The Minneapolis millers state that, in the absence of a hedgin market, the large mills with greater capital resources would have decided advantage, and that operation without hedging faciliti would lead to greater concentration and broader margins of prof consequent upon the greater risks assumed. They maintain th failures are more frequent where hedging is not employed.

On the other hand, evidence, not merely of abstinence from hed ing, but of positive opposition to futures markets, on the part millers in the Southwest appears in resolutions passed by the South western Millers' League on September 24, 1920, excerpts from whic are as follows:

*

Resolved, By the Southwestern Millers' League, at their meeting held Kansas City, Mo., on September 24, 1920, that they condemn the system no prevailing of permitting open option or future trading in wheat. * * * Resolved, * * * The future trading factor in marketing wheat and i products is absolutely nonessential. The added facilities for storing grain ne points of production and the increased milling facilities located in close pro imity to the wheat fields ** eliminate the necessity of terminal mark option trading for the stabilization of the value of the farmers' wheat, or t value of its products when converted into flour and feed. Option trading terminal markets can not be used as a protection on stocks carried by t farmer or country dealer or for such stocks carried for future distribution orders taken for wheat or its products. * * * The farmer must receive fair value for his wheat crop, and this value should not be regulated by t speculator, as now is permitted under option trading. The force concentrated dealing in future option wheat trading by authorized agents representatives of foreign nations, who depend upon the production of whe in America for their supplies, should not be allowed to influence prices whi the American farmer receives for his wheat or the price which the America miller receives for wheat products.

*

*

* * *

Resolved, That our National Congress be requested to enact a law prohibiti the future option trading in all food products, and more particularly that wheat and its products, as now permitted by the various boards of trade a grain exchanges in the United States.

Section 5. The use of futures by exporters.

GENERAL CHARACTERISTICS OF EXPORTERS' HEDGES.-The hedging u of the futures market by exporters of grain presents some distin tive characteristics of interest. The exporter generally trades large lots, at least his sales are usually in large lots. The lot use in trading in general tends to conform to transportation condition The exporter is disposed to use the futures market, even where I expects his future contracts will remain open only a very short tim because he can get better execution and be more sure of his pri on a large quantity in the much broader futures market. He ca not often immediately buy all the cash grain he wants, but, instea must wait for offers of cash grain in sufficient volume and must gi careful attention to position and other requirements in acceptin them.

A practice that is common in this branch of the grain trade an rather exceptional in any other branch is the so-called "exchan of futures for cash." The elevator having sold, to the exporter so many cents per bushel over some specific future (December whe for example) is given futures by the exporter's broker (the export being the seller and the elevator the buyer of these futures), an thus the elevator's hedge sale is offset and cleared. The elevat

11

by the exporter's broker undoes in turn the hedge purch ably made at the time of the exporter's forward sale f to Europe. The advantage to the exporter, in additi connected with the usual hedging function, consists in afforded for filling large orders promptly. The cash more easily put up appreciably through a large operati futures. No transaction in the pit is necessary in effec change and no commission on the future need be paid if t is effected immediately. For the latter reason it is us exporter to give up the future immediately at Chicago, similar contract at northern markets is not infrequent later price fixation. The price fixation may also be p Chicago, but Chicago merchandisers are not fond of t as they have found it may involve the financing of he calls on contracts giving them no compensating advantag Exporters are likely to have very large commitments in sales abroad against which they have only very small acc of grain purchased, and they therefore hedge more oft initial purchases than through initial sales of futures,' may happen that they purchase grain to arrive in anti contracts of sale, in which case the hedge they need is a In this respect, so far as they are a class distinct from elevators, their relation to futures is more like that of the of the terminal elevator companies. But in the years fol war their open interest was not in the buying side so mu merly. The hedges of exporters for which data are plott grams 20 and 21 in Appendix C include certain elevato more largely in the form of sales of futures.

12

Probably the duration of the risk on account of the ti which cash commitments must be open (sales not covere chases of cash, or vice versa) is less in the case of the exp it is for the mill or elevator. The average length of time is open (meaning perhaps the ordinary practice) for is said to be not over two weeks.

