I've been kicking around an idea about a story that exploits the difference in cotton prices between New Orleans cotton prices and the price of cotton in Manchester, England during the antebellum period. What I've found has surprised me a bit - enough that I wanted to post what I've found here to see if others could spot issues with my math (maths for our British cousins)
To do this, I want to walk through the typical process. For the sake of the discussion, it's 1840 and we have $100,000 for this experiment. We can't spend all of our money on buying cotton because we will need to pay for warehousing fees and shipping fees to get our product from New Orleans to Manchester. Probably should factor in insurance rates and broker fees too.
Let's set aside $75,000 of our 100k for cotton. In 1840, the price of cotton cotton growers could expect to receive in New Orleans was $0.089 per pound of ginned cotton (processed to remove the seeds). Source: https://www2.census.gov/library/pub...olonial-1957/hist_stats_colonial-1957-chE.pdf.
This will purchase 842,000 pounds of cotton or 2105 bales of cotton (assuming 400 pounds per bale).
The cotton gins or the agents selling from them, charge approximately a 3% fee. That's about $2,250.
Next up is shipping from the cotton gins to the warehouses in New Orleans (could be Biloxi or Mobile... but the equation shouldn't change too much). Shipping costs are expensive when not using rail, approximately 15 cents per mile per ton. For this experiment, we've bought cotton within 50 miles of New Orleans to control shipping costs. Between land and river shipping costs, we have spent $1500 to get our goods to New Orleans. If we bought cotton from growers further out, we would expect to pay a lot more to get the cotton to market.
We need to pay for warehousing until we can arrange for the transatlantic shipping to Manchester. I can't find much in the way of historical data, the best info I've found is 1-3% of the original sales price. So, we'll peg storage costs at approximately $2,250 (1-3% gives a spread of $750 to $2250).
Now, we're ready to ship it to Manchester. I've found rates that vary between $9 and $11 per ton for the transatlantic trade. The biggest factor in cost is how tightly compressed the cotton bales are. The more compact the bale, the lower the cost per ton. We find a ship willing to rent space for $10 per ton, or $4,200.
We can't afford to risk this shipment, so we buy insurance. The only thing I've found that discusses insurance during that period was the insurance rate on inland rivers in the US during the 1840s, at 1% of the cargo's value. While it is possible that insurers in the transatlantic trade might charge a premium over this, I haven't found anything showing a higher rate. Insurance is $750.
Now, we've arrived in Manchester and it's time to sell our cotton. The price buyers are paying in Manchester in 1840 is 9.4 pence per pound. Our 840,000 pounds of cotton fetch 7,914, 800 pence. Bugger that. Converting this to British pounds, we receive £32,978 for the sale of our cotton. Or to convert that to dollars, $131,355!
Let's recap our costs:
$75,000 - cost of cotton
$2,250 - brokerage fee from cotton gin
$1,500 - shipping fee to transship goods from gins to New Orleans
$2,250 - Warehousing fees
$4,200 - shipping rate from New Orleans to Manchester
$85,200 - total cost
$131,355 sales price
Profit $46,155, or approximately 54% return on investment. This seems very high.
Am I missing anything? This is a very good return on the investment - enough so that I'm questioning if I'm missing something important. IOTL, New York banks and brokers oftentimes played the middleman role, given how much of the Southern economy was based upon credit, and the profits were absorbed through interest payments to the banks, brokerage fees for the credit and the like; so the profit pie was more diffused than the above experiment - at least I think so.
Anyway, I'm asking for feedback on this because I'm considering a story about someone attempting to control the cotton trade in the antebellum world.
Mods, if this should go somewhere else, please move it. Given the POD would be prior to 1900, and we're not considering any ASB mischief (yet), this seemed the best place to discuss the economics and math behind this scenario.
To do this, I want to walk through the typical process. For the sake of the discussion, it's 1840 and we have $100,000 for this experiment. We can't spend all of our money on buying cotton because we will need to pay for warehousing fees and shipping fees to get our product from New Orleans to Manchester. Probably should factor in insurance rates and broker fees too.
Let's set aside $75,000 of our 100k for cotton. In 1840, the price of cotton cotton growers could expect to receive in New Orleans was $0.089 per pound of ginned cotton (processed to remove the seeds). Source: https://www2.census.gov/library/pub...olonial-1957/hist_stats_colonial-1957-chE.pdf.
This will purchase 842,000 pounds of cotton or 2105 bales of cotton (assuming 400 pounds per bale).
The cotton gins or the agents selling from them, charge approximately a 3% fee. That's about $2,250.
Next up is shipping from the cotton gins to the warehouses in New Orleans (could be Biloxi or Mobile... but the equation shouldn't change too much). Shipping costs are expensive when not using rail, approximately 15 cents per mile per ton. For this experiment, we've bought cotton within 50 miles of New Orleans to control shipping costs. Between land and river shipping costs, we have spent $1500 to get our goods to New Orleans. If we bought cotton from growers further out, we would expect to pay a lot more to get the cotton to market.
We need to pay for warehousing until we can arrange for the transatlantic shipping to Manchester. I can't find much in the way of historical data, the best info I've found is 1-3% of the original sales price. So, we'll peg storage costs at approximately $2,250 (1-3% gives a spread of $750 to $2250).
Now, we're ready to ship it to Manchester. I've found rates that vary between $9 and $11 per ton for the transatlantic trade. The biggest factor in cost is how tightly compressed the cotton bales are. The more compact the bale, the lower the cost per ton. We find a ship willing to rent space for $10 per ton, or $4,200.
We can't afford to risk this shipment, so we buy insurance. The only thing I've found that discusses insurance during that period was the insurance rate on inland rivers in the US during the 1840s, at 1% of the cargo's value. While it is possible that insurers in the transatlantic trade might charge a premium over this, I haven't found anything showing a higher rate. Insurance is $750.
Now, we've arrived in Manchester and it's time to sell our cotton. The price buyers are paying in Manchester in 1840 is 9.4 pence per pound. Our 840,000 pounds of cotton fetch 7,914, 800 pence. Bugger that. Converting this to British pounds, we receive £32,978 for the sale of our cotton. Or to convert that to dollars, $131,355!
Let's recap our costs:
$75,000 - cost of cotton
$2,250 - brokerage fee from cotton gin
$1,500 - shipping fee to transship goods from gins to New Orleans
$2,250 - Warehousing fees
$4,200 - shipping rate from New Orleans to Manchester
$85,200 - total cost
$131,355 sales price
Profit $46,155, or approximately 54% return on investment. This seems very high.
Am I missing anything? This is a very good return on the investment - enough so that I'm questioning if I'm missing something important. IOTL, New York banks and brokers oftentimes played the middleman role, given how much of the Southern economy was based upon credit, and the profits were absorbed through interest payments to the banks, brokerage fees for the credit and the like; so the profit pie was more diffused than the above experiment - at least I think so.
Anyway, I'm asking for feedback on this because I'm considering a story about someone attempting to control the cotton trade in the antebellum world.
Mods, if this should go somewhere else, please move it. Given the POD would be prior to 1900, and we're not considering any ASB mischief (yet), this seemed the best place to discuss the economics and math behind this scenario.
