 26 ; barley, 27 ; oats,
27; wool, 169, 170, 176
HADLEY, A. T., 99 n.
Hague Rules, 166 n.
Hamburg, 34, 56, 100, 147, 172
Harris, 133 n.
Harter Act, 166, 194
Havre, 6, 31, 56, 172, 178
Hays, W. M., 67 n., 103 n.
Hedging, 61, 100, 113, 122, 132 sq.,
153 ; in cotton markets, 80
sqq-> 95 '> required by banks,
83 ; origin of, 85 ; definitions,
86 ; in wheat, 90 sqq., 95 ; by
millers, 91, 94 ; and gambling,
101 sq.
Hester, H. G., 69 n.
Holland, 4, 37, 56
Holmes, G. K., 179 n.
Holmes, Mr. Justice, U.S.A., 105
Hood, C., 116 n., 153 n.
Hooker, R. H., 127 n., 137 n.
Hubback, J. H., 93 n., 114 n.
Huebner, S. S., 132 n.
Hughes Committee on Speculation,
N.Y., 99 n., 103, 105, 120, 125
Hutchinson, L., 151 n.
ILLINOIS, 123
India Co., East, n
Indian cotton, 22, 83, 157, 158, 161,
189, 190, 226, 231, 232
teas, 177, 178
wheat, 13, 23, 24, 163, 201 sqq.
wools, 172
Inspection of produce by govern-
ment, 17 n.
Insurance, hedges as, 86 ; marine,
166
Interest on margins, 56
Ireland, 68, 169
Iron, 6, 42, 151 sq. ; see also
Warrants.
JAPAN, 151, 160 sq., 175
Java tea, 177
Jessel (M.R.), n
Jobbers on London Stock Exchange,
128
KANSAS, 123, 161 sqq. ; City Board
of Trade, 37, 116, 133
Kenyon, Lord Chief Justice, 106
Kerr and Weld, 161 n., 163
Knoop, D., see Chapman.
Kobe, 161
LARD, 13, 35
Leipzig, 4
Leiter corners wheat, 114 sq.
Lexis, 97 n.
Line Elevator Co., 87 ; markets in,
49
236
INDEX
Liverpool Corn Trade Association,
8, 14, 23, 25, 29 sq., 31, 55, 94,
101, 104, no, 117, 138, 162 sq.,
165, 166, 192 sqq.
Cotton Association, 18 sqq., 31
sqq>, 39, 43. 47, 57 *?., 59, 62,
73, 79, 80, 85, 101, 104, 139,
142 sqq., 154 sqq., 159, 187 sqq.,
Appendix V.
Wool sales, 168, 172, 175
London Coal Exchange, 6
Corn Trade Association, 23, 25,
31, 166
Produce Clearing House, Ltd.,
27 n., 56, 147 sqq., 178 n., 179 n.
Stock Exchange, 28, 118 n., 120 n.
Wheat futures in, 114, 147 ; wheat
trade, 165 ; auction sales, 167 ;
wool, 1 68 sqq. ; tea, 176 sq. ;
coffee, 178 sq. ; see also Baltic,
Mark Lane.
" Long and short sellers," see
" Bears," " Bulls."
Lumber, grading of, 15 sq.
Lyons, 179 sq.
MAcCuLLOCH, J. R., 99 n.
Macrosty, H. W., 116 n., 153 n.
Magill, R.. 23 n.
Maize, 26, 33, 35, 147
Manchester, 156, 157 ; Cotton
Association, 159 sq. ; Ship
Canal, 160 n.
Manchester Guardian, 160 n., 187
" Manipulation," 108, 109 sqq., 129
Manitoba, see Canada, Winnipeg.
Manufactured goods and organised
markets, 7, 33, 173
Margins, 54, 55, 56, 120, 121, 124,
197
Mark Lane, 30
Market, 2 sqq. ; see also Exchange ;
municipal, 179 sqq.
Market Reporter, U.S.A., 37, 91,
116 n.
Marseilles, 56, 172
Marsh, 85 n.
Matched orders, no, in
McHugh, J. G., 53 n., 103 n.
Metal markets, 6 ; see also Iron.
