THE PRODUCE EXCHANGE

BOARD OF TRADE.
CHARACTER; ORGANIZATION; MEMBERS; BENEFITS TO PUBLIC.

The United States has never, thus far, been a great manu-
facturing country. Its commerce and wealth are chiefly based
upon the products of the soil. Its mining and lumbering in-
terests have been small compared to its agriculture. It is the
great food producing nation of the world. Eu-
r P e is directly interested in the success of agri-
culture in the United States and is dependent
largely upon American produce. The development of agri-
cultural interests has been a potent factor in the growth and
development of our cities. New Orleans became the greatest
city of the south chiefly because the products of the cotton
fields found their natural outlet there. Chicago had its growth
in the fact that it is the center of a vast agricultural domain,
Buffalo and other cities of the lower lakes assumed importance
as the transportation of farm products by water to New England
and the seaboard became a necessity. Later, Galveston in the far
southwest, Minneapolis and Duluth in the northwest sprang up
and became thriving cities because they were natural geograph-
ical outlets for agricultural products of the expanding and
developing west. Agriculture has also been the moving in-
centive to the building of railway and steamship lines. It
was to meet cargoes from the Illinois and Iowa prairies that
the first railroad lines were .pushed westward to the struggling

400



BOARD OF TRADE. 401

trading center at the foot of Lake Michigan, afterwards to
become the greatest grain market in the world.

The produce exchange is an outgrowth of our agricultural
development. It is a carefully devised business system for
handling, storing, and distributing annually millions of bushels
of grain and millions of dollars worth of animal products in the

form of meats, lard, etc., at important points
Definition in the United States. It is a grain and produce

market, the creature of our necessities as an agri-
cultural and commercial people. It differs from a stock ex-
change in that its members deal in realities, even though they
handle nothing but warehouse receipts or promises to deliver,
while the stock broker deals in the evidences of credit, or securi-
ties which may or may not have a tangible value back of them.

Produce exchanges are usually located in those cities which
have important agricultural sections, tributary to them, where
railroads center or where rail and water commerce have natural

connections at a navigable port. The most im-
Location portant produce exchanges are therefore at the

seaboard, on the lakes or on navigable rivers. On
the Atlantic coast the exchanges are at Boston, New York,
Philadelphia and Baltimore. On the Gulf of Mexico the princi^
pal exchange points are New Orleans and Galveston, and on the
great lakes are Chicago, Milwaukee, Duluth, Detroit, Toledo
and Buffalo. St. Louis, Kansas City, Cincinnati and Minneapo-
lis are examples of exchanges in close touch with producing
regions but not having advantages of lake or ocean navigation.
San Francisco is the most representative exchange point on the
Pacific coast. These cities furnish the natural outlet for the
distribution of the products of their several sections.

Each exchange is a corporation controlled by a general or
special charter under which its acts are legalized by the state
in which it i? located. It must be .governed by certain officials
elected from and by its members. These officials are usually a



402 PRODUCE EXCHANCE.

president, one or more vice-presidents, a body of directors and
various standing committees to attend to the details of official
business. Each exchange adopts for itself rules and
by-laws which govern both officials and members
in all their acts. These rules prescribe the
requirements of membership, the terms and conditions under
which a member may transact business, and provide rigid
methods of discipline for violations of the laws of the exchange.
It must be kept in mind that the exchange, as such, transacts
no business of a commercial nature, does not receive or ship,
buy or sell during its existence a bushel of grain or a pound of
produce of any kind. It simply furnishes the facilities for
trading to its members and so hedges them about with restric-
tions that every contract made is binding under its rules and
under the laws of the state and nation. Any digression from
the strict letter of exchange law is promptly followed by a
charge of uncommercial conduct and this by suspension, ex-
pulsion or other penalty.

The members of an exchange may be divided into several
classes according to the special features of the business adopted.
"Receivers" are those who make a business of receiving grain
or other produce direct from the country shipper. Their busi-
ness is to carry out the instructions of the ship-
P er e ither in storing the grain in a warehouse or
offering it for sale in the open market to the
elevator owners who may wish to carry it to a future time, to
the miller who may want wheat to grind, to the distiller, the
brewer, the cereal company or perhaps the eastern shipper or
exporter. "Shippers" are those who make it their business
to arrange for the forwarding of grain to still other exchange
points or to eastern distributers and consumers. "Carriers"
give special attention 'to financing this class of property "by
supplying the necessary capital, furnishing storage, insurance
and all needed protection until there is a demand for its ship-



MEMBERS' PRIVILEGES. 403

ment. This class of business has. given rise to extensive sys-
tems of private elevators. Public warehousemen are those who
own or lease from railroads great storage houses the contents
of which they generally do not own. They are required to issue
warehouse receipts for all grain stored in such houses and the
state, through a board of warehouse commissioners, regulates
the storing, carrying and delivery of this grain to its owners
who pay a fixed charge per bushel to the warehousemen for the
warehouse service.

