grain, whether because of the large amount so stored or space is needed for purchased grain. The storage ticket for specific lots, but for grain of the specified grade and elevator man may meet the situation by selling the store buying futures for protection. Whether or not this is method of dealing with the problem, not to hedge suc doubtful honesty, unless the elevator owner has grain o cover his outstanding storage tickets. Diagram 1 COMPARATIVE EXTENT OF HEDGING PRACTIC COUNTRY ELEVATORS IN FOURTEEN PRINCIPAL GRAIN PROPORTION OF HEDGING COUNTRY ELEVATORS BY STATES. statistics show for each State the proportion of country that hedge to a greater or less extent (whether accordin rule or occasionally) in the various futures markets.17 are based upon returns from a large part, sometimes more of the elevators in each of the 14 grain States of the inte of the United States. Elevators answering "Yes" or extent " to the question, "Is it a custom to hedge your g chases?" are counted as hedging, and the figures referre the ratio of such answers to answers of either "No" or flour sales." The geographic distribution of country elevator hedgi dicated by these replies is shown in the accompanying di 17 See Vol. I of this report, p. 214. Section 7. Strict-rule hedging. Certain special characteristics of hedging practices and policies are important for an understanding of the subject. The hedging done may, for example, be more or less close; that is, the transac tions in futures may coincide more or less exactly as to quantity and time with the transactions in cash grain. For convenience where the coincidence in both respects is made as close as practi cable, such hedging is called strict-rule hedging. EQUATING THE QUANTITY OF CASH AND FUTURE COMMITMENTS.As to quantity, since purchases in the country and arrivals from the country are likely to be in scattered car lots, very close hedging by a terminal elevator may involve the frequent sale of 1,000-bushe lots in futures. Evidences of this practice are contained in the book keeping methods of some of the line and terminal elevators of the Northwest that hedge on the Minneapolis market. 20 A grain merchant may, however, prefer to deal in futures in round lots of 5,000 bushels only. In that case he will himself carry the risk of a change in price until the unhedged grain accumulated equals the major fraction of a round lot. In order to hedge closely country elevators are, of course, much more apt to deal in smal quantities, or job lots, than are terminal dealers. It is easy to exaggerate the importance of close hedging, for ex ample, to the nearest 1,000 bushels, at least where the scale of th business is large. The risk on the fraction of a 5,000-bushel lot i relatively inappreciable to the large mill or elevator. The smal dealer especially uses the 1,000-bushel unit, although, as alread noted, hedging at Minneapolis by terminal elevators is often don in terms of such small units. SIMULTANEITY OF OPPOSITE TRANSACTIONS.-As to coincidence i time between the paired transactions the rule that the hedge shoul be made simultaneously with, or immediately after, the cash transac tion, is, of course, subject to practical qualifications. The dealer ma prefer to wait a few moments for a better market. But a brief tim may mean a considerable change in price, so that a dealer who wait for a more satisfactory market takes a speculative risk. 18 Details upon the basis of which the grouping of States with regard to the market to which they ship may be determined are to be found in Vol. I of this report, espec ally at page 132. 19 A part of the difference between Kansas City and Minneapolis territory may be du to the line elevator companies of the Northwest having made more nearly complete r turns than the other types. The head office of a line company might be expected to hav much better records and a clerical force more competent to handle them than the mai ager of an individual country elevator. According to the best available basis of com parison with the total number of elevators in the eight principal hedging States, th proportion of returns varies from one-third for Kansas to four-fifths for Minnesota. Th group of States consisting of Minnesota, South Dakota, Montana, and North Dakota which rank highest in the hedging ratio, also rank highest in the proportion of return to total elevators, and in proportion of returns by other than line elevators to the tota This situation does not indicate that returns by lines are the controlling factor in the: ratios. The ratio of returns by lines to total elevators is greater than the like ratio returns by other than lines in each of the eight States with the single exception Kansas, and the above-mentioned group of four States holds the first two and the fourt and fifth ranks in respect to the ratio of line returns to total elevators, Nebraska takin third place and thus pushing South Dakota into the fifth. 20 At Chicago the usual unit is 5,000 bushels, but " job lots of 1,000 bushels a also traded in. of the market in anticipation of purchases of cash grain later in the afternoon, or before the next opening, or next day. WAITING FOR A PRICE.--As to the price at which hedg tions in futures are executed the theory of strict and cl would seem to require the placing of an order "at the ma cidently with the execution of the cash contract. In fa it is stated with reference to Chicago that a hedge order country" is usually entered with a "limit." For exam case of a hedging sale the price may be specified as "not le Doubtless the price so fixed has a direct relation to the pri the transaction in cash grain has been effected. Orders involve taking a chance that the grain on hand will go u of hedging later at a loss. Commercial judgment is a hedging not only in this incidental way but also in decidi a purchase of grain shall be hedged at all. In the M territory there is much straight hedging "at the market.' NET POSITION OF A LARGE MILL FROM WEEK TO WEEK.