COTTON PRICES AND MARKETS 43 
both. The territory of a centralizing market is determined largely 
by transportation facilities and freight rates. The merchant operat- 
ing in a given territory establishes connections in the various cotton 
markets in the territory, by arranging to furnish limits to local 
buyers and by scattering salaried or firm representatives at strategic- 
points to buy cotton direct from local buyers and farmers and to 
take it up from those buying on limits. 
The making of limits requires considerable attention, especially 
in a market where competition is keen. The limit is made up of 
two parts. The first and most important is the parity between 
futures and the price the buyer is to pay for spots. Thus the mer- 
chant might instruct his local representatives to buy at 150 " off " 
Xew York basis Middling. If no month is specified, it means the 
near active month. The second part of the limit is the " differences ;" 
that is, the premium " on " for the better grades and staples and the 
discount " off " for the poorer grades and staple lengths under seven- 
eighths inch. The first part of the limit changes the price offered 
by the local buyer with the changes in the price of futures. 
Thus if Xew York contracts are selling for 30 cents, the local buy- 
ers can offer 28.50 cents for Middling yg-inch cotton. If the price 
of futures goes down to 29 cents, the local buyer reduces his price 
to 27.50 cents. The merchant may find that his local representative 
is unable to buy the cotton at 150 " off " and may be forced to buy 
on the basis of 125 ' ; off, 5 ' or even less. The second part, especially 
the differences for grade, is changed very largely as a result of 
weather. Weeks, or even months, may pass without a change, if the 
season is normal. 
The merchant arrives at the limits he offers about as set forth 
below, provided he has not already sold his cotton on basis. The 
time, say is November, and December futures are quoted at 35.10 
cents per pound. The cost of the freight, insurance, interest on 
funds tied up, the hedging costs and other expenses of delivering the 
cotton equals 150 points. The maximum he can pay without incur- 
ring risk would be 33.60 cents per pound. If he wishes a profit of $1 
per bale, he will quote the limit at 170 " off " December, or 33.40 cents. 
If the merchant has sold cotton for forward delivery at, say 150 " on " 
Xew York for even-running Middling, he takes this into account in 
making his limit. He is in a position to offer a better limit than 
before, but he can not base it entirely on this sale of a specific grade, 
for the local buyer must take all grades as they come, and he may 
buy 1,000 bales before he obtains 100 bales of even-running Middling. 
Changes in grade differences and staple premiums are often a 
source of loss or profit. The differences due to grade are controlled 
very largely by weather conditions during the picking season. On 
September 1, 1923, Low Middling was an average of 96 " off " in the 
10 markets. On December 11 it had gone as low as 275 "off." The 
merchant who bought and hedged Low Middling without a basis 
sale to cover, almost certainly lost money on his low grades. During 
the same time Good Middling rose from a premium of 47 " on " to 
122 " on." On the better grades the merchant will have made a 
profit. 
In trading among themselves merchants make bids and offers in 
what thev call " basis." It is alwavs so much c; on " or " off " the 
