Views from the Trade © Board of Trade of the City of Chicago 1978

© Board of Trade of the City of Chicago 1978. Readi Futur Views from the Trade © Board of Trade of the City of Chicago 1978. © Board of Trade of the City of Chicago 1978. Book III Future^Malkets VSeWS ffOITI the Trade Editor Anne E. Peck Assistant Professor, Food Research Institute Stanford University with Lloyd Besant Director, Education and Publication Services Chicago Board of Trade © Board of Trade of the City of Chicago 1978. Education and Editorial Publications managing editor Lloyd Besant Services editors Dana Kellerman, Anthony Godine Design and Production production design Richard Prey typesetting Paula DeSmet, David Sural art production Sigrid Rutstein 50001 eBoard of Trade of the City of Chicago 1978. All rights reserved. Printed in USA. © Board of Trade of the City of Chicago 1978. Contents Section 1 Introduction to Hedger Uses of Futures Markets 1 1 Introduction to Hedging Virgil A. Wiese 3 2 Case History of Hedging Virgil A. Wiese 13 3 Merchandising and Inventory Management of Commodities: Carrying Charges and Basis Raleigh B. Wilson 27 4 Grain Transportation Carl J. Lessing 35 5 Basis Patterns T.A. Hieronymus 45 6 Futures as a Corporate Tool H. R. Diercks 57 2 Farmer and Country Elevator Hedging 67 1 Farmer Use of the Market T.A. Hieronymus 69 2 Country Elevator Use of the Market E.B. Evans 79 3 Use of Commodity Exchanges by Local Grain Marketing Organizations Virgil A. Wiese 85 4 Country Merchandising and Country Bids Kenneth W. Stotler 91 3 Terminal Elevator Use of Futures 97 1 Terminal Elevator Operations Orrin S. Dowse 99 2 The Use Made of Commodity Markets by Terminal Elevators M.D. Guild 105 3 Commodity Markets and the Terminal Elevator Richard O. Westley 115 4 The Dynamics of Terminal Elevator Management Ben Raskin 123 5 Terminal Elevator Operations G.A. Kublin 131 4 Flour Millers' Use of Futures Markets 141 1 The Use of the Commodity Exchange by Millers Ellis D. English 143 2 The Miller and the Commodity Market Atherton Bean 149 3 The Miller's Use of the Commodity Exchange Fred W. Lake 155 5 Soybean Processors' Use of Futures Markets 165 1 Trading in Fats and Oils Scott E. Cramer 167 2 How a Soybean Processor Makes Use of Futures Markets Richard Williams 173 3 Commodity Markets and the Processor Dwayne Andreas 177 4 A Processor and Futures Markets W. C. Miller 183 6 New Markets and Their Uses 191 1 A Professional's View of Hedging Robert B. Parrott 193 2 Innovation by an Exchange: A Case Study of the Development of the Plywood Futures Contract Richard L. Sandor 207 3 The Importance of Hedging in Futures Trading; and the Effectiveness of Futures Trading for Hedging Roger W. Gray 223 4 Why Does Futures Trading Succeed or hail: An Analysis of Selected Commodities Roger W. Gray 235 © Board of Trade of the City of Chicago 1978. © Board of Trade of the City of Chicago 1978. Introduction The preceding two books in this series present academicians' insights into and understanding of hedging and speculation and the empirical bases of those insights. The perspective of this volume is unique: hedgers describing their own activities. No small part of early researchers' access to hedgers was the series of symposiums sponsored annually by the Chicago Board of Trade in the 1950's, and somewhat less frequently in the 1960's. These symposiums were organized primarily to provide a forum for traders to describe how and why they use futures. As such, they contained a wealth of information on actual trading practices by key industry groups. The papers were informal, each speaker describing key aspects of his firm's use of futures markets. The discussions which followed these descriptions examined major points raised in the papers and often added further insight into hedging practices. Portions of these discussions are also included here. The reports of these seminars have been long out of print and unavailable to many researchers. The uniqueness of perspective these symposium papers provide dictated a decision to reprint a selected group of them, in spite of the rather dated context of many of the examples. Five papers have been added to this collection of hedger viewpoints. Two of these additions provide a more current view of industry hedging practices. In their update, they serve to confirm the importance of the fundamentals presented in the early papers. The remaining three papers discuss from a more general view the critical importance of hedging to futures markets, both in their survival and in their development. Taken together, the papers in this volume will provide an understanding of fundamental uses of futures markets by industry groups. Recently, the Chicago Board of Trade again held a symposium in which traders described current uses of futures markets. The proceedings of this Industry Research Seminar will be available as Futures Trading Seminar, Volume V. With the older, fundamental papers and the continuing new contributions, a variety of case studies is now accumulating