The Wild Present of Futures

INVESTORS who thrive on high risk and fast action have found a hot new favorite that provides more thrills than Natomas Co., Levitz Furniture and other former Wall Street high-flyers ever did in their heyday. Its price has risen so sharply that someone who got into the market seven months ago and played it wisely could have walked away early this month with a bundle 100 times the size of his original investment.

The name of the new speculation game is soybeans. More precisely, it is soybean futures. One representative contract shot up from $3.20 per bushel last summer to a record $7 early in March and closed last week at $6.18. That outstripped even the performance of feed corn, lumber studs, and other commodities--including metals--that have also been putting on a pyrotechnic show. The fireworks have tempted investors, who not long ago considered soybeans to be little more than a health food.

The best estimate is that the number of commodity investors has ballooned from 50,000 to half a million in the past five years. Michael Weinberg, chairman of the Chicago Mercantile Exchange, predicts that there will be 3,000,000 by the end of the decade. Major brokerage houses are opening new commodity departments; Merrill Lynch recently started a commodity newswire. In late 1970 there were no mutual funds dealing in commodities; now there are 43. Last week Rufenacht, Bromagen & Hertz, a brokerage house, bought a membership on the Chicago Mercantile Exchange for $125,000, or $30,000 more than the price of the last seat sold on the New York Stock Exchange.

The newcomers are entering a world that until recently has been a mystery to all but a tiny circle of insiders, one that has its own language (scalper, old crop, new crop, cash grain) and rules. Technically, anyone who buys a future agrees to take delivery of--and pay for --a certain amount of a commodity that can be sent to him anywhere from a day to a year and a half after purchase. That arrangement has given more than one investor nightmares about having 5,000 bushels of wheat or five tons of sugar dumped on his doorstep. In fact, only 2% of all futures trades result in actual deliveries to a bakery, metal-processing plant or other users of the goods. The rest are purely paper transactions; if the holder of a soybean future, for example, theoretically bought the beans at $5 a bushel, and the price has risen to $6, he can cancel the contract by having the paper seller of the beans pay him his profit in cash. At the Mercantile Exchange, the Chicago Board of Trade (CBT)--where more than half the commodity action takes place--and other exchanges, such transactions are made in a bedlam of shouting and waving by "pit traders" who do the buying and selling for brokers forwarding orders from clients.

The action has been particularly frantic of late, partly because of the international monetary turmoil. Many a speculator has thought that 10,000 lbs. of copper, say, had more potential value than the dollars needed to buy a future on them. More important, commodity prices are being rocketed upward by a huge increase in worldwide demand for U.S. farm products. "Our markets are coming out of the age of surpluses," which always had a potential to depress prices, says CBT Pit Trader Richard H. Mayer.

Another attraction of commodity speculation is that the investor can wheel and deal on a tycoon's scale with relatively little of his own money. Most futures can be purchased on 5% margin, meaning that the speculator can buy a $100,000 future contract by putting up only $5,000 out of his pocket and promising to pay the rest upon delivery. If the price then rises 5%, he can buy another $100,000 of futures with his $5,000 paper profit, and so on and on in a process known as pyramiding. Obviously, pyramids built on such a thin cash base have a high risk of collapse, and the speculator is liable not just for his cash investment but the full price of his contract; if the price drops 20% he will lose not $5,000 but $20,000. Merrill Lynch generally requires customers to have $15,000 in income and net assets of at least $50,000 before it will accept commodity orders from them. Until recently, many brokers required women to get the written consent of their husbands before trading in commodities, on the dubious theory that they were less capable than men of standing the emotional strain.

Commodity prices frequently fluctuate in reaction to arcane events. For example, one reason for the leap in soybeans is that schools of Peruvian anchovies for a while mysteriously disappeared from the Pacific. As hardly anyone but a commodity trader would guess, that removed from the market anchovy fish meal--the only product that competes effectively against soybean meal for animal-feed protein. Last winter, a Manhattan investor bought some orange-juice futures on the calculation that "all I need to make a profit is two hours of frost in Florida." It did not happen, and he lost.

Investment studies have shown that at least three of every four amateur commodity players lose money in the long run. Yet the rewards for the winners--and the sheer excitement of the action--seem to hold a special fascination for younger speculators. "We have a new crew of investors, people not scarred by the Depression," says CBT Trader Mayer. 'They take chances because they want to live now."

This file is automatically generated by a robot program, so reader's discretion is required.