enced by the beli he needs of lar tor in placing i oy properly hed waits for oats ter, his operatio ar is involved i nly when it w a future-wh ade-as a he of the "sample uctuates great he ownership rno-grade con acticed. ng. -The hedgi meet critics of the system an any amount, of a satisfactor es afforded b not be safel or individuals d be in excess that Govern The Army had in oats and enerally rests d facility for owhere more S. of as brings the ise, also has ed in propor han in terms 00 barrels of y reason ecomes pos o the grain be required. ound in the the futures alive in the es on the one is of interest cing in detail. 20. The cashrity but much futures as a and unsatis disproportionate to his means. Under such circumstances, even if he finds it unnecessary to hedge regularly, the dealer will be able to make use of the futures for protection against an extra risk. The relation of hedging to the relative trade margin taken by the dealer or manufacturer is elsewhere considered. This relation is in part a matter of scale of operations. GENERAL SIGNIFICANCE OF HEDGING. The hedging of grain held increases the security felt by bankers and others financing the grain trade. It is especially true in the northwestern grain States that the financing of the grain movement rests largely upon hedging as a protection to all concerned in moving or accumulating grain. In the Southwest this does not appear to be the case; certainly hedging in the futures market in this region is not nearly the universal practice found in the Northwest. The argument for the advantages of hedging naturally leads up to the claim that, because of the futures market, grain is handled on a much lower margin from producer to consumer than commodities without such opportunity for the elimination or reduction of risk. This advantage can, however, more plausibly be attributed to broader and more efficient competition than directly to the reduction of risks. The hedging argument may be overworked. Merchandising is certainly possible without hedging. Although provision futures are available they are but little used for hedging in the hog and provision trades. HEDGING IN RELATION TO PERIODICITY OF SUPPLY.-The periodicity of the supply of grain makes it necessary that some one carry surplus stocks on hand immediately after the harvest through to a season when they will be taken by consumers. The producer might, and does in part, perform this function, and he is in some respects and some localities favorably situated for doing it. But producers are commonly in need of money to be obtained from the prompt sale of their crops, and they frequently have no satisfactory storage facilities with regard especially to protection from the weather and from destructive insect and other pests. As regards ultimate consumers, it is sufficient to say that they do not store supplies of grain or flour for future needs to any important degree and are probably tending more and more to live and trade from hand to mouth. There is a tendency for converters to control elevators of their own, but this does not change the mechanics of grain flow. Periodicity of production is reflected in periodicity of marketings with no appreciable tendency on the part of consumers to take up the slack. Merchandisers, therefore, or perhaps some other and possibly some specially developed class of middlemen, have to perform the function of holding grain. But the grain merchant's margin is often but a fraction of the range of fluctuations in the price of grain even in a single month. Like other merchants with a greatly varying working-capital requirement, moreover, he does business largely on borrowed capital. The seasonal concentration of market*Ch. VI, p. 239. These topics are considered in Ch. VI. np. 240 and 241. tect, not only his profits, but his capital, especially at he may believe it good policy to carry large stocks of THE PART OF THE SPECULATOR.--At the other end of trade there is, it may be assumed for present purposes The maintenance of an open and continuous market sales be made impersonally to all takers, regardless o of the trader. If the speculators in general take ov from the hedgers, that relation establishes the economi the former, since the reference is to a market relation, parties to a particular contract. Section 3. Illustrations of hedging by specific concerns. In the tables and diagrams of Appendix A are pr numerical data relating to the hedging practices of tw ern elevators and two Northwestern mills during peri 1918. The methods employed by these concerns are pr representative of the hedging and spreading practices and mills in this territory. Elsewhere there would proba a less scattered distribution of futures among the mar shifting between markets than for the first of the el considered. The following statements refer to these tab LIFE OF OPEN TRADES FOR ELEVATORS AND MILLS.-The trades to transactions in futures has an interesting bear ing methods. Close hedging by itself would tend to inv ratio than results where no importance is attached to a coincidence in time between cash and future transaction one hedge may be made to serve for several successive the actual grain. But the shifting of hedges and the spreading, etc., also involve a low ratio of open trades to In general the ratio of open trades to transactions is 1 elevators than for the mills. By seasons, the ratio is us for elevators from January to March. For mills the comes less regularly but usually earlier. The elevator more consistently and strongly on the short side of the are the mills on the long side. The elevator that trades in various markets shows ratio of open trades to transactions at Chicago, and th larly at Duluth, the local or home market in both cases lower ratio. Transactions in other than the local mark sparingly used. Among the options, for the trades of th May and July show the highest ratio of open trades to t while for mills, September is second to May in this respec COMPUTED AVERAGE LIFE OF OPEN TRADES.-The avera open trades to transactions is an index of the average le of such open trades. The quantity open at the end of th or the middle of the month in the figures for the first is true, is not necessarily representative of the average con ing that specific month, but in using averages for a c number of months the figure for open trades thus arrived regarded as representative of conditions during such a lon This weakness of the data for the purpose of computing average will affect the significance of a figure for a single =of grain. direct measures of the average length of life of open trades, as shown in the following table, by multiplying them by 302-the assumed average number of days in a month-in order to express the results in terms of approximate average days open: TABLE 1.