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HF 296.C5R7 e " UniVerSi,yLibrary 
 Th, m?iniiiiSiiViiMi r l olJ,d know about the Chic ago 
 
 3 1924 013 810 076 
 
Things You Should Know 
 
 about the 
 Chicago Board of Trade 
 
 By 
 
 E. S. Kollins 
 
 
 ompliments of 
 
 THE BOARD OF TRADE 
 
 OF THE 
 
 CITY OF CHICAGO 
 
 Copyright, 1920, by E. S. Rollins 
 Chicago, III. 
 

 Things You Should Know About Chicago 
 
 Board of Trade 
 
 £2*1 U 
 
 H 
 
 CfRl By E. S. Rollins Q^^ cf , 
 
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 The casual visitor to the Chicago Board of Trade, seeing from 
 
 250 to 300 noisy and sometimes frantic men in the pit, gesticulating 
 and shrieking at one another, and noting the dozens of hurrying mes- 
 sengers and telephone clerks and telegraph operators, and, further- 
 more, observing the intense interest that hundreds of men have in the 
 blackboard quotations that are rapidly being posted — seeing all this, 
 the visitor perhaps at once concludes that the whole affair is a gam- 
 bling game. Doubtless, too, his mind was prepared for just such a con- 
 clusion, for this is the attitude of mind of many persons who have 
 never taken the. trouble even to think whether there may not be two 
 sides to the matter. 
 
 Yet this opinion of the Board of Trade is not strange ; in fact, 
 it is difficult for a person outside of the grain trade not to be preju- 
 diced. Why? Because for , years sensational stories, newspaper 
 articles of "corners", and accounts of fortunes made and lost on the 
 Board of Trade have been published. Furthermore, the Board of 
 Trade and other graii* exchanges have from time to time been attacked 
 by politicians posing as the farmers' friend, and their statements have 
 remained unanswered, publicly. The public has never been given 
 both sides of the story nor shown the important position the grain 
 exchange occupies in the business world. 
 
 "The Chicago Board of Trade is the most economical agency in 
 the world for the distribution ,of foodstuffs." This statement was 
 made by Herbert Hoover before a committee of Congress. Mr. 
 Hoover, as Food Administrator, has for several years devoted his 
 entire time and his unusual ability and energy to the study of crop 
 distribution. His work during the war was to spread the wheat crop 
 of the United States evenly over this and the allied countries of 
 Europe; and so successfully was it done that vast armies were pro- 
 visioned and millions of civilians were actually saved from starvation. 
 
 In the light of such a statement as that quoted, coming from a man 
 whose work of crop distribution was the greatest ever undertaken 
 by any one man, criticisms of the Board of Trade such as are frequently 
 heard seem superficial. Yet they have an effect, for they warp public 
 opinion, because the public does not hear the other side. 
 
 It may be said that most of the criticisms are based upon either 
 prejudice or lack of understanding of the Board of Trade. It has long 
 
 2 
 
been apparent that the public, and particularly the agricultural part 
 of the general public, does not know! what the Board of Trade*really 
 stands for, nor the part that its members play in making a ready mar- 
 ket at all time for the farmers' grain and in distributing it to the man- 
 ufacturing centers or for export. 
 
 The Exchange Itself Does No Business. 
 
 What is the Board of Trade, and what does it do? The Board 
 of Trade, which is an incorporated association, is not a business insti- 
 tution. It does nothing for profit, nor does it either buy or sell grain. 
 The association makes and enforces trade rules for the members, and 
 provides a place of business for them — the Board of Trade building, 
 with an exchange or trading-room called "the floor", with telephone 
 and telegraph facilities. In addition, the Board of Trade collects and 
 disseminates a large amount of trade and crop news and statistical 
 information gathered from all markets and grain growing countries. 
 Thousands of dollars are annually spent in this work. 
 
 This, in brief, is what the Board of Trade as an association is 
 and dees. But in the sense in which it is commonly understood, the 
 Board of Trade is vastly different; that is, the activities of the mem- 
 bers. For convenience, and to prevent misundertanding in the matter 
 that follows, the common understanding of the term "Board of Trade" 
 and "grain exchanges" will be adopted, rather than to make the tech- 
 nical distinction between the association, which does little beyond 
 making and enforcing rules, and the activities of the individual mem- 
 bers. 
 
 "Cash" Grain Business the Foundation of the Exchange. x 
 
 The foundation of the Board of Trade, and of every other grain 
 exchange, is the "cash" grain business. This is a positive statement. 
 The true function of the Board of Trade is to "make a market" for the 
 grain crops of the country — a market so broad that any quantity of 
 grain, either "cash" or futures, can be sold at any time ; and, in addi- 
 tion, to distribute the grain crops from producer to manufacturer at 
 a minimum cost. This the Board of Trade and the other grain ex- 
 changes do;, and how they do it will be shown in this article. 
 
 The term "cash"„wheat (or other grain) means the actual grain, — 
 "spot" grain or car lots, — which is sold by sample on the exchange 
 floor. "Futures" means grain contracts made in the pit — a sale and a 
 purchase of a specified amount to be delivered next month or in some 
 other future month at a Certain price. The day of the month is not 
 stated; the day of delivery is at the seller's option^ The delivery 
 months for which most of the future business is transacted are, Sep- 
 tember, December, May and July. 
 