Purchases of cash grain by exporters may not require the futures as a hedge because the offer of the elevator porter is in some cases made and accepted at a differend under some specified future with the price per bushel to b instruction from the buyer to sell the future in question to the price. While the pricing of grain under such a con ally occurs promptly, it may be postponed for several Only when the price is fixed does the direct price risk o porter begin, and prior to that time there is no occasion f hedge the export sale unless or until the purchaser fixes before the exporter buys the grain; and if the latter occu the former the exporter's purchase needs to be hedged. He the futures market in the interval, but not as a mere hed type of grain contract is described by a Chicago elevator follows:

11 Rule XIV, sec. 9A, of the Rules of the Chicago Board of Trade. 12 Cf. statements of exporters in 1922 Federal Trade Commission hearings Manipulation of Grain, pp. 188, 238.

We may sell or buy a certain amount of wheat on which we or the buyer or seller may desire the trade left open for some future termination. In buying or selling this way we sell basis of a premium over a certain future, which gives us the right, or vice versa, the same right to the buyer or seller, to name the price during the life of the future. In this way we may have large quantities of grain sold or bought against which there are no futures until the trade is practically concluded [through the fixing of the price], at which time our books will balance.

As a result of this practice, future and cash trades, as the latter are taken on the books without distinction as to whether priced or not, will not be equal to each other, even when the policy of the concern is to hedge closely and strictly.

Export sales are generally on a grade basis. Foreign demand is less exacting than domestic demand as regards qualities not well represented in the grade requirements. Exporters can, therefore, more readily take grain by way of delivery on future contracts, and in fact buying hedges of exporters are more often allowed to run to delivery than are hedges of American millers.

The above statements regarding hedging by exporters may be summed up as follows: Their commitments are of large size; their open interest is commonly on the bought side; sales to them by elevators frequently involve an "exchange" of the cash for the future at a specified difference; their future trades are not held open long; and some of their cash sales are made at a price later to be fixed and therefore require no hedging.

OTHER USES OF FUTURES BY EXPORTERS.-The exporter (or other grain merchant) may use the futures market in connection with his grain business otherwise than by way of direct hedging. Either in preparation for the acceptance of an offer at so much over some option, or in order to make the most of an advantageous turn of the futures market after such an offer has been accepted but while the price is not yet fixed, the exporter may buy one option and sell another against it, the first presumably the one maturing earlier; for example, he may buy September and sell December wheat. When he is preparing for an acceptance, the bought future may be used as the basis of the offer; then when the cash grain is bought, the option purchased may be sold and the future sale remaining open will become a hedge against cash grain held. If the price on the sale abroad is fixed before the cash grain is bought, futures are bought so that there is an excess of future purchases open sufficient to cover the export sale of cash grain. Until the cash grain is bought or the price on the sale fixed the future trades are merely a spread and not a hedge, though used in legitimate extension of hedging operations.

Some exporters do not confine themselves to strict-rule hedging, nor even to spreading operations auxiliary to hedging. Futures may be bought in anticipation of sales abroad. This is to a greater or less extent a speculative operation, and only a small part of foreign orders can safely be thus anticipated. Or the speculation may take the reverse form of a sale abroad accompanied by a tendency to wait unhedged for a favorable turn of the market, as was alleged to have been done largely in the fall of 1920. It is stated by those in position to know that American exporters do not do this. But branches of foreign houses frequently take a speculative position. Sometimes operations that appear thus to be specula

1837-26-6

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ཟླqས༦-V anticipation of the movement of the new crop 30 days even to the extent of 90 days ahead. Whether an expo an interoption or intermarket spread depends upon his to premiums and discounts and their prospects. There ging in the purchase of the options even to the extent of speculation, if it is felt that prices of cash grain are while the purchases will often lead the sales under the o dition.

In Appendix C some data of the hedges and spread exporters and elevators are presented in the form of diagrams.

Section 6. Commercial and territorial extent of hedging.

SOURCES OF HEDGING WITH REFERENCE TO ITS DISTRIBUT DEALERS.-In general it appears that among grain dealer hedge most consistently in large volume are the termin merchandisers situated at or near markets having excha ing facilities for trading in futures. The great volum owned by them usually makes hedging imperative. So distributing centers they will deliberately speculate " by storing owned grain unhedged, thus usually, it is sa more from storage. Large elevator merchandisers at so i primary market as Omaha, where the establishment futures market has frequently been attempted but with sca do not often hedge according to strict rule, but rather pa according to their judgment of price conditions.

