The Topeka state journal. [volume] (Topeka, Kansas) 1892-1980, 1917-05-05

EXPLAINS IT ALL
e. J. Smiley to Defense OF
Board of Trade.
Discusses Future Trading,
Hedging and Speculation.
PERFORMS A USEFUL FUNCTION
Grain Man Points Out Present
Method Is Necessary.
Germany Found 1t Necessary
and Re.Established System.

| with the ewes of the world centered
on the food supply of America ana the
method of handling this supply Z. j.
Smiley. secretary of the Kansas Grain
Dealers association, has prepared an
exhaustive explanation of future trad
;,a bedping and speculation in grain
90 severely criticised in recent weeks
Mr. Smiley read this paper before the
ronAka Board of Trade at its meet
irg held Tuesday evening at the ElKs
club. His explanation OF these Trans
actions follows:
.Since no feature of the handling or
Grain has met with so much CRITICISM
as the buying and selling of grain for
future delivery, we will endeavor to
a++ennt TO explain the exact nature OF
f,,+,ra trading and in connection
+berewith, speculation and hedging.
.ETn+ures as the term is generally
,,ssd is the contract for the purchase
and sale of grain to be delivered our
ing some future month. sales Ior III
tire delivery are based upon one or
more contract grades. A purchase and
sale therefore, of 5000 bushels or
JuIv wheat made on the exchange
/ floor of any board of trade is a con-
tract in which the seller agrees TO de-
liver to the buyer some time during
the month of July next 5000 bushels
Of No ? hard or No. 2 red wheat.
The state inspection department OF
the state is the judge as to the DUAL
itv of the grain and determining
whether the grain rendered on the
contract is or is not No. ?.
Protection to MilIers.
Having briefly explained the ma
ture of a future contract, we shal
LII l,sNv
tracts for future deliveries, or futures
are made use of as hedge or protec-
ton in the transaction of the grain
and milling business. future is
contract as before mentioned The
only option feature in connection with
this contract is the option which the
seller has of selecting any one day
during the entire month on which to
make delivery. In other words, sales
for May, July, or December should
be referred to as futures. not as OPP
tons. the word option having
meaning entirely distinct from that of
the word futures The word option
is generally used in connection with
purchase of land or real estate of
some kind.
The purpose of hedging is to avoid
a risk, known as the Speculation
Risk which attaches to ownership of
any kind of property, including wheat.
, In many classes of farm produce and
in many kinds of merchandise, it is
impossible for the owner to hedge or
protect himself from this speculative
risk and as a result many classes of
farm products and manufactured ar
ticles must be merchandised. On
grain, however, this speculative risk
can be shifted by those engaged in the
actual handling of grain, upon spe-
cial class, known as SPECTATORS, and
this is done by means of sales for fu-
ture delivery as before mentioned. To
illustrate: A farmer elevator COM
pany purchasing wheat for cash and
storing same at it's elevator would be
specializing thereon if it did not hedge
the same by a sale for future deliv-
cry. If farmers elevator company
purchasing 5000 bushels of wheat in
September Immediately sells the same
in a terminal market for December
delivery, the result would be to Sc
cure the trade profit on which this
wheat was bought from the farmer,
regardless of the change in the mar
ket price thereafter If this wheat
has been purchased at a profit of
three cents per bushel after deducting
freight to the terminal market, this,
profit would not be increased by an
advance in the market price for wheat
or decreased by any decline. Suppose
| this wheat was shipped out in Octo-
| Der and arrived in the terminal mar
| ket in November and sold as cash
| wheat and at the same time the hedge
or future sale for delivery, bought on
future sale for delivery was bought in
II the price of wheat had advanced
cents per bushel an apparent profit
would be made in the sale of the cash
/ wheat thru the advance in price, but
as ordinarily the case, the December
would have advanced cents per BUSH
| ell and in the purchasing of the hedge
g loss would be sustained of cents
| per bushel which would exactly off
set the gain in the sale of the cash,
still leaving the original profit of
three cents per bushel
Protects Elevators.
This system of selling for future
delivery senables the farmer elevator
i company, the Independent dealer and
the line elevator companies to avoid
the speculative risk which would exist
IN case their cash purchases are not
hedged
"On the other hand, the millers fire.
quently makes sales of flour for future
delivery many months in advance
based upon the price of wheat at the
time of the sale. If the miller pur-
chased no wheat for future delivery as
a hedge against this flour sale, the
miller would be assuming the spec
uIatlVe risk which the milling inter-
ests of the whole country desire to
avoid. If the miller did not pur-
chase the wheat until the time ar
rived to fill the sale of flour and wheat
mad advanced cents per bushel, he
would lose cents per bushel.
/ When the farmer elevator COM
pany, independent dealer or line COM
pany conduct their business in a safe
manner by hedging all sales or pur-
chases, the result is that the banking
| interests that furnish a large portion
OF the money necessary to carry on the
| gram ana milling business, are willing
to furnish much larger sums than
| otherwise would be the case and at a