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A present a very good illustration of the practice of switching hedges from market to market in order to secure a profit. The trades of this concern were usually executed by several different commission houses among whom its business on a given market was divided, but no attempt has been made to preserve this subdivision in the compilation, all trades on a given market being combined regardless of who executed them." The Minneapolis and Winnipeg futures markets were so unimportant, comparatively, for the hedges of this elevator that in no case did they affect the decisive preponderance either of Chicago or of Duluth. In the following specified months more than 50 per cent of the future sales were made at Chicago: December, 1914; July, 1915; January, April, May, and August, 1916; and February, 1917. In all other months of the 35 covered' Duluth future sales account for over 50 per cent of the total. So far as any generalization is permissible on the basis of this showing it is that Duluth futures are used preferably to those of Chicago during the heaviest movement of wheat in the Northwest. With regard to comparative trading in Chicago and Duluth wheat futures as distributed through the year, the use of the latter market is more concentrated in the autumn, while Chicago trades are seasonally well scattered.

That the open trades of a terminal elevator should almost without exception show a net sold figure is to be expected. In 12 out of 13 options the final net figure of Appendix Table 87 was an open sale, but in 10 out of 36 trading months there were net open trades bought for Duluth wheat. Such a situation is not found for any other market. The simplest explanation is spreading between Duluth and Chicago. Although transactions in wheat at Duluth were greater in volume than at Chicago, the volume of open trades at Chicago was greater than at Duluth. The latter may be due to economizing in transactions on the Chicago market in order to save commissions (at member rates).

USE OF THE OPTIONS.-As regards the net change in open trades by options, one might expect, in general, for each option a regular rise to a maximum and a regular decline from there to the close of trading in that option, supposing, of course, that the futures are working well and that the purpose of the trading is merely the hedging of grain owned. If the hedges are switched to obtain profits from the spread between options, however, the result will be different. The regularity referred to as one to be looked for in cases of straight hedging is not dependent upon whether the stock of grain on hand increases or declines in quantity with constancy, since with two or more options to choose from, the tendency would naturally be to prefer one for new hedges and to take off old hedges in another, presumably the expiring option. But the necessity of paying commissions on trades is likely to mean the keeping open of a hedge to serve for a number of successive transactions in the actual grain, so that the shifting of quantities hedged from one option to another is likely to be done somewhat more freely in the

Data for this elevator were available in so great detail as to present a problem as to how to condense them to manageable proportions.

No sales of futures were made in June, 1917. See Appendix A.

8 Two months show no trades open and in June, 1917, there was no trading.

local market, where the terminal elevator company executes its own trades, than in others. In 8 out of the possible 13 cases (options) for Elevator A sales predominate with reasonable consistency for the transactions of several months and then purchases with similar consistency to the maturity of the option. In the May, 1917, option the closing change is by sales. There are alternations in many of the options suggestive of switching or spreading practices on the part of the elevator, perhaps the result of attempts to deal with irregularities in one or another option.

The predominant interest of the May option appears from the following tabular statement, in which D or I marks those months in which a decrease or an increase in the open interest in wheat futures is confined to a single option.

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Out of 35 possibilities (months) 11 months show net purchases or sales in a single option accompanied by net sales or purchases also in a single option. In 18 other cases the change in one direction (increase or decrease, as the case may be) is in a single option with a scattered change or no change in the other options. In the six remaining cases the change in one or both directions is divided between two options. There is little opportunity for generalization as to the seasonal variation of the preference for different options. Section 4. Hedging practices of flour mills.

GENERAL POLICIES.-The variation in policy among the larger mills (such as ship their products by rail beyond the circle of a local market) with reference to use of wheat hedges appears in Table 3, which is based on returns from 242 milling companies made in 1919 but referring to conditions and practices before the suspension of trading in wheat futures. Well over half the active milling capacity (barrels per day) of the United States appears to be included in the returns.

TABLE 3.—Hedging policies of flour millers according to returns relating to the

1915-16 crop

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1 Returns tabulated under "in part" are difficult of interpretation and this intermediate class is not well defined.

? Minnesota, North Dakota, South Dakota, and Montana.

3 This company reported hedging possibly 5 per cent of both flour and cash grain.

+ Missouri, Kansas, Oklahoma, and Texas.

5 One company reported 1 per cent hedged.

One company reported only 10 per cent hedged.

7 Ohio, Indiana, Illinois, Iowa, Nebraska, Wisconsin, and Michigan.

Three companies reported hedging to the extent of 5 per cent.

9 New York, Pennsylvania, Maryland, and West Virginia.

10 Virginia, North Carolina, Tennessee, Kentucky, and Georgia.

11 Colorado and Wyoming.

12 Includes 25 mills operated by the Colorado Milling & Elevator Co., all in Colorado except 1 in Utah, and 3 each in Idaho and Kansas.

13 Washington, Oregon, and California.

14 Two companies reported "Do not hedge," then answered "Yes" to question "Do you accept deliveries on future contracts as a general practice?"