 3 
 
Terminal Elevators and 'Future Trading Benefit Grower. 
 
 The elevator storage capacity for grain in Chicago is the greatest 
 in the world. There are 67 elevators, and the total capacity is 
 57,000,000 bushels. This includes the huge public storage elevators, 
 the storage bins of the "industries", i.e., corn and oats products man- 
 ufacturers ; those of flour mills and of grain shippers. 
 
 In these great elevators and those at other grain exchange. centers, 
 the temporary surplus of the crops, when the grain is marketed in 
 excess of immediate requirements for consumption or export, is stored 
 until needed. 
 
 If it were not for future trading, the great storage elevators would 
 never have been built ; for without future trading, no company would 
 buy a large stock of grain unless the price were at a very low level. 
 But great elevators would never have been built for that purpose. 
 The United States and Canada are the only countries having ter- 
 minal elevators with great storage capacity and systems of grain 
 grades and inspection ; and these countries are the only ones having 
 a system of future trading and markets where hedging sales are made. 
 Also, these two countries are the only ones in the world in which 
 the grower is in close touch with the markets and may know every day 
 what the market price is, and, therefore, approximately what he should 
 receive for his grain at the nearest country station ; also, they are the 
 only countries having elevators at country stations, where the farmer 
 may store his grain. The United States and Canada lead the world in 
 grain market facilities, and the growers are correspondingly benefited. 
 This advanced position in moving the crops, and the relatively high 
 prices paid to the farmer for his grain, is directly due to the system 
 of future trading and its offshoot, the terminal elevators, both of which 
 were developed by the Board of Trade. 
 
 With the futures market in which to place hedges, the terminal 
 elevator companies buy grain and fill their storage tanks during the 
 heavy crop movement ; and as the grain is purchased, they mal$e hedg- 
 ing sales in the pit. That is, they sell contracts for the delivery of cer- 
 tain amounts of grain in some future month. This will be explained in 
 detail further on. Then, whether the price goes up, or down, they 
 neither lose nor gain by the fluctuations. 
 
 Without future trading and the great terminal elevators, the 
 grain supplies above immediate requirements— the temporary surplus 
 —when the crop movement is heavy, would be peddled about until the 
 price became attractive to persons who would take speculative chances 
 and buy it. This would probably be the importers of Great Britain, 
 who are the best "waiters" in the world, when they see a burdensome 
 surplus in any country. The result would be that the importers of 
 
 4 
 
Great Britain would always get our grain surplus at roek-bottorr 
 prices, just as for years they have taken the surplus of Russia' and 
 Argentina. 
 
 ■& v 
 
 Chicago Annually Receives 300,000,000 Bushels of Grain. 
 
 Before examining the futures market in detail and describing 
 hedging sales and purchases, let us first glance at the "cash" grain 
 market of the Board of Trade. 
 
 I have said that the "cash" grain business is the foundation of 
 the Chicago- Board of Trade. Chicago annually receives, following 
 normal crop seasons, approximately 300,000,000 bushels of grain. 
 
 Where does all this grain come from? it may be asked; and by 
 whom is.it shipped? Chicago draws grain from a vast territory, not- 
 withstanding that other markets, — to the northwest, the west and 
 the southwest, — cut up the territory and retain a large part of the 
 moving crops. Chicago draws grain from Minnesota and the Dakotas, 
 notwithstanding the Minneapolis and Duluth markets ; from Wiscon- 
 sin, although there is a market at Milwaukee ; from Illinois, Missouri, 
 Iowa, Nebraska, Kansas-, Oklahoma, yet there are active grain ex- 
 changes at Peoria, St. Louis, Kansas City and Omaha, in that territory, 
 and to the east at Indianapolis, Toledo and Buffalo, and important 
 markets at the seaboard. 
 
 Chicago is the great central market, however, and the Board of 
 Trade is the chief distributor and reflector of price-making conditions, 
 
 While some grain is received from other markets, most of the 
 receipts come from independent grain buyers and elevator owners 
 in the states mentioned. Unlike ' the markets at Minneapolis and 
 Duluth, which are largely supplied by "line" elevator companies (com- 
 panies having headquarters in those cities and owning "lines" of 
 country elevators at from 20 to over 100 country stations each) — 
 unlike those two markets, Chicago receives most of its grain from in- 
 dividual dealers in the towns of the states mentioned, who, of course, 
 buy directly of the farmers. 
 
 Competition Between Grain Exchanges. 
 
 Now the country dealer does not blindly ship his grain to Chicago, 
 nor anywhere else. He ships to the market that he thinks will pay 
 him best. Every morning he has the previous day's quotations of 
 several markets, so that, with freight added, he knows approximately 
 which market is likely to net him the best price. When there is no 
 appreciable difference, the choice becomes merely a matter of prefer- 
 ence, with the personal equation a factor, and services previously 
 rendered by some commission house a consideration. 
 