Wheat stored in a public warehouse, if hedged, is hed owner. The user of public storage capacity in this way miller or a shipper. Warehousing apart from mercha milling, it appears, has long been on the decline.

Grain may be accumulated and hedged with reference delivery as an outlet. Of course, such delivery on futures i possible alternative and the merchandising elevator compa any time buy in its futures. This kind of hedging is of interest because it probably represents the original and fu type of hedging procedure. The hedging of grain bo immediate or prompt resale is logically, though perhaps no of time,18 a later development.

Commission merchants, as such, or receivers, have no oc hedging since they do not own the grain. But commissio the Northwest hedge systematically for customers whom financing.14 14 The hedging practices of exporters and mills dealt with in previous sections.

COUNTRY ELEVATORS NORTHWEST CONTRASTED WITH SOUT In the territory tributary to Minneapolis and Duluth, h almost universally the practice of country elevators. The vators with head offices at Minneapolis have their policies de at the terminal market and they are more important in t

18 The futures originally dealt in at Chicago were for "the month" and month" delivery.

14 See Vol. 1 of this report, p. 216.

days or possibly xporter will use his judgment as ere will be lag. tof unqualified are going up; e opposite con eads of certain of tables and

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ers those who ninal elevator changes offer ime of grain Sometimes in in the cash said, earning important I of a local Scant success,

partially and dged by the y may be a andising or ce to future is only one any may at particular undamental bought for Lot in point ccasion for on men in they are have been

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market cash commission men, and are thus under more or less_compulsion to hedge to protect their terminal market creditor. Most. if not all, Minneapolis grain merchandisers hedge consistently, and it appears that a great majority of country elevators in that districtthat is, in the great spring wheat territory-hedge regularly.1

15

In the grain-producing Southwest, the winter wheat belt, the hedging use of futures is much less frequent, and in fact is not general. This does not necessarily mean that country elevators there go altogether without protection from possible price decline, though many do. Among reasons offered in explanation of the situation are the following: The country houses in the Kansas district are smaller and, therefore, the risk is smaller. They are also nearer the market than in the Northwest, partly owing to the importance of the country mill as a buyer. Kansas country houses also do a great deal of selling to arrive, and this is in effect a form of hedging, though it does not involve the use of the futures market by the seller. It is also said that in this section there is a choice of markets. New Orleans or Galveston may be paying more for wheat than Kansas City, under which circumstances it may be sold directly for shipment to these ports without a future being sold at Kansas City, the country dealer thus taking a wider margin and carrying the risk. In the Northwest, also, commission-house financing may cause the country elevator to be influenced in favor of hedging."

16

OTHER CONDITIONS.-The territory tributary to Chicago is geographically less well-defined than in the case of Minneapolis and Kansas City. The practice of hedging on the part of country elevators in this area doubtless varies a great deal. It is said that the smaller shippers hedge very little. Corn and oats are on the whole more important crops in this territory than wheat. There are few line elevators surviving in the Chicago territory. Farmers' elevators (in general the cooperatives), according to limited observations made at country points in Illinois and Iowa, are less inclined to hedge than other types.

Of course, the largest concerns holding grain, whether at terminal markets or in the country, and whether converters or merchandisers, do hedge. Chicago draws this class of future business from a greater distance than any other market. Indeed, at times considerable hedging has been done there by European grain dealers. Canada is a regular source of hedging and other future trades made on the Chicago market. Future trading interests at Chicago (of course, the wire houses especially) are inclined to overstate the extent and degree of hedging by country dealers.

On markets other than the three specified the situation is similar to what it is in the territory near Chicago. It is flatly stated that hedging is not the practice of the territory tributary to Milwaukee. East of Chicago generally there is less hedging than west of that market.

HEDGING TO PROTECT THIRD PARTIES.-There is one case of country elevator hedging where the futures market is used to protect third

18 See Vol. I, p. 214.

16 For more detailed consideration of reasons for the differences referred to see Vol. I of this report, Ch. IX.