The terminal elevator will hedge its to-arrive purch futures market. It appears that Chicago and Kansas C purchasing to-arrive than Minneapolis. In general, to by the country shipper largely take the place of hedg futures. The proportion of transactions to-arrive, fur said to be increasing at the expense of consignment bus Such coincident purchase and sale is sometimes ref hedging. That a terminal-market purchaser upon satisfa can so generally be found is at least possible in part final holder will use the futures market to hedge his to chases. The same practice that does away with the need by the country elevator makes hedging, if anything, necessary for the terminal dealer who agrees at the mome specified price for grain that he will not receive for p weeks, when market conditions may have radically cha method supposes the use of a futures market, even whe transaction does not directly enter at the country end. tracts, also, may be hedged by purchasing wheat to-arrive SYNCHRONIZED CASH PURCHASES AND CASH SALES.—That site cash transactions of any sort serve to protect each making a hedge in the futures market unnecessary, supp that the sale of the cash grain is nearly coincident in po with the purchase. Merchandisers of grain are frequen position of making sales at about the same time that they purchases. Under such circumstances the futures mark resorted to merely to protect unusually large holdings.

If the purchases and sales of a grain merchandiser are n cident in point of time and the need of hedging is thus la ated, the cost of commissions on futures is saved. Howe change member who is also a member of the clearing house larly represented in the pit is not concerned as regards t commissions and may prefer to hedge according to strict though the closing trades are made the same day. Such may hedge regardless of the shortness of the period for future trade is likely to remain open. But its manage adopt a policy of exercising commercial judgment as to w future price obtainable is satisfactory, in which case the from the rule of simultaneous contra transactions appears form.

The willingness of a merchandiser to purchase grain up margin of profit may depend upon the availability of th for hedging. If there is no good hedging opportunity, chandiser may refuse to buy except as fast as he can sell. refusing to accumulate grain, he may bring about a c between his purchases and sales and so arrange them as the purpose of protection against a violent decline in pric futures at Chicago during the greater part of the period o pation by the United States in the World War afforded on unsatisfactory hedging market. This condition was me important merchandiser through restricting his dealings in indicated.

cover successive lots of grain is a substitute for rehedging, and is likely to involve some degree of failure of exact coincidence in time and quantity between open hedging sales and the ownership of actual grain. For example, a country elevator may have not less than 40,000 bushels in the house throughout the buying season and a varying additional amount up to 20,000, 60,000 bushels thus being the maximum. Under such circumstances the 40,000 bushels of futures originally sold will be kept open and an additional 20,000, or some portion of it, sold and bought as occasion requires. Such a method of handling hedges means a rather long life for the open trade.

Since there is not often a saving of commissions involved, terminal elevators at important markets, as already indicated, are disposed to close and open their future trades without regard to the possibility of making the same hedge serve for several lots of grain. Indeed, with them the situation works the other way. There is often a shifting of the hedge on a given quantity of grain from option to option and from market to market, and even possibly a speculative taking off and putting on of the hedge, as market conditions vary. The same hedging sale may be made to serve the purpose of protection to two successive owners of the same lot of grain. If the two owners are customers of the same commission house, and if it is shown that the future sale was made against the transfer of the cash property, the transfer will be made without a commission charge. If the two successive owners are customers of different commission houses the hedge may likewise be transferred, but without the saving of commissions and not without the bother of hunting up the other party. Although such procedure is sometimes adopted, it is not usual.21

Transfers of hedges by way of exchange for cash grain as between mills and elevators are commonly made. The price in such a case is so much over the option. The mill's bought hedge that is taken by the elevator presumably closes an open future sale of the elevator and the trade is completed with the greatest simplicity and expedition. One commission man cites such procedure as the consummation of a 66 perfect hedge."

Section 10. Border-line hedging.

SUBSTITUTION OF FUTURES FOR CASH GRAIN HOLDINGS.-Farmers sometimes sell grain from the thresher to save losses from waste or deterioration and costs of storage. In such a case the farmer may buy the May future to hold in place of the actual grain, if he wishes to obtain the benefit of an expected rise in price.

An elaborate explanation by a former Northwestern wire-house branch-office manager of such transactions by the farmer makes the method of selling the grain and buying the future alternative to storing the grain locally or on the farm. The advantages claimed for the method under consideration are: (1) It enabled farmers to sell their grain when the roads were good in the fall and when they

The commission charge as applied to such cases and commission rates in general are discussed in Vol. V of this report, Ch. II, sec. 9.

use of his money from the grain during the winter, excep part of it as was required for margin; (4) it gave him tunity to take advantage of any rise in the price of grain passed out of his hands.25

"CONTRACTING THE CROP AHEAD.-The farmer occas the futures market to sell his crop before the harvest, seems good to him. This might be described as hedging crop. There is said to be an increasing tendency to do th the farmer thinks the price looks satisfactory, especially nois corn belt. The commercial motive in the operation It is said that country elevators sometimes do the same t on the basis of contracts with the farmer, in which case th for them quite definitely hedging, or on the basis of lo prospects and the expected crop movement from the farm "OVERHEDGING AND COGNATE SPECULATION.-It is said tendency on the part of the country dealer who has, fo 20,000 bushels of grain, to "hedge" it by selling 25,000 futures because he feels bearish on the market. A wire-h ger may instruct the novice how to hedge and then, when has gone down, tell him to take off his hedges and make stead of riding back with the market. Such procedure times work well, but it is dangerous.

When the cash grain is sold, also, there is a tendency t "hedge" on, thus letting it become a speculation. One gers of hedging is doubtless the ease with which hedging into speculation. It seems better that the country dealer 1 ing about the futures market than that he become a specula

Heavy losses by dealers who would hardly think of i future trade as a pure speculation have often resulted fr hedging" or holding futures that have ceased to be hedges. that such things frequently occur illustrates the discreti commercial character of most hedging, nothwithstanding th allegation of a strict hedging use of the futures market dealers.