 All markets are constantly soliciting the business of country 
 
dealers. This means competition; the keenest kind of competition, 
 not only between the several markets, but also between the commis- 
 sion firms in each market. The way to retain a country shipper's 
 business and to gain new business is to give satisfactory service. This 
 means to get the best grades possible for grain consigned to them; 
 to get close to the top prices of the day for the grades of grain sold, 
 and to render minor services just a little more satisfactorily than com- 
 petitors. The commission house that loses its snap and efficiency 
 in going after and retaining business is quickly crowded out by its 
 aggressive competitors. In the cash grain business, every commission 
 house of the Board of Trade regards every other commission -house 
 as a competitor, while all the commission houses jointly regard all 
 those of St. Louis and Kansas City and Omaha and Minneapolis as 
 rivals who take advantage of every opportunity that arises to best 
 Chicago. Active competition constantly exists between members 
 of each exchange, and just as fierce between the different exchanges 
 themselves. 
 
 Two plans are followed by. country buyers in selling to the 
 Chicago market. One is to sell T:he grain outright, for shipment when . 
 cars can be obtained, or in 30, 60 or even 90 days, according to the 
 requirements gt the receiver. 
 
 The other plan, and one that has steadily grown in favor during 
 the last few years, is to "consign" the grain. That is, to ship it to some 
 commission house to be sold on arrival. This is the acid test cf both 
 a grain market and a commission house ; for if the returns are not 
 satisfactory, the country dealer will certainly never consign another 
 car of grain to that house; and, indeed, he may even ship to some 
 other market. By their accounts-of-sales are grain commission houses 
 known to country shippers. 
 
 In the "Cash" Market. 
 
 Grain is usually sold the day that it arrives., it may be to the 
 "industries", that is, corn or oats products companies ; to flour mills, 
 to shippers or to terminal elevator companies. Before a car of grain 
 can be sold, however, it must be sampled and inspected by the State 
 Inspection Department, to determine its grade and condition. The 
 grain, is then promptly sold on the basis of the State sample, on "the 
 floor" of the Board of Trade. The buyer may reserve the privilege 
 of having the grain resampled by a Board of Trade sampler and rein- 
 spected before the car is unloaded, in order to determine whether the 
 sample on which he bought it fairly represented the entire car load. 
 But the buyer must either accept or reject the grain by 11 o'clock 
 the following morning. 
 
 A Battle of Salesmanship. 
 
 When samples of grain are taken on the floor of the exchange 
 a. battle of salesmanship begins. Dozens of salesmen for the com- 
 mission houses, with their little sample bags of grain, represent the 
 country dealers who have consigned grain to the market/ Opposed to 
 the salesmen are the buyers for the terminal elevator companies the 
 
shippers and the "industries". That is the line-up, not only today, 
 yesterday and last week, but tomorrow, next week and every business 
 day of the year. It is in reality a battle of shrewd salesmanship on 
 one side and just as shrewd purchasing ability on the other. 
 
 Good grain salesmen are high-salaried men. Commission houses 
 are constantly looking for -them. A good salesman knows grain, and 
 more. He knows the grain business and human nature; further, he 
 must, as a rule, be well liked by the buyers. But his success depends 
 upon the satisfaction of the shipper when the 'atter receives his 
 account-of-sales. 
 
 Country Dealers Check Up Sales. 
 
 The country dealer is, in his way, as shrewd as the Board of 
 Trade men. When he receives an account-of-sales of a car of grain, 
 he gets out his market report for the day on which the car was sold. 
 Then he compares the price he received with the different prices at 
 which the same grade of corn — if it was corn — brought. Now if the 
 country dealer knows that his car was in good condition, he has a 
 right to expect close to the top price -for the day. If he finds that he 
 actually did receive the top price, he congratulates himself and thinks 
 kindly of the commission house. That means more business for the 
 commission house. 
 
 Every commission house knows that every country dealer is going 
 to do just as described in the foregoing paragraph, and every salesman 
 knows that his work, whether, good or bad, will be reflected in the 
 volume of consignments to his house. The prices at which "cash" 
 grain is sold are gathered for publication and are shown in the trad- 
 ing-room and later in the day are put out on the "ticker". These quo- 
 tations are eagerly scanned by the salesmen and others. When a sales- 
 man sees that his sales were close to the top prices for the day, satis- 
 faction is plainly seen in his expression. Likewise, disappointment 
 is "registered" when a salesman sees that the prices at which he sold 
 his cars are low in the range for the day. 
 
 Buying "for Shipment" or "to Arrive", and Hedging. 
 
 Now let us return to the first plan mentioned as being followed 
 by country dealers selling grain in the Chicago market ; namely, sell- 
 ing it "for shipment" at some future date. The other party to the tran- 
 saction, the receiver, buys the grain "to arrive", or "for shipment" 
 at a specified date ; it may be for 10-day shipment, 30, 60, or 90-day, 
 as agreed upon. 
 
 To illustrate a complete transaction, it may be said that a manu- 
 facturer of corn, products in Chicago buys, through a commission 
 house, 10,000 bushels of corn for shipment in 60 days, at a price that 
 shows him a profit either to manufacture or to ship to some customer. 
 At the other end of the transaction, a country dealer has sold, through 
 a commission house, 10,000 bushels of corn for shipment in 60 days. 
 This is a simple commercial transaction. The country dealer either 
 has the corn in his elevator or has contracted with some farmer or 
 farmers for the grain. At the market end, the receiver has either sold 
 finished products at a profit, to represent the purchase, or he is antic- 
 ipating his requirements 60 days in advance. 
 
