y large dealers et is unsatisfac One Chicag s. immediately i he average and nough they may hedge sale by the idea that no attention is upposes a large er get the ben ning might be sses and gains from the simi Aging practice small and the ying spreads e loss as well accumulation lisposition of ot be unduly oprietary inanalogous to ed as regards strict theory where hedg quantitative acts, as has The by-laws of the mannt the mill et hedging ere hedges There, if and, hedg risk, since here is the k does not JATIONS. r to highs ctuations. by averswing. mine apstion are. terms by to price chances appear to be about equal that the net movement of price between the opening and close of the session will cover only abou one-third of the price range of the day. Section 8. Commercial judgment and hedging. So far as the decision whether to hedge or not to hedge is mad to hinge upon the price obtainable in the futures market, the hedge apparently has no such strict regard for hedging as is often implied in the arguments of those defenders of future trading who empha size the need of hedging facilities. But even if the futures marke is not systematically used by the majority of cash handlers, they may find it useful under special conditions. HEDGING PRACTICES IN RELATION TO EXPECTED PRICE CHANGES.--I hedging is a matter of judgment in the individual case, holders o grain who are convinced that the price will advance, even though they are accustomed to the use of a futures market, may not hedg grain held in relatively moderate quantity, and may thus speculat on a rise. As a matter of fact, some country elevator managers say they hedge only when they think a drop in price is due. If thi attitude toward hedging is common and successful, elevator hedge should in general show gains on the future trades. It is said tha hedging was discontinued by country elevators rather generally during the advance in prices caused by the prospect and the fact the entry of the United States into the World War. Even in the Northwest country elevator men have observed that there is usually an upward tendency of prices toward the end of the crop year and have, therefore, shown some inclination not to hedge. If it is true as said by men in the grain trade, that, after the height of the mar keting, prices advance four years out of five, buying grain withou hedging may be a "good speculation.” It is also stated that there is much less hedging in proportion to cash transactions in a "quiet" market, which condition is also indica tive of the exercise of commercial judgment in hedging or no hedging. The risk is reduced when prices are stable. In the execution of hedging trades, if the quantity is large, judg ment is often exercised as to whether all shall be put out on th market at once. This involves slower execution, but such a hedge often has his own trader on the floor who is in position to watch the market carefully and take advantage of slight fluctuations. Doubt less in the smaller markets care must be exercised in executing hedge so as not to put the market against the hedger. At Chicago the hedging offerings of a particular concern ordinarily make little o no difference, though the effect of simultaneous offerings from vari ous sources may be felt. HEDGING IN RELATION TO DISCOUNTS ON FUTURES.-Even though the grain dealer wishes to hedge consistently, the market may be in such condition that the risk of hedging is too great. For the owner of grain there is danger in hedging when the futures are at a consider able discount as compared with the cash grain. The future and the cash tend to come together in the delivery month. Prior to the delivery month the future should normally be sufficiently above the date of the transaction to the delivery, so that contrac sale may be met by actually storing the grain for delive however, there may be an acute demand for the ca account of a temporary or local scarcity which will p price out of line. Or the futures market may be domina sellers who are bears as to what conditions will be, for the coming May. If the future is below the cash and a hedging sale is such circumstances, and if the purchased grain hedged i the two prices have come together, or nearly so, then, in loss and gain in closing out the two transactions bala other, there will be some uncompensated loss on the Hedging sellers prefer to use the futures only when the mium on the futures over the cash, and it has been stated majority of cases they will not hedge at all when futur marked discount. That the premium of the future over the cash is no adequate to cover the storage charge may be attributed the fact that the terminal elevators are usually glad to of getting only a portion of the expense to the outsider charges, insurance, and interest. Among other considera is always the possibility of the merchandising elevat more by means of selling their cash grain, or a large at a premium over the hedging sale price by reason of or of its improvement through treating and mixing.22 HEDGING IN RELATION TO VISIBLE SUPPLIES.-It is said futures market is likely to be satisfactory for hedging pur there is a large stock of the grain in question at the termin and in storage. Under other circumstances there is no luctance to hedge but also more opportunity to dispose o grain promptly at what is considered a good price. POLICIES OF A LARGE ELEVATOR MERCHANDISER.