In actual practice the Department of Agriculture has designated some eleven cities where bona fide spot markets exist. A recent bulletin of the Department shows that futures now fairly reflect the great spot markets of this country instead of being much lower, and also conform to the Liverpool market. Indeed since handling and freight charges are included, fu tures now tend to be higher than spots. As fu ture trading dominates the price situation it is main tained that the farmers are greatly benefited and hedging is rendered a fairer and more satisfactory process.
9. Use of futures.—The usual method of marketing the cotton crop is for the planter to sell out, in advance of harvesting, with the condition that delivery of his crop will not be made for several months. There are several different channels through which the farmer may dispose of his cotton, but the system as a whole must involve the use of futures on a large scale. It is especially necessary for the southern mills to em ploy futures in their hedging operations. The alter native is to buy cotton and own it for a great length of time, because of the insecurity of the trend of future prices. This entails a heavy outlay of capital, besides storage and insurance expenses and loss in the weight of cotton.
Since cotton buyers in nearly all cases must hedge and employ the future market for the purpose, they have never felt that they could pay much higher prices than those made in the future market, and while many spot markets have always existed in the South, the growers received in the main, lower prices than were made in those markets. It is this anomalous situation which the Futures Act has already begun to remedy. While the judgment of the thousands of buyers and their representatives as to the numerous grades in different parts of the South naturally differs from time to time, there is a constant tendency for the price paid to farmers to approach the future price minus freight, insurance and handling charges.
10. Factors that determine cotton prices.—Al though artificial causes appear to have affected the price of cotton, for reasons already mentioned, it is unquestionable that the great underlying movements of cotton prices respond to the law of supply and de mand. As stated by Hunter A. Gibbes, in a prize es say published in Commerce and Finance: 1 It is, doubtless, true that during periods of active specula tion the price is pushed up or down by the artificial influence of trading in futures. In such a case the successful specu
lator simply takes advantage of a condition by exaggerating the condition in the minds of the investing public. For ex ample, before the maturity of the crop of 1910, the indica tions were that the crop would be short. The increased de mand for cotton for manufacturing purposes made it highly probable that the price would be above normal. The far seeing speculator impressed this condition upon the minds of others, and thereby succeeded in pushing the price for a time to about seventeen cents per pound. Fortunately for those on the bull side of the market, the early diagnosis of the situation was correct. The crop was in fact short, and as a result of the active period of speculation in futures the average price for the crop of 1910 in the United States was 13.95 cents. In 1911, the situation was reversed. On ac count of the high price of 1910, a larger acreage was planted during the succeeding year. The early crop reports indi cated a large yield. The wide-awake speculator again took advantage of the conditions, and on the bear side of the mar ket hammered the price downward. The average price for the crop of 1911 was only 9.56 cents per pound.
In 1914, the crop of the United States was the largest on record, being 16,134,960 bales, including linters. The early forecast of the crop and war conditions in Europe gave the wise dealer another opportunity. The result of his activi ties was an average price of 7.33 cents per pound for the 1914 crop.
In 1910, the high speculative prices caused the average price for the year's crop to be in excess of the average actu ally justified by the law of supply and demand. In the years 1911 and 1914, the average price was doubtless lower than that actually warranted by the law of supply and de mand. This abnormality of average price for each year was due to psychological processes. 'We feel the same influ ence in every other phase of business activity. Men are like sheep. They follow one another. In case of a real estate boom the influence of speculators on one another causes prices to go upward, but temporarily only. In the excite ment of an auction sale of jewelry or furniture, the subtle influence of the auctioneer often makes a price much higher than that justified by the actual worth of the article sold. In each case, however, it should be borne in mind that the marked influence on price is for a relatively short period.