Some consideration of the totals will serve to indicate the character of the table as well as to throw light on the general situation as regards mill hedging. With regard only to the number of milling companies included in the returns, of the 242 in the total, 126 (slightly more than half the number) stated flatly that they did not hedge, or reported so small a percentage of hedging that it is treated as accidental. Of the 116 who did hedge, 9 did not hedge flour contracts, though they hedged wheat held unprotected by sales of flour. Slightly more than half of the number of those who hedged flour contracts hedged only in part. The number hedging all flour contracts, which is 52, is identical in the total with that hedging all wheat, but there are frequent variations of identity in detail.

Results as measured by capacity are somewhat different from those for numbers of companies. They are summarized in the following tabular statement:

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The importance of the practice of hedging is greater when measured in terms of the capacity of mills than in terms of numbers. Nevertheless only three-fifths of the capacity of mills reporting belongs in any sense in the hedging class. This ratio is considerably influenced by the large capacity of certain Minnesota mills, which hedge systematically. The ratio of consistent and full hedging to partial hedging is similarly increased by the capacity basis of comparison. Some allowance for dilution in the intermediate group would still leave less than half the capacity of mills in the United States practicing hedging.

This comparison on the basis of capacity means that the large mills hedge to a greater extent than the smaller mills. Average capacities for milling companies in the above table are: Hedging completely, 2,856 barrels per day; hedging in part, 1,244; not hedging, 1,194.9

HEDGING BY MILLS IN VARIOUS GEOGRAPHICAL SECTIONS. The practice of hedging varies greatly among mills located in different sections. The northwestern mills in the Minneapolis territory, even the medium-size mills, generally protect themselves by hedges in futures as completely as it is possible for them to do. In the Southwest, however, many of the rather large mills in Missouri, Kansas, and Oklahoma do not make a general practice of hedging. The mills in the central group of States between the Mississippi River and the Appalachian Mountains do not hedge as much as those in the Northwest, but do hedge to a greater extent than those in the Southwest. Eastern mills hedge more generally than do those in the central group. The mills in the Southern Pacific and Rocky Mountain States hedge even less than those in the Southwest. As a general rule mills hedge less in proportion to their remoteness from Chicago, except in the

In order to avoid the effect upon these results of the capacities of a few large Minneapolis mills, the 242 companies have been given ordinal numbers from the largest to the smallest. The average of ordinals for the hedging group is 80, for those hedging in part 113, and for those not hedging 141.

case of eastern mills. The smaller mills throughout the country generally use hedges much less than do the larger mills in the same sections.

MINNEAPOLIS PRACTICE.-Minneapolis millers consistently use the futures market for hedging purposes, either by selling the options against uncovered stocks of wheat accumulated or by buying futures to hedge uncovered flour contracts accepted. The process of hedging flour sales may be described as follows: The miller receives an offer for 10,000 barrels of flour at a certain price. He looks at the future quotation and if satisfied with the price accepts the order, the price for flour being such that, using the grain-future quotation as a basis, the cost of the flour will yield a satisfactory margin. He immediately buys 45,000 bushels (42 bushels per barrel) on the local wheat futures market. As fast as the miller's cash wheat buyer picks up the needed wheat, his pit man will sell out the option.

It has been frequently stated in times past that the miller's hedge was initially a purchase; that whereas the terminal elevator opened its futures account by selling against stocks accumulated, the miller opened his account by buying against contracts for flour, thus offsetting to some extent the operations of the elevator company.10 An examination of examples of recent mill hedging shows, however, that millers have recently hedged almost as frequently by selling as they have by buying futures. An illustration of the use of the hedging market to protect an accumulation of supplies in anticipation of the close of navigation on the Great Lakes appears in the statements of a representative of a large milling company, with plants at Minneapolis and Buffalo, that in operating their Buffalo_ plant, on account of transportation, it is necessary to have in Buffalo on December 1 a very large proportion of their winter grind. Very seldom are flour sales on hand at that date sufficient to cover this wheat as well as Minneapolis stocks. Therefore such wheat is sold in the futures markets, and as flour buyers come into the market the milling company purchases back the futures and sells the flour. Without the futures (the statement continues), if compelled to lay in the stocks of wheat, they would do so with considerable apprehension, and undoubtedly base their prices both to the purchaser and the consumer on far wider margins than they do now with the "insurance" carried by the future trading.

OPPOSING THEORIES ON MILL HEDGING. The following arguments are advanced by the trade in support of the practice of hedging by mills. Hedging enables the miller to operate on a smaller margin and to sell flour at a lower price relative to the price of wheat than he otherwise could. It enables the miller to accept flour contracts for forward delivery and thus to utilize to the fullest degree the capacity of the plant. Credit can be more readily secured, especially by the smaller mills, when the banks are assured that the earnings of the mill will not be impaired unexpectedly by fluctuations in the price of wheat. The use of the futures market for hedging, and the indi

10 F. M. Crosby (1922 Federal Trade Commission hearings on Market Manipulation of Grain, p. 960) says the flour movement comes after the wheat movement; so they do not offset. He also says (p. 991) that in the two years preceding October, 1922, they had very little forward selling of flour. The hearings here referred to are not printed but the typed transcript of the record is accessible to the public at the office of the commission.

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