Middlesbrough, 151, 152, 191
Middleman, i, 76, 77 ; see also
Speculator.
Millers and Milling, 89, 91, 94, 139,
165
Milwaukee Chamber of Commerce,
120 n.
Mincing Lane tea auctions, 177 sq. ;
coffee auctions, 179
Minneapolis, 13, 27, 89, 139;
Chamber of Commerce, 37,
53 s?-, 73, 87, 94, H3
Monthly Crop Reporter, U.S.A.,
66 n., 67
Municipal Markets, 179 sq.
Murray, 67 n.
NEGOTIABILITY of warrants, n sq.
New Orleans Cotton Exchange, 19,
31, 36, 61, 62, 69, 73, 85, 144
New York Coffee Exchange, 15, 27,
36, 39, 43, 73, 178 ; Cotton
Exchange, 13, 31, 36, 43, 60 sqq.,
73, 85, 86, 103, 117, 144;
Produce Exchange, 13, 35 sq.,
37, 49, 90, 104, 129, 148 ;
Chamber of Commerce, 36 ;
Stock Exchange, 42 ; wheat
trade, 161 sq. ; Department of
Food and Markets, 180 sq.
New Zealand, 5, 170
" Norm " in cotton market, 142, 143
" Normal " in crop reports, 65
OATS, 27, 35, 68, 87, 137
Office of Markets, U.S.A., 17
Oklahoma, 15, 19, 224, 228
Omaha, 37, 116, 133
Option, 44, 45 ; see also " Privilege."
Organised Market, see Exchange.
Osaka cotton market, 160 sq.
Ottawa, 73
PACIFIC coast, 15, 163
" Parcel " wheat, 24, 165 ; see also
" Parcel" contract forms, 193,
208
Pardridge, 129
Paris Bourse, 3, 44, 56
Parkes, E. T., 157 n.
Patten cotton corner, 115
Pepper futures, 147
Peru, 22, 83, 189
Philadelphia, 90, 173
Plate, river, 24, 166 ; see also Con-
tract form, 208
" Points on " or " off," 21, 61, 84,
157, 187, 188, 189, 225, 229
Pools, in
Pope, J. E., 77 n.
Pork, 13, 35
Porritt, E., 92 n.
Price basis, 61 ; quotations, Chap.
VI.
" Privilege," 45 sq., 48 sq., 120, 183 ;
double, 46 sq. ; legislation
against, 122 sq.
INDEX
237
Produce Exchange, Chap. III. ;
see also New York, Toledo -
Producers' Price Current, 74
" Put," 45 sqq., 183
QUALITY of produce in contracts,
24 ; see also Grading.
Queenstown, 10
Quotation Committee, 36, 73 ; of
market price, 71 sqq.
RATHBONE, H. R., 104 n.
Receipts, warehouse, 52, 190 sq.
Reports, crop condition, 9, Chap. VI.
Rew, 85
Riddell, F. W., 92 n.
Rings, settlement, 52
Rosario Santa Fe, 33, 206, 208
Rotterdam, 56
Roubaix-Tourcoing, 6
Rubber, 147
Rumours, false, no
Rusby case, 106
" Rye terms," 166
SAMPLE, selling by, 4, 14, 30, 31, 168
Santos, see Coffee.
Schmoller, 97 n., 143 n.
Scotch Pig Iron Trade Association,
152
Scottish iron trade, 42, 151 sqq. ;
wool, 169
Scrutton, Lord Justice, 166
Sea Island cotton, 19, 218, 219
Settlement, periodic, 51 sqq. ; see
also Clearing house, Ring.
" Settlement terms," in Liverpool
cotton, 57
Shaw, A. W., i n.
Short selling, 42, 100, 102, 106, 108,
113, 114 ; effect on prices, 127
sqq.
Simpson, Sir J. H., 82 n.
Speculation, 40 sq., 79, 96 sqq., 125,
128, 145 ; contrast with gam-
bling, 99 sq., 120, 121 ; by
outside public, 103, 121 ; pre-
judice against, 105 ; evils of,
Chap. IX. ; influence on prices,
Chap. X.; and farmers, 132;
see also Hughes Committee.
