options. They are able, it is said, to make a sure re carrying charge difference, since they can take in and car grain, and they are not under any necessity of chargin full storage rates for the use of empty elevator space. might be expected in general to operate inside the spreader. Diagram 2 SEVEN-YEAR AVERAGE DECEMBER-MAY SPREAL DAY TO DAY IN DECEMBER, 1909-1915. CENTS +4. +3 1+2. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DECEMBER SPREADING BETWEEN OPTIONS RELATING TO DIFFERENT CROP two options between which the spreading operation is u belong to different crop years-May and July wheat, for e the speculative element in the operation is greatly increase a spread, in fact, amounts to staking money on comparative of the volume of existing stocks and of the size of the com Certain speculative elements in a straight long or short are, however, largely canceled out, especially general effects ness and credit and political conditions, which may be sup affect the value of both crops alike, or at least in the same regardless of the relative supply of the two. The greatest opportunity for profits from interoption s is evidently to be found in spreading between options perta different crop years. This is not only because the greater ment of speculation the greater the possibility of profit, because discounts on the more remote futures are more usu return from a carry the actu ging themselve ce, hence the e independent indicate whether this more speculative type of spreading is more or less indulged in than the type involving options of the same crop year, which obviously has a rather different character.19 Spreading between options is done to a considerable extent by members of the exchanges who specialize on this sort of trading, but probably more of it is done by elevators. A few pit scalpers at Chicago specialize in spreads of this sort. The typical pit scalper, however, does not like to put up the margins that may be required to carry the open trades. Section 7. Other spreading operations. SPREADING BETWEEN GRAINS.-Spreading between grains, so called, is a comparatively precarious operation and is infrequent. One grain trade man estimates that spreading between grains does not amount to much more than 1 per cent of the total spreading. There appears, however, to have been a good deal of spreading between wheat and rye futures lately. It used to be said that corn was worth twice as much as oats per bushel and wheat worth twice as much as corn, but no such relation has held for a long time.20 In view of the well-known connection between the price of corn and of hogs, it might appear that there would be some spreading between corn and provision futures. There is not, because, it is said, the provision pits are controlled by the packers. SPREADING BETWEEN ROUND LOTS AND JOB LOTS.-Spreading between job lots and round lots is a minor phase of pit scalping operations, of interest chiefly with reference to the degree of efficiency with which it serves to keep the job-lot market in line with that for full lots. It is said that fewer than half a dozen men make a specialty of this kind of spreading in the pits at Chicago.21 Perhaps the considerable amount of spreading that takes place between the Chicago Board of Trade and the job-lot Open board across the street should be placed in the same category. These two are kept within about one-eighth of a cent of each other by this means, but the spread may go to one-half cent.22 It is worth noting that the term "changer," which is applied to the double memberships as between the Chicago Board of Trade and the Chicago Open Board, is also the name applied to the Milwaukee spreaders who keep that market more or less in line with Chicago. COMPOUND SPREADS.-It is possible to combine spreading between markets and between options in a single operation. It is said that selling Minneapolis September wheat and buying Chicago July wheat or vice versa, was a favorite spread of Northwestern elevators prior to the war. 19 The hedging of grain of the old crop in an option relating to the next crop involves a similar speculative element. For example, the hedging of old crop wheat in Chicago in July is not suitable if there is a large discount, and certainly does not, except under conditions of a large and low-priced carried-over stock, conform to the principle that the future used for a hedge shall be one on which delivery can be made. 20 For computed average price differences between grains for a period of 30 years, see Appendix A of Vol. VI. There is no occasion for such spreading at Minneapolis, for reasons stated in sec. ? of Ch. IV of Vol. V of this report, p. 154. 22 This subject has been discussed in Ch. VI of Vol. V of this report in describing the Chicago Open Board. spreading. In the United States spreading relates pri tures. Spreading in cash grain, and the incidental tran grain between markets, is nevertheless of some importan and off-grade stuff. Elevators, moreover, are in posit transport the actual grain in connection with spreadin between markets. It has already been noted how they cash holdings for delivery in connection with spread options. Section 8. Operations in futures by the elevator merchandis THE MERCHANDISER AND THE WAREHOUSEMAN. The pr chandisers of grain are the terminal elevator operators. a convenient position to hold grain for such length of choose. The merchandiser who sells to jobbers and di consuming centers and to exporters is presumably a termi The merchandiser as such owns the grain that he public warehouseman as such does not own the grain he law imposes duties on the public warehouseman which tirely consistent with his ownership of grain stored The Illinois law prohibits the storage by a public warel his own grain in his public house. However, the public in Chicago are operated by operators of private termin and the law prohibiting storage of their own grain is ea In effect, the public elevator capacity at Chicago is op convenient branch of the business of the big elevator mer The function of storage, although, according to statemer men in the grain trade, it used to be performed by p housemen, is now performed by the merchandisers. Th between present conditions and former conditions-upor theory of future trading and the rules of the Chicag Trade are still largely based-is well shown by som figures. In 1893 the capacity of regular elevators at Chicago wa bushels and of private elevators 10,000,000 bushels.247 elevators were public warehouses, as the 1893 rules of required and the rules still require them to be. In 1919 warehouses in Chicago had a total capacity of only bushels, while other elevators in Chicago had a capacity of bushels. Since some of the private elevator capacity industrial purposes, rather than for commercial purp worth noting that 32,245,000 bushels of the private g operated under the custodian rule of the board,25 which the elevators as merchandisers, and only 10,220,000 bu not so operated. Despite the Illinois law the merchandisers are able to public storage capacity for storing what is practically, if their own grain. That they have occasion to do so illu 23 Public storage is " one of the insurance agencies that the cash-grain have," says Mr. Marcy, 1922 Federal Trade Commission hearings on Market of Grain, p. 690. 