426 REPOKT — 1900. 



may Le enormous quantities of produce of inferior quality, it cannot 

 be tendered in fulfilment of an ordinary future contract ; or, if tenders 

 below the standard quality are, as in some cases, permitted, the limits 

 of such deficiency in quality which are acceptable are narrow, and a 

 pecuniary allowance must be made for the deficiency. 



The purchase or sale of regular futures- contracts is made, however, 

 to serve as a hedge against too great loss from the variation in price 

 of classes of produce not actually deliverable on such contracts, and, 

 indeed, for some dealings in goods produced from the raw material to 

 which contracts refer. This use of the futures-contract depends on the 

 fairly close accord between the movements in price of different quali- 

 ties of the same commodity. The accord is not exact, but it generally 

 suffices to render the hedge effective in some degree. To illustrate, we 

 take the spot prices of middling American cotton and good fair Per- 

 nambuco at Liverpool on March 29 and May 17 of the current year. 

 The former stood at 5j%o?. at the earlier date, 5^d. at the later. The 

 Pernambuco quotations were Qd. and 5^d. Of the variation of -Id. shown 

 in the latter price, y/jrf. were shared by the former. Hence, in a great 

 degree, futures in American would have served as a hedge against 

 variations in price of Pernambuco almost as well as against variations 

 in price of American itself. As a direct insurance in dealings in the same 

 commodity as that named in the futures-contract, that contract is 

 obviously serviceable. An importer who purchases a shipload of wheat, 

 anticipating to sell it on arrival at a certain price, will sell futures 

 to an amount corresponding to the quantity of actual wheat he has 

 bought. If the price has fallen when the goods arrive, the amount received 

 from their sale will be reduced, but, on the other hand, the cost of 

 repurchase of the futures-contract will have also fallen, and to an 

 amount which will cover the bulk, if not the whole, of the loss on the 

 sale of the actual grain. So, also, in case of a forward sale, the risk of 

 loss through price-variation may be eflfectively insured against by a 

 pui-chase and subsequent resale of a futures-contract. 



The facility of dealing in these contracts, then, affords a means of 

 reducing risk of financial loss in the handling of the actual produce, 

 both that which is of such quality as to be tenderable on the contracts, 

 and that which is not of such quality. Its use in covering the latter class 

 of dealings leads to a considerable excess of dealings in futures over actual 

 deliveries of tenderable grades. Now, in considering the influence on 

 prices of the modern system of dealings in futures, the reduction of the 

 risk assumed by various sections of dealers must be given a prominent 

 place. The margin of profit which is sufficient to support dealings of 

 a comparatively safe character is much smaller than that necessary 

 when risk is considerable. Even though the goods pass through the 

 hands of more numerous dealers than formerly, the cost of handling 

 may be reduced thi'ough the reduction of the risks of the dealers. We 

 have been unable to obtain any satisfactory means of determining to what 

 extent the cost of handling (apart from elevator charges and freight 

 charges) has been reduced, but we have seen no reason for supposing tha.t 

 it has been increased, as seems to be suggested by some who direct atten- 

 tion to the large number of hands through which a futures -contract may 

 pass, and the accumulation of commissions which is suggested in conse- 

 quence. The fact that dealings in wheat futures in Liverpool, for 

 example, amount to from twelve to twenty or thirty times the amount of 