-Estimated days life of open trades, for certain elevators on the short side and for certain mills on the long side, for years specified S. presented so two Northwes eriods precedi probably fair ces of elevato bably be foun arkets and le elevators her ables. e ratio of oper aring on hedg nvolve a lower a nearly exa ons and when e holdings of he practice of transactions lower for the usually lowes e lowest ratio Ors are much market than 1913-14. 1916-17.. 1 See footnote below. 2 A very small quantity of bought open trades is dealt with negatively. Elevator B, as previously stated, uses only the local market, hence the average life of its open trades might be expected to be somewhat greater than the corresponding figure for elevator A. Mill B, also, confined its future trades to a single market. But elevator A's average is over a month. Both the elevators show shorter lived hedges in 1915-16.5 Because elevator A is so nearly consistently on the short side, it is possible to compute an average life of open trades by markets and options, as is done in the following table. The average result for the Duluth market for 1917 is the only one appreciably affected by the inclusion of long open trades. For elevator A it is possible to test the effect of the roughness in the register of conditions as regards open trades through doubling the number of points at which the quantity open is actually determined. The representative quality of the average at the open trade end of the ratio is thus improved. Results are shown in the following tabular statement. Quantities are thousands of bushels. 5th of month basis: 1914-15.. Three-year average.... 15th and end of the month basis: The fact that the difference between the results in the two cases (between 30.4 and 29.7 days) is so slight is indicative of the fairly representative quality of the open trades, even when determined merely at monthly intervals. There is an important limitation upon the significance of the result of deriving an average life of open trades by the method suggested. But if it can be assumed that the trades are open consistently on one side and there is no shift from a condition of open sales, for example, to one of open purchases, there is no fundamental difficulty. Because of the fact that there is usually such a shift in the mill hedges used, it is not often applicable to them. The difficulty caused by fluctuation between an open short as regards the futures and an open long condition makes it impossible to compute directly the days open for the more important mill (Mill A). 1 The results for markets and options are subject to qualification. The ratio of App open bought trades negatively. For the purpose of computing the average duratio ments on the futures market, they may better be taken positively. In the computa are so taken. But the method is not free from objection. With the open trades gi of the month (as for elevator A), this device accomplishes the purpose fairly well. B the result does not quite conform to reasonable requirements as regards methods of i in taking open trades at the middle of the month to represent the average condition fro The point can best be understood in terms of graphics. A straight-line change i figure to another is assumed. When a pair of successive figures are of the same sign short-there is no complications. When they are not consistently on one side or the o is a change from one to the other side), the straight-line assumption does not work difference may be shown thus: If both open trade figures are positive, that is D B and E A, then the area representing condition in terms of days open, D BA E, is evidently 1⁄2 (10+18) X30-420. But i condition is negative, i. e., D C, then the area D C A E, representing the number o 1⁄2x10x (10×30) +×18×(1830)=227. The value of this area long or short for thes 18 of a month short and 28ths long) is the difference between the positive and negative positive. The use of the ratios of Table 90 in computing life of open trades is thus subject exaggeration where open trades are taken positively regardless of the sign. The use of a computation also somewhat limits the significance of the results. 000 bushels. The difference between these two figures may be taken to represent switching and spreading operations. The transactions of the mills and of the other elevator may, in the light of information as to the practices of these companies, be taken to represent purchases and sales of grain or flour. The year 1915-16 shows the greatest volume of transactions in futures, while 1916-17 shows the smallest. The net total transactions by months-sold in excess of bought during the month, or vice versa-show the direction of hedging activity up or down and the seasonal variation of the need of hedging. The net figures by months for elevator A are shown in the following tabular statement. The figures are in thousands of bushels and are in roman type for net purchases and in italic for net sales. This elevator was predominantly selling futures in August, September, October, December, and January, and buying them in during the other months. In other words, it was accumulating grain and grain_and hedging it during the months of heavy crop movement. But June 1916, is conspicuously irregular. USE OF VARIOUS MARKETS.-Much spreading and switching_of hedges between markets was apparently done by elevator A. For elevator B such operations are excluded by the fixed policy of this company to do all its hedging in the local market (Duluth). Mill A, it was stated, hedged systematically, but it sometimes postponed buying when the market looked too strong, or, in other words, was not always particular to hedge up close. It did very little of its hedging outside the local market (Minneapolis) and did not make it a policy to switch its hedges for profit. Hedges of mill B were confined practically entirely to the local market. As the mill is a member of the clearing house, cost of commissions would not be a weighty reason for economizing in transactions. Its low ratio of transactions to open trades is therefore noteworthy. The operations of elevator 1837-26-5 |