 7 
 
In the latter case another transaction is necessary before the 
 matter is closed. That is, the manufacturer wishes to protect himself- 
 from a possible decline in price; for should the price of corn decline, 
 he will be forced to sell his products at the lower level, thereby losing 
 the profit he already has secured on his purchase of the raw material. 
 What does he do to protect himself? 
 
 Placing the Hedge. 
 
 What he does is even simpler than purchasing the corn in the 
 country. The manufacturer gives a broker an order to sell 10,000 
 bushels of "May" corn, or some other month, in the pit, or futures 
 market. The order is executed almost instantly, and now the manu- 
 facturer has his corn "hedged" and his profit secured. If the price 
 goes up, he will make nothing, while if it goes down, he will lose noth- 
 ing; for the price of the future, the "May" contract, and the price of 
 the "cash" or actual corn, go up or down together. (The future is 
 not necessarily the "May" contract. It may be the "December", 
 "March", or any other contract traded in. But the most active con- 
 tract months are December, May and July.) 
 
 The broker did not sell the manufaturer's corn, when he placed 
 the hedge in the pit or futures market. What he did sell was a con- 
 tract for the delivery of 10,000 bushels of corn next May, against loss 
 of his profit if the price should decline. "May" corn means a contract 
 for the delivery by some seller, and to take delivery by some buyer, 
 of a stated amount of grain of contract grade, at the specified price, 
 next May. 
 
 The matter now stands this way : The manufacturer has 10,000 
 bushels of corn bought in the country, which he knows he will receive 
 in approximately 60 days; and he has an equal amount sold in the 
 futures market as a hedge against loss should the price decline. 
 
 As he wants the actual or "cash" corn to manufacture into fin- 
 ished products, he of course has no intention of delivering his corn 
 on the contract made by the broker in the futures market. What he 
 does is this : He sells manufactured products for delivery beyond 
 60 days in advance, on a basis of the present price of corn. This trans- 
 action takes care of his 10,000 bushels purchased in the country. 
 That is, the sale of finished products takes care of his raw material. 
 
 He still has an open contract in the futures market, namely, a 
 sale of 10,000 bushels of May corn, or in reality, May contracts. This 
 matter is easily and quickly disposed of. He merely gives his broker 
 an order to buy 10,000 bushels of May corn. The order is executed 
 in a few seconds. This closes his obligation in the futures market. 
 
 Price Declines, But He Loses Nothing. 
 
 But how does he come out if the price has changed ? may be asked. 
 To illustrate, let us say that the manufacturer bought his corn in the 
 £? U , r l try ~ l t $1 -£ ' deliv ered in Chicago, and sold the May contract at 
 $1.33. Then the market declined 4c, say, by the time he sold his fin- 
 ished products. Therefore he sold the latter on a basis of the decline, 
 or at $1.26 for the raw material. But the May also declined 4c, so 
 the broker bought the May contract at $1.29, and as the manufacturer 
 sold it at $1.33, he made a profit of the 4c. But he lost 4c a bushel on 
 
 8 
 
the "cash" corn, which offset the profit on the May contract. There- 
 fore he neither gained nor lost by his hedging, but protected and 
 retained his original profit when both transactions were closed. But 
 if he had not hedged by selling the May contract, he would have lost 
 4c a bushel of his original profit on the decline in the price of the 
 "cash" corn. 
 
 Hedging in Early Part of Crop Moving Season. 
 
 Before describing the speculative side of the market, the trade 
 custom of hedging should perhaps be enlarged upon. It should be 
 explained first, however, that since August, 1917, when the distribu- 
 tion of the_ wheat crop of the country was taken over by the Food 
 Administration Grain Corporation, there- has been no futures market 
 for wheat. At present there are futures markets for corn, oats, rye, 
 barley and "provisions", i.e., mess pork, lard and short ribs. However, 
 in describing hedging and speculative transactions in the matter that 
 follows, what is said of corn or -oats applies to wheat and also to 
 "provisions." 
 
 Others who use the grain markets for hedging purposes, besides 
 those already mentioned^ are, terminal elevator companies, country' 
 dealers to a limited extent, line elevator companies, receivers in the 
 East, exporters and mills (flour milling companies). Also, Englisn 
 importers are large purchasers of wheat futures in the Chicago market, 
 to insure their getting an abundance of "cash" wheat later. 
 
 As already mentioned, some hedges are made by SELLING in 
 the futures market against "cash" grain just purchased; as, for 
 example, by terminal and line elevator companies and country dealers ; 
 also by mills and corn and oats products companies when they have 
 stocks of grain in excess of sales of finished products. 
 
 On the other side, those who hedge largely by BUYING in the 
 futures market are the mills early in the crop moving season, when 
 there is a heavy demand for flour far in excess of the receipts of, wheat. 
 In August and September the mills, because of its being possible to 
 hedge against flour sales by buying September or December contracts 
 in the futures market, are enabled to sell flour enough to insure their 
 full-time running until, usually, January 1st. As the wheat move- 
 ment increases late in the fall and the mills purchase ''cash" wheat, 
 the futures that were purchased are gradually sold. That is, the 
 hedges are closed out as the actual wheat is purchased. 
 