In the workings of the Produce Exchange no class of mem-
bers occupy so prominent a place as Commission Merchants. As
a rule they outnumber the grain receivers, the shippers, the ele-
vator owners and the independent traders, who are without a
commission business. Ordinarily the best class of commission
merchants do not trade on their own account, but confine them-
selves to the proper execution of customers' orders. For the
handling of a trade in grain there is established



ty each exchange a regular commission charge,



usually Jc a bushel for opening and closing the
trade. The business is most profitable, when conducted on a
large scale, the largest houses in the largest markets of the
country frequently executing orders for many millions of bush-
els of wheat, corn and oats in a day. This presupposes a very
extensive office force, a big private wire system reaching to
other exchange points and a wide acquaintance backed by a most
excellent reputation for handling all orders instantly and accu-
rately. Where a few houses of this kind exist in a large trading
center there are hundreds of smaller concerns doing a limited
business, but under the same rules and restrictions of the
exchange. The first province of the commission man is to exe-
cute orders in any or all markets on the exchange. He must
know his customers, or the people who entrust him with orders.
If he has not a personal acquaintance with his principal, (the
man giving or sending the order,) he must have what is the



404 PRODUCE EXCHANGE.

equivalent of personal acquaintance and confidence a financial
guarantee from the principal. ,,

This brings up the subject of margins or security on trades
ordered. The favored commission house may have a number of
customers whose financial prominence is such that they have
carte blanche privileges at the order window. In such cases the
commission merchant knows that whatever is bought or sold for
such account is as "good as gold" without the scratch of a pen.
This class of customers is the exception. For the ordinary
trader the first step is to be properly presented to the head of the

commission house as a reputable gentleman. The
Margins second requisite is for him to deposit with the

house such sum of money or certified checks as
will cover ordinary obligations in the trade. Then his orders to
buy or sell are carried out by the machinery of the fully equipped
commission house. If his orders exceed in volume the credit he
has with the house, the credit clerk is quick to notify him that
more funds are needed. The rules of most exchanges permit
the commission merchant, if any unusual action is taking place
in the market, to call margins on trades to the extent of ten per
cent, of the ruling value or price of the article bought or sold.
As an example: The customer has wheat bought at 80 cents for
a future month. Ten per cent, of this price is 8 cents. The
commission man if he fears a bad break in the market may ask
the trader to put up enough funds to protect the trade on a
break of 8 cents or down to 72 cents. If the wheat is sold at
80 cents and the market looks so strong that it may make a big
advance, the margin is called the other way, the trader putting
up the funds to protect the house on a possible upturn in price
to 88 cents. When the market has covered half this ground a
break of 75 cents or an advance to 84 cents, the commission man
may again call for margins to the full limit above or below the
ruling price. Thus, on a very excited market or during panicky
conditions, margin calls on customers may come thick and fast.



MARGINS. 405

The customer may feel that lie can not or will not risk more
money on his open trades and orders them closed at a loss. If
customers do not respond to margin calls the house with the
open lines on its book, may close the same for account of those
whose margins are ahout exhausted.

These are extreme cases. The ten per cent, margin call is
unusual. In the ordinary condition of trade from 2 cents to 5
cents a bushel protection is considered sufficient by the commis-
sion merchant. Naturally there are times when the customer
can not be reached quickly or for some reason can not respond
quickly enough and the commission house is caught in the gap
between the wicked market and the tardy principal.

Many students of business methods are apt to conclude that
all transactions on an exchange are surrounded by some unex-
plainable mystery. They readily understand that conditions
such as drought, frost, excessive rain, etc., affect the year's
output of produce, and the whole problem of
grain speculation is made up of factors as plain
and simple. The speculator watches the crops of
the world the year through. If the winter crops go into the
ground in good shape it is the first promise of abundance for
the coming year. If spring crops are seeded favorably and a
large corn acreage is planted the probability of abundance in-
creases. Everything else left out of the question, this farm
prosperity starts the speculator selling months ahead. If the
opposite is true adverse seeding seasons, winter killing of wheat
and wet weather delay in corn planting the speculator begins
buying on the theory of short supplies and naturally higher
prices. Extend this system of observation so that it covers
the importing countries of Europe chiefly England, France
and Germany and the competitors of America in exporting
supplies to Europe chiefly Russia, Danubian countries, India,
Australia and Argentina and you will find the commercial
reason for ninety per cent, of the trading done on future con-



406 PRODUCE EXCHANGE.

tracts. If importing and exporting lands are promised short
crops then very high prices for twelve months ahead are almost
certain. If both importing and exporting countries have an
over abundance promised, prices are likely to be depressed.
The speculator also takes into account the reserves on hand from
the previous year. This is important whether these reserve
stocks are at home or abroad. Weather conditions are watched
every day of the year. Great crop promise may be changed in
a night by a hard untimely frost, by hot winds, by excessive
rains at harvest or by a widespread drought during the growing
period. The perfection of the signal service and the weekly
and monthly weather and crop reports furnished all exchanges
by the agricultural department at Washington have become more
and more an aid to the trade in shaping prices according to
natural conditions.

In a general way the Produce Exchange is a benefit to both
producer and consumer. The first great benefit is in the ac-
curacy with which the organized trade gathers and makes public
valuable information about production the world
Exchanges th< over - Both producer and consumer can more in-
telligently prepare for the future the one by sell-
ing quickly or holding on to his year's production as the con-
ditions suggest, the other by making his contracts early for
supplies or by holding off for lower prices as his judgment
might direct. In the event of poor production at home the
speculator is the best friend of the farmer. Long before the
grain approaches harvest and perhaps months before the great
American corn yield is to be gathered, the traders who watch
every feature of crop development have advanced prices to a
high level and the man who owns the acres is the first to feel
the benefits. He may have less bushels to market but his
crop loss is to a large extent made good by the markets made
possible only by the Produce Exchange as here outlined.