Playing with the Futures

Straddles, hedges, shorts, longs. To most people, the argot of commodities trading is about as exciting and intelligible as the fine print in a Eurobond offering. Not, however, to the traders and speculators who wheel and deal on the floors of the commodity exchanges of the Midwest, where most of the nation's grain trading takes place. For the high rollers in the mysterious world of wheat and corn futures, soybean stop orders and daily limit moves, commodities are the stuff of fast fortunes.

For two days last week, of course, no one made or lost anything in grain futures trading. By temporarily halting the activity altogether to prevent a panicky overreaction to the cutoff of grain exports to the Soviets, the Administration simply told everyone to calm down and wait before trying to buy or sell in the unsettled market.

Commodities trading is a nerve-racking business even under the best of circumstances, and hundreds of thousands of dollars can be won--and lost--by a 10-c- swing in the price of, say, soybeans, which were selling last week for as much as $6.58 per bu. But the speculative market performs an essential function: it helps give stability, or at least predictability, to the future price of grain. That enables everyone from Nebraska wheat growers to Boston bakers to make intelligent forecasts. Each one can determine just how much he will have to spend to buy or, conversely, how much he can count on receiving for selling, grain as much as 14 months into the future. The futures contracts that are traded on the commodity exchanges enable people in the grain business, or anyone at all, to "lock in" a guaranteed future price for the commodity.

Say, for example, that an Iowa farmer expects to harvest 50,000 bu. of corn in six months' time. By checking with his broker, he finds that the six-month future price of corn is $2.75 per bu. The farmer calculates that $2.75 per bu. for his crop would be a fair price, so he guarantees that he will get it by "hedging," or agreeing in advance to sell a contract for 50,000 bu. at that price in the futures market. This protects him against a drop in grain prices.

On the other hand, if the price rises to, say, $3 a bushel in six months' time, the farmer would not collect that extra 25-c--a-bushel profit. But farmers are often willing to forgo the opportunity for additional profit in order to guarantee in advance what they consider to be a fair return.

Every day farmers and others use commodities hedging, and far more complex investment techniques as well. So do the nation's large grain trading companies and food corporations like General Mills and ITT Continental Baking Co. Countless more ordinary investors are in the market hoping to make quick and stunning profits. If they are wrong, speculators must be prepared to lose big. Anyone who bet last autumn that January wheat prices would be headed up, and bought the maximum permissible number of 600 wheat futures contracts, could have lost $600,000 in a single day last week. Conversely, anybody who had correctly bet months ago that prices would decline in January, would have reaped rich profits.

With so much money at risk, commodities investors generally were furious that the Administration had halted any commodities trading last week. In fact the 48-hr, cooling-off period was necessary. With millions of tons of grain suddenly available to flood the market, the Administration needed a breathing spell to convince investors that it had a plan to keep prices from plunging to ruinous depths. When grain trading resumed on Wednesday morning, however, it seemed for a while as if panic had not been prevented but merely postponed. No sooner did the opening bell sound in the pits of the Chicago Board of Trade than a roar of sell orders flooded the hall. A record 100 million bu. of corn were offered for sale, but there were few takers. Similar sell orders hit wheat and soybeans. Within minutes, trading came to a virtual halt as one commodity after another slumped to the maximum daily limit permitted under exchange rules. The limits were 100 a bu. for corn, 200 for wheat and 300 for soybeans.

By Thursday morning, there were signs that the market was stabilizing. Wheat, corn and soybeans opened down the maximum limit, but buyers soon came into the market for soybeans, the crop least affected by the embargo. By day's end there were also a few cautious buyers for corn and wheat On Friday the recovery continued. Grain prices were still below their week-earlier levels, but the slide had halted, at least temporarily, as investors took note of the Administration's steps to help farmers.

Among the first bargain hunters to come back into the market were buyers from Europe and Taiwan. By the Friday close, some optimistic grain men were talking of a full rally by springtime. Said Wallace Weisenborn, vice president for commodities at Chicago's Harris Bank: "In the long run, the world needs U.S. grain. We're the class in the league, and no one else can come close. We have to win out. We're not selling Edsels, you know."

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