Opinion ID: 300588
Heading Depth: 1
Heading Rank: 2

Heading: cargill's activities in the may 1963 chicago wheat futures market

Text: 17 Cargill, Inc., is a closely held family corporation and is one of the largest grain merchandisers and exporters in the country. It owns an elevator and warehouse in Chicago which is designated regular for delivery of grain on the Chicago Board of Trade. In early 1963, Cargill was of the opinion that there would be an ample supply of soft red winter wheat at the end of the crop year, May 1963, and hence hedged its inventory by selling May 1963 wheat futures on the Chicago Board of Trade. In early March 1963 it reached a maximum short position in the future of more than eight million bushels. 3 As explained above, such a hedge operates as insurance against falling prices. 18 However, in February and March of 1963, Cargill sold substantial quantities of soft red winter wheat to mills in the Southwestern part of the United States. This demand was unusual because ordinarily soft red winter wheat does not move from Chicago to the Southwest. Apparently the movement was prompted by an unusual combination of freight rates which made it economical to ship wheat in this direction. Also in March, the Spanish Government indicated a definite interest in purchasing large quantities of soft red winter wheat and Cargill hoped that it would be able to obtain some of this business. Based upon these developments, Cargill revised its opinion of the supply-demand situation and concluded that supplies of wheat would be tight by May, the end of the crop year, that therefore prices would not fall, but might rise, and began liquidating its short hedges and established a long position in March 1963 Chicago futures. 19 On April 15, 1963, Cargill liquidated all of its short hedges remaining in the May future and established a long speculative position of 250,000 bushels. 4 Between that date and May 15, Cargill increased its speculative long position to 1,930,000 bushels. 20 The United States Department of Agriculture publishes figures every week indicating the quantities of deliverable grade wheat located at various market areas around the country; these figures do not indicate the ownership of such supplies. On April 12, 1963, just prior to the date Cargill established its long position in the May 1963 wheat future, Department figures showed that there were 2,804,000 bushels of deliverable grade wheat stored in Chicago warehouses. Of this amount, Cargill owned 2,471,000 bushels. It is important to note here that Cargill was thus in possession of a vital piece of information that other traders and grain dealers in Chicago did not have access to, namely that it owned the bulk of deliverable wheat in Chicago. While all traders of course knew the total quantity of deliverable wheat available in Chicago, only Cargill was in a position to know that it owned the vast majority of this wheat. 21 In early May 1963 it became known that the Spanish Government would in fact purchase large quantities of wheat; and on Saturday, May 11, it offered to purchase 50,000 tons (40 bushels to the ton) of soft red winter wheat to be delivered by June 10. At this point in time, no American exporter could make this sale because the Department of Agriculture subsidy cutoff date for export of old crop wheat was May 31, and logistical considerations prevented the loading and shipping of the wheat in time to meet the subsidy deadline. 5 Cargill so informed the Department of Agriculture. On Monday, May 13, the Department of Agriculture announced that the subsidy deadline had been extended to June 10, 1963. 22 On Tuesday, May 14, 1963, Cargill offered to sell to Spain 12,500 tons of wheat at a price which equaled $2.13 1/2 per bushel or 10 1/2 cents over the May future; and on the next day, Cargill offered 15,000 tons at a price which equaled $2.09 per bushel or 5 1/2 cents over the May future. Both of these offers were accepted on Saturday, May 18. Cargill thereupon loaded out 770,000 bushels of wheat from its Chicago elevator and shipped it to Spain. Cargill made a profit on both of these Spanish sales. 23 This loadout together with other commitments left Cargill with approximately 50,000 bushels of wheat in its warehouse as of Monday afternoon, May 20. This constituted all of the wheat in Chicago warehouses which was available for delivery on the May wheat future. 6 24 Monday, May 20, and Tuesday, May 21, were the last two days in which the May 1963 wheat future could be traded on the Chicago Board of Trade, and Cargill decided that it was time to begin liquidating its long futures position. Under Board of Trade rules, the maximum permissible price fluctuation of wheat futures is 10 cents above or below the previous day's closing price. The maximum permissible high price Monday was $2.19 3/8. Cargill placed an order with its broker to sell 100,000 bushels of futures at $2.19. The broker was able to sell only 40,000 bushels at this price and the order was canceled. The market closed that day at $2.18 5/8, an increase of 9 3/4 cents from the previous day's closing price. 