 When one considers the number of large milling centers, it is 
 ^possible to realize the immense volume of hedging on the buying side, 
 which begins in July and continues to the middle of the fall. As this 
 buying begins before the heavy volume of hedging sales by the eleva- 
 tor companies fairly starts, the effect is to offset the declining ten- 
 dency of prices caused by the early crop movement. It is safe to say 
 that there are very few mills of 500 barrels a day capacity in the 
 country that do not hedge their flour' sales and their wheat stocks, 
 when there is a balance either way, by purchases or sales in some 
 futures market. It would be suicidal for a large mill not to do so. 
 Likewise, a terminal elevator company or a "line" company would 
 be inviting disaster to fill its tanks or its houses with unhedged 
 grain. Many a country elevator owner or company has met disaster 
 
by carrying a stock of unhedged grain; yet it is common report in 
 the grain trade that many co-operative farmers' elevator companies 
 do not permit their managers to place hedges in the futures markets 
 against grains in their houses, and so they compel the managers to 
 speculate on their cash grain. 
 
 It may also be said that banks, when asked to loan money on 
 grain in elevators, demand that the grain be hedged. They do not loan 
 money for speculating in grain. On grain that cannot be hedged, 
 a. much smaller amount will be loaned, compared with the price, than 
 on hedged grain. 
 
 How Country Grain Dealers May Hedge. 
 
 There are throughout the principal grain growing states, say 
 from Michigan and Ohio west, including Indiana, Illinois, Missouri, 
 Iowa, Wisconsin, Minnesota, the Dakotas and Montana, Nebraska, 
 Kansas and Oklahoma, many thousands of independent grain buyers, 
 each owning his own elevator, a.nd farmers' co-operative elevator 
 companies. During, a season when grain prices have a steady ad- 
 vancing tendency, they make money by carrying stocks of unhedged 
 grain-. But in seasons when prices go the other way, they lose heavily, 
 and many of them are actually crippled. The readjusment from the 
 present high price levels to normal, pre-war prices for grain, — and 
 such a readjustment is inevitable, — is likely to take many of them 
 down as the first winds of fall shake off the autumn leaves, unless 
 they learn to hedge. 
 
 At the beginning of the crop movement, when the farmers are 
 selling their grain freely, it. is impossible for the country dealer to 
 get cars enough to ship grain as rapidly as he purchases it. Further- 
 more, it requires from several days to as many weeks for the grain to 
 reach a terminal market after it has been shipped, and a decline in 
 price may come meanwhile which would not only wipe out all the 
 profit but cause an actual loss. This hazard may all be avoided by 
 hedging. 
 
 Although the unit of trading in the futures market is 5,000 
 bushels, 1,000-bushel lots of wheat, corn, oats, rye or barley can 
 readily be sold. Therefore the country dealer can easily hedge his 
 daily purchases.. All that is necessary to do, after he has bought 1,000 
 bushels of wheat or other grain from the growers, is to wire some com- 
 mission company that handles "cash" grain, as follows: "Sell 1,000 
 bushels of December wheat", or other grain, as the case may be. Now 
 the country dealer may rest easy and not worry about price changes. 
 As soon as he has purchased another 1,000 bushels, he will again wire 
 an order to sell in the futures market. 
 
 When he gets a car, he will ship the grain to the commission 
 company, with instructions to sell it on arrival, and, as soon as it 
 is sold, to BUY 1,000 bushels of December. The latter transaction 
 closes out his hedge. As a car load is more than 1,000 bushels, two 
 cars with an approximate total of 3,000 bushels could be shipped to 
 better advantage, as that amount could readily be bought or sold 
 in the futures market. Transactions in the futures market must be in 
 multiples of 1,000 bushels. 
 
 I have seen a commission man sell a car of wheat to a mill and 
 
 10 
 
then rush to the pit and buy 1,000 bushels of some future there. „ This 
 indicated that the country shipper had hedged the grain previous to 
 shipping, and had instructed the commission house to "take off" the 
 hedge as soon as the "cash" grain was sold. Such a transaction may 
 be illustrated as follows: 
 
 A Transaction Illustrated. 
 
 A country dealer buys, in the course of two or. three days, or some 
 times even in one day, 1,000 bushels of wheat at an average of $1.50. 
 To this he adds 3c as his margin-for profit and expenses. Then he 
 sends a night message to his commission house : "Sell 1,000 December 
 wheat." This is sold equal to $1.55 at the country station, say. In 
 a few days he has bought another 1,000 bushels, so he repeats the 
 order ; and again when he has bought a third 1,000 bushels. For con- 
 venience, let us assume that it all averaged $1.50, plus the 3c margin. 
 Two cars are finally secured and the 3,000 bushels of wheat loaded into 
 them and shipped to the commission house. The instructions are 
 to sell the wheat on arrival and BUY 3,000 December. 
 
