CBOT Rules: 703 C., sections : 10108 & 11108
1973 was a benchmark year in terms of price discovery in grains and commodity price inflation.
July 1973 Soybean futures traded at $3.31 ¾ as a price low in August of 1972.
Between December 1st of 1972 and the end of January 1973 the market hovered slightly below and finally above $4.00. A price level beyond wildest dreams!
Unfortunately, I was one of those speculating it was impossible for the market to deal with $4.00 soybeans; that is, until in January of 1973 and I learned detailed fundamental research is extremely valuable.
Of course those who are pure technicians and only follow a mechanical trading system or follow the trend care less about the fundamentals; some lessons were learned in 1973.
A grasp of the fundamentals of a market allow the analyst to ‘play with WHAT IF?’ alternatives. In my opinion, a thorough grasp of the fundamentals of any market provide some long term perspective.
During 1972 the market was dealing with the probability of bumper crop yields. The markets were also coming to terms with large purchases of grain by the
The trade was complacent. Almost the reverse of the ‘Madness of Crowds.’ Those of us in agriculture were accustomed to large surpluses and low prices. Users, whether exporters, processors, feed yards or food purveyors were unprotected in terms of user hedges. In fact, few even thought about future coverage of commodity needs. Few Fortune 500 companies understood or used commodity futures.
Additionally, Exportklub-the
Export reporting was not a part of the protocol of trade. Just the opposite. Grain exporters were accustomed to walking a secret path through a variety of governments and other private buyers. Grain exports had always been a dark, murky world. Governments, beginning with Napoleon (“Armies move on their bellies”) insisted upon great secrecy in regard to purchases of foodstuffs.
During this period, 35 year old Willard Sparks, the Director of Research for the Cook Grain Company, and a fanatic about detailed commodity research, calculated the amount of possible tonnage to be loaded on vessels from
The Cook Grain Company, considered at the time to be an upstart among the big boys in the grain trading world, followed the advice Willard Sparks. They contracted or leased fobbing rights, fobbing capacity from export elevators to the extent available. A genius strategy.
As the spring of 1973 approached and grain prices continued an upward advance newly formed export companies (of which there were many) and export grain brokers (of which there were many) LEARNED THE IMPORTANCE OF THE TERM: “Out of Position Hedger.”
Some of these folks with soybeans sold FOB the Gulf of Mexico, Houston or CIF export destination either frequently lost their lunch into whatever disposable container was immediately handy or raced into the men’s room, or broke into acute perspiration when they heard the news: the elevation to get your soybeans from the barge or from rail cars into a vessel either was completely unavailable, or would cost $1.00 OR HIGHER per bushel (normally the fee would be around 2 cents per bushel).
Those folks choosing to search for alternatives versus drowning sorrows in gallons of adult beverages came across Rule 703 C. The load out fee for a delivery warehouse receipt was but 4 cents per bushel. The rule calls for barges, rail cars or vessels to be loaded for 4 cents. The Rule has since been amended to 6 cents.
The bottom line: their alternative became buy futures and stand for delivery.
Therefore, the final few upside dollars in soybean values can be attributed to the inability to load vessels through normal channels versus the shortage of soybeans.