-The ch the hedging practices of one large concern, as described by of it, is worthy of special consideration. The business integrated, including a considerable line of country ele well as public and private terminals in several markets, sive private wire system, and a nation-wide buying and s ganization. The concern hedges in hundreds of thousands els at a time. Its method, however, involves the use of tl markets with the same exercise of judgment and discretion the same reference to profits from that source as would be in connection with the exploitation of any other commerci tunity. Grain will be hedged immediately or not according to the price is judged by the manager to be too low and w is thought that a better price can be obtained by waiti Orders to buy or sell as taken to the pit by his traders at ing may be given with a limit, but the manager is acce telephone and may change his plan momentarily. Often hi will change and a less favorable price will result from 22 The numerical data of cash-future spreads are subjected to analysis wit to matters in which the elevators are particularly interested in Vol. VI, Ch. V Besides the hedging of grain the concern always has ground products to hedge, with reference to which the policy is similar, or, in fact, probably more disregardful of whether the accumulated stock is carried unhedged or not. Thus, if the futures market is judged to be higher than it ought to be, several hundred thousand bushels of grain or converted grain products may be hedged by a sale of futures, and, if the futures judged to be too low, large sales of grain may be hedged without delay by a purchase of futures (instead of a lower price being waited for), there being meanwhile no change in the situation as regards the contra items to the possible bought or sold open trades in futures. It should be noted that these converted grain products are largely package goods, and, therefore, marketable at comparatively stable prices. The concern purchases large amounts of barley and sometimes hedges them in oats, pound for pound, but also is willing to hold the barley unhedged. The manager felt that for suck hedging the price of oats should be high as compared with barley. He felt no reluctance about hedging one grain in another and had on occasion hedged oats in wheat, also wheat in oats. Hedges of this company may be placed in any of the future markets and shifted as occasion arises, sometimes with a view to obtaining profits from price spreads. A trade on another market may be left open merely to protect a Chicago transaction. The concern also conducts large intermarket and interoption spreading operations as such with accounts kept separately from its hedges. Large contracts for sale to exporters, etc., may or may not be hedged promptly. Finally, it should be added, though the hedges and cash commitments of this concern never balance, they are not so conspicuously out of balance, relatively to the amounts involved, as the so-called hedges of many smaller concerns. OTHER METHODS.-Not many large terminal dealers follow just such a policy as that above outlined. Some elevators in the same general class with the one referred to hedge strictly as soon as they purchase, feeling that any fractional loss they may incur by reason of not getting the best price on a particular lot will be made up to them in the long run by variations the other way. It is noteworthy that one of the largest grain concerns following a strict hedging policy included among its partners some of the most persistent large speculators in the Chicago market. It would be impossible to draw a sharp line of distinction between strict rule hedging and the qualified methods. Moreover, the latter easily pass over into practices corresponding to a different method of dealing with the trade risks in question. Where there is no futures market, the merchant carries the risk himself, though he may limit it in various ways, as by keeping his trades within moderate dimensions compared to the amount of his capital, by not accumulating very large stocks, etc. If there is a well-developed futures market available, however, this may serve his purpose better than anything else, though he may hedge only a portion of the stock carried. Perhaps no class is better qualified generally to assume the mercantile risks of any branch of business than the men actually engaged in it. It is suggested by a grain trade man that a grain dealer who has 100,000 bushels on hand may find it possible to protect himself by པ་དཔཔ་ ཨཙ WIL པ་་་་ J hedge only 30,000. One dealer says, hedging should moderation;" that is, a man doing a fairly large volu business should make use of the Chicago market at ti "to the extent of a fair share of the line that he has." theory according to which some hedging is done, and it acted upon by terminal market dealers. Certain large terests state that they will usually hedge about 50 per grain, but at times not any. They are willing as grain take chances as to their judgment being right. HEDGING AS A SORT OF SPREADING. The commercial hedging trades is implied in a remark of an oldtime says that hedging is a sort of spread between the cash tures. Of course, the spread often goes against the tra as favorably to him. The process of hedging does no grain dealer to reckon in anticipation just what his prof grain is going to be, except where he expects to delive on the hedging sale. Hedging, therefore, sometimes do the purpose of insuring an ordinary merchandising pro great degree of efficiency. It sometimes, of course, & profits of the seller of grain, but that is another matter. sible that the normal result of a hedge, viewed as a spre the cash and the future, would be a profit to the seller o since he may get the benefit of a premium on the cash, du or temporary scarcity. There is always the possibility a turn" in the cash grain between the placing and the the hedge. All these elements in the situation, however, i as well as possible profits. The risk of hedging and exercising discretion as to whether it may not be bett grain unhedged are illustrated by the possible effects of age or freight embargo upon the country dealer who he THE SHIFTING OF HEDGES.