 Between the purchase of the wheat in the country and its sale at 
 the terminal market, prices decline 10c, let us assume, in order to 
 illustrate what frequently occurs. Therefore the "cash" wheat is sold 
 at equal to $1.43 in the country, and the December is bought at a 
 price equal to $1.45, as both the "cash" and the futures declined 10c. 
 No allowance is made for the commission paid the commission house 
 (which is 1 per cent) as that would tend to complicate the illustra- 
 tion. 
 
 Now the dealer has clearly lost 10c a bushel on his "cash" wheat, 
 but as he sold the future at $1.55 and "bought it back" at $1.45, he 
 just as clearly gained 10c a bushel on the latter. In other words, 
 he lost on his wheat but gained an equal amount on his- hedge. The 
 hedge actually saved him from losing 10c a bushel on the 3,000 bushels 
 of wheat.' His actual profit is in the 3c margin allowed on the original 
 transaction. 
 
 Had the market advanced 10c instead of declined, he would have 
 gained 10c on his "cash" wheat and lost 10c on the future. But by 
 hedging, his business was on a safe, commercial basis. Had he not 
 hedged, he would have been doing a highly speculative business. 
 
 They Blame The Board of Trade. 
 
 One of the unfortunate results when grain dealers, particularly 
 farmers' co-operative elevator companies, take speculative chances 
 by carrying unhedged grain in their elevators, is this : They are bound 
 to be caught in a declining market sooner or later and lose heavily. 
 Then they place the blame on the Board of Trade, the system of trad-' 
 ing in futures, and the "grain gamblers." Yet they themselves are 
 as surely gamblers, and with much less reason (for they are taking 
 blind chances), as was "Old Hutch", in the eariy days of the Board of 
 Trade ; "Jim" Keene and John W. Gates, New York Stock Exchange 
 men, each of whom lost several millions trying to corner wheat; or 
 Joseph Leiter, in the 90's, who actually cornered the market yet lost 
 several millions because he didn't know when to let go. There was 
 
 11 
 
another young man, George Phillips, who, also in the 90's, cornered 
 the corn market, and "got away with it." These men were indeed 
 grain gamblers, but no more so than the country dealer who fills his 
 elevator with unhedged grain, and trusts to luck that prices may ad- 
 vance: for he may "go broke" while waiting. There is no business 
 necessity for this kind of speculation ; and the grain dealer or the miller 
 who does not hedge should recognize himself as a speculator, and 
 not regard himself as a conservative business man. 
 
 Speculation and Speculators. 
 
 Speculation on the Board of Trade of the kind carried on by the 
 men mentioned, and by some not mentioned, is as dead as the Louisi- 
 ana State Lottery. It was killed by the Board of Trade itself. It 
 would now be just as impossible to corner wheat or corn, as was 
 openly done by Leiter and Phillips, respectively, as it would be to 
 revive the lottery. > 
 
 The wide publicity given to the cornering of wheat in early days 
 by "Old Hutch", and his boasts (which he made good) every day on 
 "the floor" of how much he would advance the price that day ; news- 
 paper accounts of numerous "deals" after that, up to the pyrotechnic 
 days of the two young plungers, Leiter and Phillips, whose market 
 manipulations "incited" first page headlines in daily papers in every 
 market center — such publicity was the worst kind of advertising the 
 Board of Trade has ever had. It was the worst kind, because it gave ' 
 the general public the impression that fostering speculative "deals" 
 was the Board's chief function, whereas they were merely eruptions 
 or excrescences. Yet the wide publicity given to such "deals" actually 
 brought about a correction of the greater evils of. speculation. It 
 developed a sentiment against such trading. Men who regarded the 
 grain exchange merely as a private game preserve have been discour- 
 aged and made to see that the other members and the public have 
 superior rights, when commerce and the price of foodstuffs are in 
 question. 
 
 Organized Speculation Prevents Monopoly. 
 
 Without the futures market and organized or regulated specula- 
 tion, it would be possible for a few great elevator or mill and other 
 manufacturing industries to create a monopoly that would absolutely 
 control the grain markets. Under the present market system, which 
 has been built up by competing interests, monopoly is impossible. 
 For example, when prices of wheat, corn or oats are low, mills and 
 other manufacturers, exporters, and importers in other countries, can 
 buy in the futures market and compel some one to deliver the "cash" 
 grain to them, or settle at a higher price if the grain is absolutely 
 unobtainable. 
 
 On the other hand, when prices are high — when they have sud- 
 denly been pushed to a 'high level by speculators or by unusual con- 
 ditions, the farmer can use the futures market the same as elevator 
 companies do, if he owns any grain. He can sell for future delivery, 
 and sell his "cash" grain later and at the same time "buy back" his 
 hedge. Farmers, by using the futures market, could be the balance- 
 wheel, for they would be more powerful than any. group of speculators 
 
 12 
 
or all of them combined. But the farmer seldom takes advantage of 
 high prices or an advancing market. Individually, of course, there are 
 exceptions : but collectively, the farmers will watch. prices advance 20c, 
 30c, or 40c, and then sell their grain when prices have declined again. 
 Then they will curse the mythical price "manipulators" and "grain 
 gamblers." 
 