24 This is the first year in which the annual report of the Chicago Board o figures for private elevator capacity. 25 Rule IV, sec. 22. rimarily to f ansportation of ance for barle sition easily t ing in future ey utilize their ading betwee isers. principal mer They are time as the istributors & inal elevator stores. The - stores. The are not en by himself houseman of cwarehouses mal elevators asily evaded perated as a chandisers." nts made by public ware e difference n which the Board of e accessible $ 32,800,000 The regular the board the regular 13,800,000 42,465,000 s used for oses, it is roup were fact marks shels were • use their ot legally, strates the house has to Manipulation Trade gives by the way in which the elevator merchandisers exploit the futures market with reference to earning carrying charges. The common mode of utilizing public storage capacity by the merchandiser for his own grain has been for him to sell to a futures commission man car lots of cash grain to go to store and at the same time to buy from him a corresponding quantity of futures, the price being such as to give the commission man a profit of a fraction of a cent a bushel over expenses, and the expectation being that the warehouse receipt will in due time be delivered to the elevator company on the future contract. The elevator will probably immediately deliver out the receipts on its future sales, having very likely bought the grain with reference to meeting future contracts in this way. Or the future sale may have been put down to the commission man who delivers the warehouse receipts directly to the purchaser of the future. Another means of utilizing their own public storage is for the elevators to "special bin" grain put into storage, in which case it is not deliverable until loaded out into cars and re-elevated, since storage space so used is not regarded as public for the time being. Sales to go to store, it is stated, indicate an intention to deliver the grain on future contracts. It is also probable that considerable grain has been stored by one public elevator operator in another public elevator under some understanding practically providing for an exchange of capacity. It is said that the public elevator operators do not want grain stored with the expectation that it will not be left long, and that commission men are not encouraged to store awaiting sale, the elevators preferring to fill up with their own grain. If the elevator man operates as a warehouseman only, he will seek to earn a return merely for storage and handling. Although the charge for elevating and for storage is so much per bushel, the cost of these services varies considerably according to the degree of utilization of capacity. The relation of the large elevator merchandisers to the futures market is often of primary interest, owing to the tendency of the elevators to take grain into their elevators and earn carrying charges when the spread between cash and futures makes such a policy profitable to them. Conditions enabling others to do this seldom develop. This situation does not necessarily mean that the rates for storage are unduly high. With reference to utilizing storage capacity, the elevator operator may feel that half a cent a bushel from a well-filled elevator is better than 1 cent contingent upon the demand of grain dealers for space. But apparently there are other sources of profit to the elevators, connected with the possession of the grain, which induce them to take less than the full carrying charge, among them profits from the shifting of hedges and the possibility of selling the cash at a premium through raising its grade or otherwise. The gist of the situation was concisely stated by an officer of the Chicago Board of Trade in the following words "in grain elevator construction, the cost is so great that such buildings, separated from the commercial advantages they confer upon their owners, are, at the present time (1914), wholly unprofitable investments." * * * carrying charge difference, of the cash grain for sto complicated methods of earning carrying charges. The ation of spreading between options as carried on by elevators has been described in a previous section of t In such a case there may be an element of manipu process. The competition of elevators at minor concentration those at the large terminals tends to make it more dif full carrying charges on grain stored and hedged. Not former less costly to build and operate, but their loca such as to give them a little better opportunity to get higher price for quality or position than the elevator terminal markets. Grain in position to be shipped with to Kansas City or Chicago may, allowing for freight, f price than grain in Chicago, which is not available for tive market. Elevators west of Chicago are said somet against a hedge on a basis such that it is difficult for the whole. Anything that might be said about the shifting of h connection would be of the nature of repetition and rev has been said in Chapter II. Even so, the ramification of commercial judgment in hedging will not be exhaust viously noted, a hedge may be initially placed in Chi sake of better execution, shifted to the local market f connection with the contingency of delivery, and shif Chicago to facilitate the exchange of cash grain for a chase all of which operations are consistent with pur purposes. But it is easy to pass from this to hedging in t high-priced market and shifting to another market tions change, and so on back and forth. The fundamen may be to get the equivalent of carrying charges, whic hedge in a single market may not give. The same of the spread between options is to be looked for. Such to take advantage of price differences of small magnitu acteristic of mercantile practices. 28 See p. 81, sec. 6. |