in the literature. Once again researchers and teachers will have access to the descriptions of uses of futures markets by a variety of industry groups. Before turning to the readings, it is important to have a clear understanding of what is meant by hedging. What distinguishes hedgers from speculators? Broadly speaking, a position in a futures market is a hedge position if it may be viewed as a substitute, albeit normally temporary, for an intended cash transaction. The advantage of this definition is its generality. It clearly establishes that hedgers are futures participants who also deal with the cash commodity. This definition covers a variety of specific hedging practices including inventory hedging, anticipatory hedging, cross-hedging, processor hedging, and forward-order hedging. However, its generality in definition masks the variety of individual motivations in executing the different kinds of hedges.The papers included here provide insights into these varied motivations for specific hedging practices. The first chapter serves to introduce concerns fundamental to all hedging practices, the importance of the basis and basis changes. The meaning and importance of the basis is established through examples and discussion from the first two papers by Weiss. Wilson's paper contributes a somewhat more © Board of Trade of the City of Chicago 1978. general discussion of grain pricing and an introduction to long hedging. The next two papers concentrate on determinants of basis prices. Lessing describes key features of the transportation system which effect local bases while Hieronymus provides evidence and analysis of these differences and patterns. In the final paper in this group, Dierks provides a current perspective on these hedging fundamentals. The papers in the second and third chapters focus on how and why farmers and elevator operators use futures markets. Hieronymus' paper is unique in the futures literature in its discussion of farmer hedging alternatives. Actual farmer use of futures markets has been limited; the discussion there provides some indications of why. The remaining papers in these two chapters return to discussion of the principles of hedging stocks of commodities. They are from the perspective of country elevator operators, country merchants, and terminal elevator operators and provide examples of both the usefulness of and the difficulties of hedging. There is repetition among these papers. Each, however, describes a unique situation or set of problems created by his situation and therefore adds to our understanding of industry practices. Clearly emerging from these papers is the proposition that hedging does not eliminate all risk nor does it guarantee profits. The papers in the next two chapters examine the role of futures markets in the processing of agricultural commodities. The fourth chapter deals with flour millers while the fifth chapter contains viewpoints from soybean processors. In moving from primarily a storage function (country and terminal elevators) to a processing function, the role futures perform changes. Looking first at the flour millers, the reader finds that millers are often net short the cash wheat. That is, they characteristically make forward flour sales without necessarily having the actual wheat in store. English describes the process for a typical order in his paper. Bean provides another example and isolates factors of key importance in the hedging decision. In the final paper in this group, Lake adds insights into the millers' problems in using futures markets. Turning to the soybean processors, the hedging possibilities are greatly enlarged. There are futures markets not only for the raw material— soybeans—but also for the processed products—soybean meal and soybean oil. The hedging possibilities are much more varied and the hedging use of these markets is much more complex. The four papers here provide examples of this immensely complex hedging use. The final group of papers summarize the importance of hedging use of futures markets through their concern with new markets and market survival. In the first paper, Parrott reviews basic hedging principles, provides another example of the soybean processor's alternatives and then shows how these principles can be and have been applied to the hedging of broilers. Sandor's paper focuses on a nonagricultural market, the plywood futures market. It provides the reader with useful insights into the process of contract development and the importance of the underlying industry to this development. The final two papers, both by Gray, provide a more general analysis of the factors important to the success of a futures market and thereby reemphasize the importance of hedging and hedging usage of the markets. © Board of Trade of the City of Chicago 1978. Section 1 Introduction to HedgerUsesof Futures Markets © Board of Trade of the City of Chicago 1978. © Board of Trade of the City of Chicago 1978.

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