Cotton trading falls roughly into two categories: trading in cotton for immediate delivery, or spot cotton; and buying or selling for delivery at some future time. Purchases or sales of spot cotton mean that cotton actually will be delivered from vendor to purchaser, but, as we shall see, trading in futures does not necessarily mean that the contract will be fulfilled by delivery. The great cotton markets are New York, Liverpool, New Orleans, Bremen, and Havre. Of these New York is almost entirely a futures market, while New Orleans is chiefly a spot market. Liverpool, Bremen, and Havre trade in both spot and futures, but Liverpool is the European centre for trading in future contracts. [Sidenote: _The New York Cotton Exchange_] Only about 2% of the annual crop is sold spot in New York, and yet it is the prices on the New York Cotton Exchange which govern very largely the price paid to the grower in the South by the various buyers. The New York Exchange is the barometer of the American, and to a large extent, of the world’s cotton trade, because its mechanism works out the equilibrium between demand and supply; and as this mechanism consists chiefly of the trading device called the “Hedge”, we shall digress for a moment to consider its operation. [Sidenote: _The “Hedge”_] We might say that hedging is an insurance against fluctuations in cotton prices by purchase or sale of future contracts for cotton against sale or purchase made for actual delivery. It consists of nothing more than of neutralizing the gain or loss which will result from existing delivery contracts if the price rises or falls before delivery date, by creating an off-setting loss or gain. [Sidenote: _As Used by the Merchant_] Assume, for instance, that a merchant makes a contract with a mill in July for 100 bales October delivery. He sells at the current price of let us say 30 cents per pound plus his overhead and profit. In due course he will obtain his cotton from the South, but in the meantime he covers, or hedges his contract by buying 100 bales of October futures on the Exchange. If he has to pay the grower 31 cents for the cotton which he has sold to the mill for 30 cents, he will on the other hand, be able to sell his future contract which he bought at 30 cents for 31 cents, so that the loss on one is neutralized by the gain on the other. Vice versa, he will lose whatever _extra_ profit he might have made from a falling price. [Sidenote: _By the Manufacturer_]