 I have heard presidents and secretaries of farmers' organizations 
 declare : "The farmer is a business man !" So he is — in the manage- 
 ment of his farm ; but the marketing of crops is a specialized business 
 that he has not yet mastered. The existing system of crop distribution 
 by means of grain exchanges is the result of a gradual evolution from 
 the crudest possible methods of marketing, such as still continue in 
 Russia and Argentina, for instance. If the farmer would learn to take 
 advantage of the opportunities to sell his crops at the satisfactory 
 prices from time to time afforded by the existing market system, he 
 would not then condemn the markets when prices decline. 
 
 Speculation vs. Price Manipulation. 
 
 There is a wide difference between speculation and price manipu- 
 lation. Sentiment among the best houses of the Board of Trade, in 
 the last few years, has turned strongly against heavy speculation by a 
 few powerful traders who may attempt to influence prices, although 
 there is no thought of actually cornering anything. 
 
 Yet there are other men who at times' trade heavily in an attempt 
 to anticipate the slower working out of the law of supply and demand. 
 That is, "they try to "beat the law of supply and demand to it." For 
 example, if prices are high in the spring or early summer and a 
 study of crop conditions leads such men to believe the supply will 
 be in excess of the demand in the fall, they will sell the July future 
 short, and later sell the September short. Or, if their study of crop 
 conditions leads them to believe the crop will be short, and therefore 
 the demand greater than the supply, they will buy the futures, expect- 
 ing higher prices. 
 
 Not only must the big speculators study supply and demand 
 conditions, but they must also have an. accurate idea of price levels — 
 whether the average price is too high or too low. For example, 85c for 
 wheat in Chicago was a fair price some years ago, and $1 was a high 
 price. Yet there were men who "went broke" selling it short at. $1, 
 and others by buying it at 70c. Men who buy or sell grain futures 
 after a study of general conditions that affect. prices, and then await 
 the working out of the law of supply and demand, are speculators, 
 it. is true, but they are not market manipulators. 
 
 Sentiment has strongly developed against speculation that fends 
 to unduly influence prices, while actual manipulation would not be 
 tolerated' Sentiment has also developed against "public" speculation 
 in grain, and many houses now discriminate against accounts of per- 
 sons who do not undertsand the market and who would therefore be 
 certain to lose their money should they persist. 
 
 Yet speculation with its grosser forms eliminated is an integral 
 part of the 'grain business, and it can never be separated from the 
 organized futures market. Why? Because it is impossible to> un- 
 scramble the futures market and eliminate speculation — even if that 
 
 13 
 
were desirable. But it is not desirable to try to eliminate speculation 
 from the grain market, because regulated, intelligent speculation is 
 an actual benefit to the market and therefore to the producer of grain, 
 to the manufacturer of grain products, and to the consumer. 
 
 To eliminate speculation from the futures market would mean 
 the elimination of the market itself. This would only turn the cash 
 grain business into a highly speculative business for all concerned, 
 and necessitate the entire reorganization of the milling and grain 
 handling industries. 
 
 How Speculation Serves a Useful Purpose. 
 
 Speculation in grain futures gives volume and breadth to the 
 market, thus making it possible for elevator companies, mills and other 
 manufacturers, shippers and exporters, to place their hedges at any 
 moment during market sessions. Activity is greatly aided by the 
 scalpers, for they are always trading. The scalpers in the pit, who 
 do a considerable part" of the speculative business, correspond to the 
 "stock jobbers" of the London Stock Exchange, where they are recog- 
 nized as a valuable and necessary part of the market. The stock job- 
 ber is valuable because he is at all times ready to either buy or sell 
 at some price. That is, he "makes a market" for offerings when, at 
 the moment, there is no investment demand nor offerings. This is 
 exactly what the scalper in .the grain futures market does. Therefore 
 the scalper should be recognized as an important market factor. 
 
 Before the war, which brought big and rapidly-moving price 
 fluctuations, the scalper was more of a factor than he has been since 
 1914. He is at home when the fluctuations are small and the market 
 does not have a definite trend, or when the general movement is 
 slow, with many small changes. Scalpers thrive on ^c fluctuations 
 but cannot follow such rapidly moving markets as have been the rule 
 since 1914. 
 
 Therefore the scalper has, since that year, partially been elimi- 
 nated as a market factor. Yet a change in the rules of the Board of 
 Trade has also had an effect in this direction. That is, a new bro- 
 kerage rule, which makes it obligatory for Board of Trade houses to 
 have their orders in the -futures market executed by brokers, instead 
 of by their own salaried pit traders, as was formerly done. The bro- 
 kerage is 75c for 5,000 bushels, and as trading in the corn pit has been 
 heavy for several years, expert brokers are enabled to make large in- 
 comes. Furthermore, most of them are too busy on orders to trade for 
 themselves. The total volume of scalping at the close of 1919 was 
 probebly not more than 25 per cent of its pre-war volume. 
 