-The shifting of hedges ma merely from Chicago to the local market and its purp in the latter a hedge that, at the time of its original ope not be executed satisfactorily there. Chicago will yield to heavy selling than other markets, so that if the local depressed the elevator hedge will be placed elsewhere instance and later brought back. It may sometimes be a take a hedge out of a market when prospects are unfav example if it appears that a squeeze will develop. In s the hedge is shifted to another market where visible s other conditions are easier. The hedges may, however, be deliberately switched w to making profits. In general, the switch will be made ence to profiting by temporary conditions that unduly rais the price in one futures market, as compared with anoth the profit may be indirect. The operation is often in ma 28 Such conditions may necessitate buying in the hedge at a time wh high at the terminal and low in the country. E. G. Nourse, formerly hea partment of Agricultural Economics at the Iowa Agricultural College, follows: "The hedging of grain at certain times, if done judiciously, is a advantage to the local elevator. It must be kept absolutely clear, how speculative intent, and to be successful must be handled by a man who about the actual operations of terminal grain trading than do 90 or perhap of cooperative managers. If a man is a novice or an inherent speculator, keep his fingers off of this particular box of dynamite." (Wallace's Farm 1922, p. 7.) ld be done "in S." This is the n merchants to 1 character of of he closing involve risks the need of ter to carry of car shortedges. 23 ay often be pose to put ening, could less readily l market is in the first advisable to vorable, for such a case supply and ith a view with referse or lower er, though rket effect en prices are ad of the De is quoted as considerable ever, of any knows more 95 per cent he had better er, Aug. 11. essentially affected by the shifting between markets. The switching of hedges is said to be one way to make money out of the elevator business. When deliberately practiced for profit it is likely to be largely mixed with spreading. One Northwestern elevator manager said all the money his company made came from spreading. But the manager of another Minneapolis concern with elevators said their study and practice of spreading and of switching hedges has not made a difference of an appreciable fraction of a cent per bushel in their profits. An elevator having grain hedged in a market where there is no squeeze may take advantage of a corner in another market by shifting its hedge thither and delivering; of course, supposing there is time for the necessary railroad shipment. If the hedge is already in the market in which the corner comes, there is, of course, no such opportunity. THE CHOICE OF A FUTURES MARKET.-In the choice of a market for hedging the first consideration probably is that it should be a market where delivery would be most natural and convenient for the hedger. A terminal elevator or a mill is likely to hedge in the local market. Country elevators generally hedge in the market to which the grain is shipped. The terminal elevator or the large flour mill may not find the local market satisfactory for the placing of large hedging orders, and may therefore hedge in some other market. So long as the hedge is shifted to the local market before the delivery month. it does not necessarily matter where it is originally placed. It is important that the hedge be brought back to the local market only if it is to stay open for some time. Conditions in the various markets at the time the hedge is put out affect the choice. The prospect of a squeeze or corner is a good reason for staying out, as regards the selling hedger. There may be the inducement of expected spreading profits in deciding where to place the hedge. Sometimes the hedge is shifted from the local market to Chicago with reference to the convenience of Eastern buyers and exporters, who may prefer to hedge there and who may take the grain over in exchange for futures. THE CHOICE BETWEEN OPTIONS.-In the matter of the choice between options, it is said that the country dealer and outside traders, in order to save commissions and to leave plenty of time to market the grain, are apt to hedge in the more remote future, but that terminal market dealers are likely to hedge in the near or next-maturing future. But if the purpose of the terminal elevator is to fill its bins in order to earn storage charges, it may prefer the more remote future. But such general practices are modified by conditions existing at the time. Other things equal, a hedger will choose the option most likely to weaken when making a hedge sale and the opposite for a hedge purchase. Section 9. Substitutes for hedging in futures. TO-ARRIVE SALES.-The great substitute for hedging in the futures market is the sale to-arrive (including the "on track" sale). The country elevator man may sell to-arrive as he purchases, the two cash |