" Speculation " cotton, 158
Speculator, expert, Chap. VIII.,
98, 100, 103 sq., 108, 121 ;
services of, 107
Spot transactions, Chap. IV., 192 ;
see also Contract forms in
Appendices IV. and V.
" Spread," 46, 49
" Squeeze," 113, 114 n., 116, 117,
153
St. Louis, Merchants' Exchange of,
13. 37
" Standard " grade in futures, 43 ;
condition of crops, 68 ; iron,
152
Standardisation, see Grading.
Staple, cotton, 19, 59, 62, 63, 222
Statistics, crop, in Canada, 68 ; and
Crop Estimates, Bureau of
U.S.A., 65
Steadiness, price, 130 sqq.
Stewart, J., 92 n.
Stock Exchange, 3, 4 n., 42 ; see
also Bourse, London, New York.
Stone, 143 n.
" Store, in " sale, 88
" Straddle " in America, 46 ; in
Liverpool, 47
Sugar futures, 147, sq.
" TALE quale," 166
Tea, 147, 176 sqq.
Terminal elevator, see Elevator ;
contract, see Futures.
Texas, 19, 60 ; see also Contract
forms, Appendix V.
Tin, 7
Timber, 15 sq.
Tobacco, 179
Toledo Produce Exchange, 37
" Tops," wool, 6, 153, 172 sq.
" Track, on " sale, 88, 161
" Trade," a, 44 n.
" Transit, in " goods sold, 10
Transport, i, 2
" Trust Letter " in cotton trade, 83
UNITED States, 3, 8, 9, 91, 92, 103,
113, 119, 121, 122, 123, 154 ;
grading of produce, 12, 13 sq.,
17, 26, 55, 72, 139, 206, 208 ;
Industrial Commission, 125,
133, 144 ; coffee consumption
in, 37 ; Bureau of Corporations,
61 ; auction sales, 168, 180 ;
wool trade, 173 sq. ; see also
Act, Agriculture, Chicago, New
York, etc.
" VALORISATION," coffee, 149 sqq.
Van Antwerp, 103 n.
Virginia, 119 n., 179
WAREHOUSE receipt, 12, 190 sq. ;
Act, U.S.A., 176
Warehousing, i, 176
238
INDEX
Warrants, Chap. II. ; iron, n, 12,
191 ; corner in, 115 sq. ; trade
in, 151 sqq.
" Wash sales," in sq.
Weld, L. D. H., i n., 161 n., 163,
181 n.
Wheat markets, Chap. III. ; grad-
ing, 22 sqq. ; futures, Chap. IV.;
crop reports, Chap. VI. ; c.i.f.
and spot business, 161 sqq.
Wichita, 161
Wine, South Australian, 17 n.
Winnipeg Grain Exchange, 9 n., 38,
44 n., 54 sq., 73, 77, 92, 93, i°o,
101, 133, 138, 190
Wisconsin, 118
Wool grading, 5, 169, 170, 174, 176 ;
auction sales and trade, 168
sqq.
se, R.
Wyse, R. C., 78 n., 103 n.
THE END
PRINTED IN ENGLAND BY WILLIAM CLOWES AND SONS, LTD., BECCLES.
THIS BOOK IS DUE ON THE LAST DATE
STAMPED BELOW
AN INITIAL FINE OF 25 CENTS
WILL. BE ASSESSED FOR FAILURE TO RETURN
THIS BOOK ON THE DATE DUE. THE PENALTY
WILL INCREASE TO SO CENTS ON THE FOURTH
DAY AND TO $1.OO ON THE SEVENTH DAY
OVERDUE.
8E'r 25 1936
- OCT301&3h
APR 30 1938
JAN 27 1943
/?AO
49 >%
. ..• ^ nf 1QA1
JAN IT
«
18^
/ Pl r'jlQ \O
ODoc AV Ju
i^'^ .
REC'D LD
•
NOV 41962
LD 21-100m-8,'34
408981
UNIVERSITY OF CALIFORNIA LIBRARY
Live Music Archive
Librivox Free Audio
Metropolitan Museum
Cleveland Museum of Art
Internet Arcade
Console Living Room
Books to Borrow
Open Library
TV News
Understanding 9/11