The Wall Street Journal calls futures trading ‘the hottest and most exciting investment game around.’ In 1980, $2,000 billion worth of futures contracts were traded on the ten US exchanges. The world’s largest exchange, the Chicago Board of Trade, reported a 1981 first quarter increase in trading of 48 percent over first quarter 1980.
Over 100 futures markets world-wide tie this planet’s basic food resources into an ever-tightening knot of what US economist Dan McCurry calls ‘some of the most powerful, secretive and parasitical institutions in the world.’
So what are these unknown creatures that remain a mystery to most of us? A futures market is an arena where commodities — raw materials really — to be delivered some time in the future are bought and sold. The commodities vary from coffee, soybeans, silk, and pork bellies to rubber, fur, grains, gold, eggs and government bonds. In 98 per cent of the trading nothing more than paper actually changes hands. Often goods being traded haven’t yet been planted, mined or processed. What’s up for grabs is quite literally the future.
Futures trading is built on the old market principle of supply and demand. When goods are plentiful prices fall, when goods are scarce prices rise. In theory, futures trading allows both buyers and sellers to take advantage of these fluctuations and to protect themselves from unnecessary losses. In theory we should all benefit.
Here’s a sample trade: Say a major soybean producer wants to guarantee himself as high a price as he can get right now, for a crop to be harvested in four months. At the same time let’s say a feed processor needs an assured supply of soybeans four months from now, at as low a price as he can get.
There are risks involved for both because neither knows what will happen in the next four months. But they can short-circuit most of the risk by reaching a compromise price now for that future crop. They or their agents meet in ‘the pit’ of a futures market and bully each other to a mutually agreeable price. They make a contract the producer to deliver and the buyer to receive so many tonnes of soybeans four months from now at the agreed price — no matter what happens in the interval.
Later, when one sells and the other buys the actual crop one will gain and one will lose, compared to then-prevailing prices. If their futures contract price was $300/tonne and the going price turns out to be $310, the grower will have ‘lost' $10/tonne and the buyer ‘made’ the same. Most dealers make ‘offsetting transactions’, hoping to gain on one deal what might he lost on the other, or better still to gain on both. The soybeans, meanwhile, may be no more than sprouts while all this is going on over their heads.
The people who run the markets would like us to think this is a fair description of the way they work. Because risk is reduced for both soybean producer and processor, their capital investment can be less. Therefore, or so the theory goes, they pass on to the rest of us lower prices — and everyone is happier and better fed.
But there are nagging questions. How then can bids on the Chicago exchange floor top $400/tonne when farmers are receiving $172/tonne? And how can sugar prices in the supermarket soar by over 500 per cent when there’s virtually no change in the actual supply of sugar?
The answer to both questions is speculation. The future of the innocent soybeans described above can be traded back and forth dozens of times before the beans exist in any saleable form. Prices rise and fall but the trend is always upwards. On each deal someone makes money and someone loses. But in the end most people lose. Three-quarters of the people tempted into the market by the promise of quick profits lose their money, experienced traders say.
These investors provide what old hands call ‘fresh blood’, essential to keep the markets 'liquid'. That means keeping trading volumes high, the only way money can be made by the winners. Clayton Yeutter, President of the Chicago Mercantile Exchange warns 'This isn’t a game for widows and orphans.’ That's obvious with a licence to trade on the "Merc" priced at $355,000.
Speculation is a colossal gambling game based on the theoretical future price that commodities will fetch on the cash market. Up or down, it doesn’t matter which way the price moves as long as it moves. Futures newsletters for investors report hurricanes, floods and coups d’etat as gleefully as they do sunshine and record shipments. As factors in price movement all of them make money for successful futures traders.
Who are the winners and how do they win? By and large they are the big traders — and the biggest of all are the private corporations. They have three distinct advantages over anyone else.
The activities of big multinational companies on the world’s cash markets powerfully influence price movements on the futures markets. For example, five grain companies control about 80 per cent of the world’s grain traffic. They can dictate prices to both producers and consumers now and so are in a most favourable position to say what prices will be in the future.
Speculating on the future is often more profitable than selling real food, providing you can exercise a degree of control over it. GATT-Fly, a Canadian church-funded group that studies world trade reported the giant multinational sugar firm Tate and Lyle, made about half their $100 million profit in 1975-76 from futures trading.
Dr. John Helmuth, a US House of Representatives economist, has been probing the industry for several years, particularly as it affects the survival of independent cattle farmers. His startling reports in 1981 undercut claims that futures trading protects producers and so by inference consumers.
By examining market records Dr. Helmuth found as soon as cattle prices on the Chicago future markets rose to the point where independent farmers could recover their costs, prices would suddenly nosedive again. Then he discovered that on the days they dropped, a network of large commercial feedlots, meatpackers and grain companies had made unusually big sales of cattle futures contracts. Large sales force prices down. Over a period of 16 months a small group of very large traders all with business links to each other made a net profit of $110 million on their trades.
Dr. Helmuth believes neither the period he covered nor what he found is atypical. Small farmers, unable to protect themselves against these dealings, nor even to cover their costs simply fold. And once wiped out they rarely come back.
More and more of us are becoming dependent on fewer and fewer producers, processors and distributors of food. Now agribusiness is also quietly gaining control of our future food on the wild and brutal floors of the futures markets. Boasts Clayton Yeutter, ‘soon the whole world will be coming to Chicago to trade on our markets.’