25 At the opening of business on May 21, 1963, there was a total open interest in the May 1963 wheat future of approximately 8 million bushels. Of this, Cargill owned 1,890,000 bushels or about 24 per cent. At the same time the quantity of deliverable wheat in Chicago warehouses owned by persons other than Cargill was approximately 20,000 bushels. When trading opened at 9:30 a. m., the future traded at approximately $2.22 and gradually declined until at 11:02 a. m. it traded at $2.15 1/4 which was the low price for the day. During this period, Cargill purchased another 100,000 bushels of futures which increased its speculative long position to 1,990,000 bushels. Additionally, Cargill obtained control of another 50,000 bushels which it agreed to sell for Continental Grain Company's account. Trading in the future was to cease at 12:00 p. m. 26 At 11:45 the future was trading at $2.20. At this point Cargill transmitted to its broker six orders to sell its futures position as follows: 27 200,000 bushels at $2.27 200,000 bushels at $2.27 1/4 300,000 bushels at $2.27 1/2 400,000 bushels at $2.27 3/4 500,000 bushels at $2.28 390,000 bushels at $2.28 1/4 28 These orders were limit orders, which meant that the sales could not be made below the prices specified. The maximum price at which the May 1963 future could be sold was $2.28 5/8. 29 Prices did not reach the limits specified in Cargill's order until 11:53 a. m. At this time Cargill's holdings constituted approximately 62 per cent of the open interest. From this time until the close of trading, Cargill's broker liquidated 1,625,000 bushels for Cargill's account. Prices reached $2.28 5/8, the limit for the day. Confusion and congestion was so great at the close of trading that 420,000 bushels remained open after trading ended, and Cargill had unliquidated holdings of 365,000 bushels. 30 Shortly after the close of trading, Cargill was visited by the Acting Chairman of the Business Conduct Committee of the Chicago Board of Trade, who requested Cargill's cooperation in the orderly liquidation of its remaining long position, pointed out the apparent short supply of soft red winter wheat in the Chicago area and suggested that Cargill offer to sell warehouse receipts to the unresolved shorts in order to clear up the May wheat future. Cargill replied that it only had approximately 35,000 bushels of uncommitted wheat available for sale, but that it could make substantially greater amounts of warehouse receipts available at a price of $2.28 1/4 if it could be assured of receiving these receipts back in settlement of its long position, since this wheat was actually needed for delivery on prior commitments. There were at this time no other warehouse receipts available in Chicago for delivery on the May wheat future. Cargill was advised by the Chicago Board of Trade that it would receive its receipts back in the course of delivery. 31 Cargill thereupon sold 100,000 bushels of warehouse receipts to various commission houses for $2.28 1/4 per bushel. (Approximately 75,000 bushels of this wheat was already committed under prior sales.) These receipts were then tendered to Cargill in satisfaction of the shorts' delivery obligations, resold by Cargill and then redelivered to Cargill and other longs in satisfaction of the contracts, and this process was continued until 370,000 bushels of the unresolved open interest were liquidated by this method. In the course of this circulation, 55,000 bushels of Cargill warehouse receipts were received by longs other than Cargill, who then sold these receipts to other unresolved shorts, who in turn redelivered them to Cargill. Cargill liquidated 315,000 bushels of its long futures by this method, and in addition received 50,000 bushels of wheat from other sources. 32 To summarize then the liquidation of the 420,000 bushels open interest remaining after the close of trading in the May 1963 wheat future, Cargill received 315,000 bushels of its own warehouse receipts plus 50,000 bushels of wheat from other sources, while other longs received 55,000 bushels of Cargill warehouse receipts. All of the Cargill receipts used in this delivery process were sold by Cargill at a price of $2.28 1/4 per bushel. 33 After settlement of the outstanding May futures contracts, Cargill had approximately 88,000 bushels of old crop wheat remaining in its warehouse. Between June 4 and June 13, it disposed of this wheat at prices ranging from $2.10 to $2.13 per bushel.