Section 11. Conditions for the correct functioning of hedging

GENERAL CONSIDERATIONS.-If the futures are to be used nate the risk of price changes, the futures market ought to a character that a hedger could confidently give an order buy large quantities "at the market" with the expectation order would be executed at within a small fraction of reasonably to be expected from an examination of the lat tions, and also such that he could confidently expect the pr between the cash and the future to remain substantially u or changed only as affected by carrying charges.

If the futures market does not offer facilities by which may be definitely eliminated, but instead offers only qual tection accompanied by such unfamiliar risks as may be by future trading as such, the argument for strict hedging

25 Of course, if the market went down the farmer would lose in either interesting opinions on the subject of hedging from farmers and other smal house customers are considered in Ch. V, sec. 11.

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efficient and safe employment as to be useless, or worse, for the small grain dealer who can not concern himself with future-trading technique.

HEDGING RISKS AND LOSSES COMPARED WITH MERCANTILE RISKS AND LOSSES.-If the hedger finds the conditions actually met in the futures markets such as require much technical skill and judgment, hedging itself involves risks with which the dealer is probably less able to cope than he is with ordinary mercantile hazards.

What the risks of hedging are have already been indicated in dealing with the subject of the exercise of commercial judgment in hedging, as well as in the statistical data of cash-future spreads, etc., in Volume VI of this report. The future may not be at a normal premium. Prices at the terminal and in the country may not be duly related. A corner may make it necessary to deliver on the hedge, etc. Hedging does not work properly where discounts on the future are considerable nor where congestion develops near the maturity of the option. Under such circumstances the best that may be said for hedging is that the loss is limited, though the hedging itself causes loss so far as the spread between the cash and the future changes unfavorably between the time of putting on and taking off the hedge. Occasionally a terminal grain trade man will be found who says that it costs more to hedge than it does not to hedge, more money being lost than made.

INSURANCE DIFFERENT FROM HEDGING.-The future contract used in hedging is not an insurance contract in any proper sense, even if it serves a somewhat similar purpose. There is no specific premium paid for specified protection. The hedger gives up gains as well as avoids losses.

Insurance avails itself of the theory of probabilities, in its practical application to averages, with the result of broadly distributing nearly certain aggregate losses, but the direct effect of the hedge is merely to transfer a loss or a gain, and such losses or gains are often markedly concentrated.

Section 12. Hedges as a means of obtaining and disposing of grain.

RELATION OF HEDGING TO DELIVERIES ON FUTURES.-The immediate purpose of this section is to consider the possible use of hedges as a means of obtaining or disposing of grain by delivery. It is quite true that the hedger ordinarily does not expect to deliver the grain when he makes a hedge sale. For this there are two principal reasons. In the first place he wants to obtain the advantage of any particular demand that may develop for the specific quality of grain he has purchased. In the second place, because of the tendency to discounts, or to inadequate carrying-charge premiums on the futures, he frequently can not place his hedge at a price that would warrant his holding the grain to the delivery month and delivering it. Nevertheless, conditions may develop that make the delivery of the grain on the hedge the best thing to do. Similarly, the elevator merchandisers and others may accept delivery on their hedges in futures, either because they have contracts or orders upon which the grain can be applied, or because they may have pur

cheaper than buying in the cash market.

INSTANCE OF LARGE DELIVERIES ON HEDGE SALES.-The eries, considered in terms of bushels, are in fact not gible, although, especially at Chicago, they are very s portion to the total volume of futures.26 Such deliverie are almost always made by dealers having special making delivery and devoting special attention to tha these being the large merchandisers that operate publ private elevators. Sometimes, as the matter works ou cerns may act in a sort of representative capacity for other traders in the matter of deliveries.

The open interest on the short side in 1922 May w cago, it appeared, was, as delivery approached, mainly the hedgers were mainly elevators outside Chicago. Th obstinate and prices were high. The hedgers looked being badly squeezed by the rise in prices. The strong ket, however, made it possible for Chicago elevators futures to the hedgers and buy from them, or others, at a satisfactory difference for delivery on the futures cago elevators then brought this wheat to Chicago f They thus acted in effect as intermediaries in the de hedges and received presumably a small profit per bu utable to their special facilities for handling and deliveri at Chicago. Although there was no corner in this opti ference of opinion between the two sides of the market v and the obstinacy of the longs was so pronounced that hedges was the only way to settle the question at issue as of wheat.

TAKING DELIVERY ON HEDGE PURCHASES.-There have re several conspicuous instances of taking delivery on hedg at Chicago, and there are some practices, even if occa: of mills and grain dealers which deserve mention in this It should be noted that the tendency to discounts may the taking of grain on delivery, the effect on buyers bein site of that on hedge sellers, except so far as the desire grain may be discouraged by mixing and other pract elevators making the deliveries.

It appears that the Washburn-Crosby mills will take hedge purchases, even at Chicago, but only after ascertai definitely what is the quality of the stock in elevators delivered out, and especially that it is not red winter. also true of some other mills. F. M. Crosby says, 66 I wo take wheat from almost any market than Chicago-tal Kansas City because we know what the quality is, or Minneapolis." 28 Reasons why Chicago provides for nume erable grades and varieties have been noted elsewhere.29 the mills prefer to select their own qualities and will ex futures for cash before delivery.

26 See Chap. IV, sec. 10.

27 1922 Federal Trade Commission hearings on Market Manipulation of G 976.

28 Idem, p. 977.

29 Vol. V of this report, pp. 198 and 199.