- -Th Appendix Table 91, which relate to a large flour mill, se strate the qualifications of the rule of coincidence in quantity when it comes to dealing with concrete cases. The comparatively low ratio of futures to flour cont minimum being 1.5 per cent and the maximum 91.0, but of the figures nearer the former-as well as the fact th most of the period covered the company was on the short futures market, should be observed. Indeed futures wer the bought side only in October, 1916, after the first week the week of April 17 to the next to the last week in July, year covered by these figures, however, was a very unusu is indicated by the low state of flour and wheat stocks abo 1, 1917, as compared with August 1, 1916. Contracts for cash wheat not yet delivered, as distinguis future contracts, also served to protect flour sales ahead. such contracts were always considerable and varied in the ered between a maximum of 5,500,000 bushels in Novemb minimum of 190,000 bushels in June. The variation was seasonal and in general parallel with that of stocks. The of stocks, including contracts, occurred a little later-that beginning of December-and the minimum also a little lat ward the end of July. Flour contracts were always consid excess of wheat contracted for. Flour contracts reached th mum at the end of October, with a lesser peak in April. It was the stated policy of the mill to buy equal quar either cash or futures, for every barrel of flour sold. But futures or cash wheat are bought is always a matter of ju Too high premiums on the cash cause the buying of the Other years would naturally show different seasonal variati the one covered by the above figures. In the nature of hedging can not be exact, or bushel for bushel, as regards of futures to protect commitments not otherwise counterb It does not appear that this company attempted to keep the or even on the dging transac close hedging market" coinfact, however. der from "the cample, in the less than 80." price at which rs with limits unhedged or s a factor in ding whether Minneapolis t." The figures of serve to illu n time and ontracts-the at with most that during t side of the ere open on k and from 1917. The sual one, as out August bushels. This may have been due to an unsatisfactory condition o the hedging market and, of course, toward the end of the perio covered by the table there was no real futures market. The larges net short condition of the concern was 156,000 bushels, on Augus 29, 1916. At this time the mill had over 3,000,000 bushels of future sold. The final net short or long condition was not so important rela tively as it might appear from the absolute figures. Prior to Jun 1917, the ratio of the net short or long figure to that for stock reached an occasional maximum of about 10 per cent. For the sam period the maximum net short ratio was less than 2 per cent. To ward the end of the year, however, as hedging opportunities i futures became unavailable, this ratio increased. NOVEMBER 30 POSITION DATA.-A condensed table showing condi tions for the Washburn-Crosby Co. as of the end of Novembe for five years is shown below. At this time of year the mill position was out of balance to the extent of a little under 6 pe cent in one year, and in another year 2 per cent, and in both case net long of the actual wheat. The maximum figure showing a ne short condition in the actual grain is less than one-third of on per cent.2 21 TABLE 4.-Relation of future commitments to stocks and sales of wheat an ished from In volume e year covber and a s definitely maximum is, at the ter, or toderably in heir maxi antities of t whether judgment. e future. ions from the case s the use balanced. e balance 1 Statement of wheat purchases in all positions. 2 Statement of future contracts, sometimes referred to as options, either bought or sold. Quantity of wheat short or long after deducting flour sales from the total wheat stocks (column plus flour stocks. NOTE.-Footnotes 1 to 4 describe the columns to which they relate, substantially i the words of F. M. Crosby. Column 4 is derived according to the relations of the figure as described; flour stocks, according to footnote 4, are applied against flour sale hence the net" in the caption of column 4. Column 6 is also computed and include The data are from Federal Trade Commission hearings on Market Manipulation of Grain p. 990, but are also printed except for the year 1921, in Future Trading Hearings befor the Committee on Agriculture, House of Representatives, Sixty-sixth Congress, thir session, p. 344 and future trading in grain hearings before the Committee on Agricultur and Forestry, United States Senate, Sixty-seventh Congress, first session, p. 191. EXTENT OF HEDGING BY RULE.-It is impossible to determine th extent of strict rule hedging. Most of the line and terminal elevator In the 1922 Federal Trade Commission hearings on Market Manipulation of Grain p. 993, F. M. Crosby refers to having been 400,000 or 500,000 bushels long on on occasion for a period of six weeks, because the large discount of July under May mad a hedge in July worse than no hedge. in the Northwest. However, some firms, even very 1 hedge strictly and promptly, or, if the hedging market tory, avoid cash purchases ahead of their actual sales. terminal elevator company hedges overnight bids im the morning at the market on the theory that, on the in the long run, the result will be no different even thou obtain a fraction of a cent more on a particular he waiting. THE ARGUMENT FROM AVERAGING.-With regard to tl hedging will work satisfactorily in the long run if no paid to the hedge price, it should be noted that this supp number of transactions in order that the hedging dealer efit of the average. Moreover, the same sort of reasoni applied to the handling of unhedged grain; that is, losse will cancel each other in the long run. The difference fro lar reliance on averaging in connection with the hedgi itself is the fact that, in the latter case, the risk is sm relative loss equal only to what may result from varyi while in the first case all the possibilities of speculative as of speculative gain are present. But, if there is no ac of grain beyond normal merchandising needs, and the dis it is prompt, the risk of the mercantile method may not great, though much depends upon the extent of the prop terest of the dealer, and whether his equity or what is al the margin on future trades is thin. The argument from average effects may also be implied coincidence of quantities and times. In this respect the st of hedging is subject to qualification in practice, even w ing is done as a matter of principle. Inexactness in q adjustments may amount to 10 per cent of flour contra been noted in the case referred to above at page 55. Th of a St. Louis mill designed to restrict the discretion of agement leave a leeway of 35,000 bushels, to which exten may be either long or short at any one time. HEDGE MARKET.-When there is a disposition to strict there is also likely to be a fixed practice as regards whe are to be placed, confining them to the local market. necessary, delivery may easily be made. On the other ha ing in the local market only may itself involve a greater it may not be the safest market, that is, the one where th largest stock of grain and where the smallness of the stock tempt someone to make a squeeze." 66 RELATION OF THE OPPORTUNITY TO HEDGE TO PRICE FLUCTU Hedging has relation primarily to extended price trends, or and lows for a period of months, rather than to slight flu Minor fluctuations are likely to take care of themselves aging. What the merchant fears is the effect of a larger It is of some interest from this point of view to deter proximately how important the minor fluctuations in ques The question thus raised may be reduced to statistical t stating it as a problem of the relation of daily price ranges |