She could not know that but comparatively few of the traders below were representatives of brokerage firms which were trading on margins for speculating clients—that most of the traders were negotiating legitimate deals in futures for firms who actually had the grain for sale, for exporters who would take delivery of the actual wheat for shipment, for milling companies who would grind it into actual flour.
Because trading for delivery in future months affords opportunity for speculation, it is not to be condemned necessarily. It is the balance wheel which steadies the entire grain business. Even the speculating element is not without its uses at times and the layman who ventures to condemn This or That out of hand will do well to make sure he understands what he is talking about; for the business of the grain dealer is so subject to varying conditions and so involved in its methods that it is one of the most difficult to be found in the commercial world.
Trading in futures finds birth in the very natural disinclination of Mr. Baker to buy his flour by the warehouseful. He does not want to provide storage for a year's supply, even if he could stand such a large bite out of his capital without losing his balance. So while the bakery man is anxious to order his flour in large quantities for future use, he is equally anxious to have it delivered only as he needs it, paying for it only as it reaches him—say, every three months.
Before contracting for the delivery of the flour on this basis Mr. Miller must look to his wheat supply on a similar basis of So-Much every So-Often and he, too, has an eye on storage and, like his friend the baker, he "needs the dough," as they say on the street, and he does not want to part with any more hard-working money than he can help. Accordingly he looks around for somebody who has wheat for sale and will sell it right now at a fixed price but defer delivery and payment to a future date. With the price of his wheat thus nailed down, Mr. Miller can set the future price on his flour to his customers, taking delivery and paying for the wheat as he requires it for filling his flour orders.
In the meantime where is the wheat? Out near the fields where it was grown, in country elevators perhaps, ready for transportation to market as the law of supply and demand dictates instead of the whole crop being dumped at once and smothering prices below the cost of production. Or perhaps it is in store at the terminal where Mr. Exporter can handle it. It will be seen that the mutual arrangement to buy and sell for future delivery simplifies matters for everybody in the grain trade.
The manner in which the legitimate trader in futures protects himself from price fluctuation is easily understood. While a deal in cash wheat would refer to a definite shipment as shown by warehouse receipts, a deal for future delivery is merely an obligation involving a given quantity of grain at a given time at a given price. Being merely a contract and not an actual shipment, the seller does not require to produce the grain immediately nor is the buyer required to hand over the purchase price when the trade is made. Thus it is possible to buy a thousand bushels to-day for October payment and sell a thousand bushels to-morrow for October delivery, cancelling the obligation. The trade can be balanced at any time before October 1st. Again, a thousand bushels of October wheat may be bought (or sold) to-day and the future switched to May 1st by the sale (or purchase) of a thousand bushels for May delivery.
Take the man with the blazing red tie half way up his collar, the man who this morning offered to sell fifty thousand bushels for October delivery at $1.43 7/8. Suppose that he represents a company with a line of elevators at country points. To his office at Winnipeg has come word from country representatives that fifty thousand bushels have been purchased for the company. At once he enters the Pit and sells fifty thousand bushels for delivery at a future date, thereby "hedging" the cash purchase out in the country. Once this future of fifty thousand is sold the company no longer is interested in market prices so far as this grain is concerned. If the market goes up, their cash grain is that much more valuable, offsetting the loss of an equal amount on the future delivery; if the price goes down, what is lost on the cash wheat will be gained on the future. So that the difference between the price paid for the grain at the country elevators and the price at which they sold "the hedge" is the only thing which need concern the grain company and it is here they must look for expenses and profits. This method of hedging enables a grain company to make purchases in the country on much smaller margins than was possible in the early days when the marketing machinery was less completely organized. It eliminates to the greatest extent the necessity of speculating to cover risks.
The speculator's opportunity comes in connection with the fluctuations of the market in deliveries. He merely bets that prices will go up or down, as the case may be. He is not dealing in actual wheat but in margins. He buys to-day through his broker, who has a seat on the Exchange, and deposits enough money to cover a fluctuation of say ten cents per bushel. If October wheat to-day is quoted at $1.45 his deposit will keep his purchase in good standing until the price has dropped to $1.35. He must put up a further deposit then or lose the amount he has risked already, the broker selling out his holding. If the speculator is on the right side of the market—if he has guessed that it will go up and it does go up—he can sell and pocket a profit of so-many-cents per bushel, according to the number of points the price has risen. If he has bet that the market will go down the situation merely is reversed.
The machinery for handling the huge volume of business transactions in a grain exchange must be complete and smooth running to the last detail, so designed that every contingency which may arise will be under control. For simplicity and efficiency in this connection the Winnipeg Grain Exchange occupies a unique position among the great exchanges of the American continent; in fact, it is a matter for wonder that its methods have not been copied elsewhere.
The Winnipeg Grain and Produce Exchange Clearing Association is a separate organization within the Exchange and to it belong all the Exchange members who deal largely in futures. Each day the market closes at 1.15 p.m. By two o'clock every firm trading on the floor must hand in a report sheet, showing every deal made that day by the firm—the quantity of wheat bought or sold, the firm with whom the trade was made, the price, etc. If on totalling the day's transactions it is found that they entail a loss, the firm must hand over a cheque to the Clearing House to cover the loss; if a gain in price is totalled the Clearing House will issue a cheque for it to the firm so gaining. Thus, if Jones & Brown have bought wheat at $1.39 and the market closes at $1.35 they lose four cents per bushel on their purchase and must settle the difference with the Clearing House. All differences between buyers and sellers must be settled each day and if the volume of trades has been heavy, the Clearing House staff work on their books—all night, if necessary—until everything has been cleared for next day's business. The firm which loses to-day may gain by to-morrow's trades, maintaining good average business health. Any private trading which may take place after official trading hours is known as "curb" trading.