 Some Board of Trade houses do not desire speculative accounts 
 They prefer to devote all their attention to the "cash" grain business! 
 There is a noticeable tendency in this direction, when one looks back 
 a few years. In fact, it is becoming more apparent to the members 
 of the exchange themselves that the true function of the Board of 
 Trade is to make a market for the grain crops of the country and to 
 efficiently and economically distribute them, storing the temporary 
 surplus from time to time until it is required by the manufacturers 
 Making prices, beyond the minor fluctuations, is left to the law of sup- 
 ply and demand. v 
 
 14 
 
Cost of Marketing Wheat Lower Than of Any Other Commodity. 
 
 i In the opening paragraph of this article, Herbert Hoover is quoted 
 as saying: "The Chicago Board of Trade is the most efficient and eco- 
 nomical agency in the world for the distribution of foodstuffs." 
 
 The cost of marketing wheat, corn and oats, which can be hedged 
 irf the futures market, is lower than the cost of marketing any other 
 farm product. 
 
 Grain is now sold on arrival at a terminal market for a 1 per cent 
 commission. Before the war and the increased cost of doing business 
 it was lc a bushel. Every person who handles other farm products 
 takes at least 10 per cent of the selling price. 
 
 The reason for the low cost of marketing grain is found in the 
 organized markets — the grain exchanges, where all purchases and sales 
 are on a competitive basis and where dealers protect themselves by 
 hedging in the futures market. Because of the factors mentioned, busi- 
 ness is done on close margins. 
 
 The cost of marketing wheat, corn or oats — including all charges 
 between the farmer and the manufacturer or exporter, except freight — 
 is approximately 10 per cent. This includes the country elevator com- 
 pany's profit, the commission at the terminal market paid for selling 
 the grain, and the commission paid to some receiver at the market who 
 ships it to some eastern manufacturer or exporter. Thus the country 
 elevator and the "terrible" middlemen we hear so much about, add 
 10c a bushel on $1 corn or wheat by the time the grain has traveled 
 from Kansas to Boston, for example ; and 3c of the 10c is taken by the 
 first buyer, the country elevator company. 
 
 A member of a prominent Chicago commission house recently 
 told me that he has frequently wired to stations in Iowa to learn what 
 price was being paid to farmers for corn, and then wired to New 
 England points to learn what price jobbers there were asking for the 
 same grade of corn. This Board- of Trade man told me that the 
 difference between the price paid to the Iowa farmer and paid by the 
 New England retailer averages (not including freight) 10 per cent 
 of the original price. 
 
 Actual transactions are more convincing than mere statements, 
 however. Therefore, details of two are given herewith — if space per- 
 mitted, hundreds might be given : 
 
 On Sept. 14, 1914, before the war had demoralized prices, the 
 following charges for wheat between Kansas farmers and the sea- 
 board and Liverpool, were shown on transactions: 
 
 Cents per bushel 
 
 Price paid farmer 87 
 
 Margin of country elevator 03 
 
 Paid by receiver .90 
 
 Freight, Kansas to Galveston 15 
 
 Inspection, weighing, etc 0025 
 
 Gross margin of receiver * 0125 ' .165 
 
 Paid by exporter at Galveston $1,065 
 
 Charges at elevator and for loading into boat. . .0125 
 Insurance 0075 
 
 IS 
 
Overhead expenses of exporter Ul 
 
 Net profit of, exporter 0125 .0425 
 
 Ocean freight to Liverpool .06 
 
 Cost laid down in Liverpool $1.16 75/00 
 
 The freight was 21c a bushel, and all other charges 8.75c, or gf 
 shade above 10 per cent of the price paid to the farmer. Details-«f 
 another wheat transaction, showing the charges from Kansas to 
 Philadelphia, follow: 
 
 Cents per bushel 
 
 Price paid farmer 87 
 
 Margin of country elevator'. 03 
 
 Inspection, weighing, interest on draft 0025 
 
 Commission 01 
 
 Freight to Kansas City 062 
 
 Paid by receiver in Kansas City .9745 
 
 Mixing in Kansas City elevator ,.0025 
 
 Exchange .0020 
 
 Overhead expenses of receiver 0037 
 
 Net profit of receiver „ . . . .0063 .0145 
 
 Freight, Kansas City to Philadelphia .1560 
 
 1 $1.14 50/100 
 
 The freight from the Kansas point of origin to Philadelphia was 
 
 almost precisely the same as to Liverpool, or 21.8c a bushel. All 
 
 other charges amounted to 5.7c a bushel, or less than 7 per cent of the 
 
 price paid to the farmer. 
 
 The different charges in the two transactions, summarized, were 
 
 as follows: 
 
 1st 2nd 
 
 Price paid farmer 87 87 
 
 Freight , 21 ^218 
 
 ^All other charges and profits 0875 .057 
 
 , Price delivered Liverpool $1.16 75/100 ' 
 
 Price delivered Philadelphia $1,14 5/100 
 
 In Conclusion. 
 
 ' In conclusion, it may be repeated that the Board of Trade, itself 
 does not make prices, nor does it ever buy or sell anything; The 
 Board of Trade merely furnishes an open market and trading facili- 
 ties, gathers, and distributes crop and market information, for all 
 buyers and sellers of the United States and of the world Thus a 
 central market >or meeting place is provided, where all representatives 
 of the great law of supply and demand, whether buyers or sellers 
 consumers or producers, receivers or shippers of grain or produce,' 
 may satisfy their needs. And it is the dominance of thesupply or of 
 the demand that works out the problem of prices. 
 
 16 
 
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