THE PRODUCE EXCHANGE Continued.
CASH GRAIN; FUTURES; INSPECTION; BUCKET SHOPS.
Although about ninety per cent, of the contracts made on
any exchange are in "futures" there must always be the very im-
portant basis of cash business. Without the actual property
the contracts for future delivery would mean nothing and would
have no standing in law. The main fea-
tures of cash tradin g wil1 therefore be con-
sidered first. A good portion of the trad-
ing hall is generally given to what are termed cash grain sample
tables. The grain house with a certain number of cars of
wheat, corn, oats, rye, barley or flax seed on the railroad tracks
for its disposal hastens to have samples of the same displayed
on these tables. The samples are in small paper sacks, the
contents of which have been taken from the cars when they
were inspected on arrival. Each sack contains the name of the
railroad line over which it was received, number of the car, the
grade affixed by the official inspector, etc. When the samples
are placed on the tables the grain is on the market. Around
these sample tables gather the receivers who have grain to sell
and buyers of all classes who wish to secure a share of the current
receipts from the country. As suggested before, these buyers
may include: First, elevator owners who want the grain to
fill their houses for the profits in the storage; second, the millers
or their agents buying wheat to grind; third, brewers and dis-
tillers who wish corn or barley for manufacturing purposes;
fourth, the agent of the cereal company who wants oats for his
plant; fifth, the shippers who have need of grain of all kinds to
fill contracts made with eastern distributers, with actual con-
408 PRODUCE EXCHANGE.
sumers or with export interests contracting for supplies needed
When the seller and buyer agree on a price for a single car
of grain or for fifty cars, as the case may be, the sample bag
passes to the buyer. Pie can then direct the railroad having
the cars on its tracks how to dispose of them. They may be
ordered to a certain warehouse or mill or other
t P o r B P u e yer PaSSeS P lant to be unloaded ^ they may be ordered
switched to the tracks of some other road to be
forwarded to the point for which the grain was purchased.
These transactions repeated on each trading day of the year
constitute the chief feature of the cash grain trade.
Another important feature in the cash grain business is the
delivery of grain in either private or public warehouses. Sales
may be effected from private houses by samples or from public
warehouses by the tender of the official receipt or certificate
representing the grain when it went inte storage. Usually sales
made from storage houses are for larger amounts possibly only
25,000 bu. ? if some special lot of grain is desired but more
frequently 50,000, 100,000 or 250,000 bushels where the grain
is to be moved out by rail or water in large quantities. In all
these transactions the bill of lading, the certificate of the public
weighmaster, and the official inspection certificate pass with the
grain to the buyer who gives in exchange his check in full pay-
ment. This closes the cash grain transaction.
That part of the business of the Produce Exchange which re-
ceives most notice by the press and the public is known as
"trading in futures" or speculation. Unreasonable critics of the
system go so far as to call this feature of the business gambling.
This phase of criticism was discussed in a previous chapter on
the Stock Exchange, which furnishes a parallel case.
Each member of a Produce Exchange can do business on his
own account or he may execute orders for others inside or out-
side the association. If he. operates for others he does so on a
CASH GRAIN. 409
commission prescribed by the rules. He must in making a re-
port of his trades to his principal state in certain written form
with whom he made the trade in the open market,
^e ^ me a ^ which it was made and the price.
If a member acting as a broker for a fellow
member or as a commission merchant for an outsider makes
ten or twenty or two hundred trades in a day the same exacting
conditions attach to each separate transaction. It is the growth
of such business that builds up, first the small commission firm
and possibly, later, the great grain and banking house with
private wires stretching out to other exchange points and pene-
trating into the states tributary to the home exchange.
The trader who sees in existing conditions on a certain day
reasons for higher prices and operates with a view of advancing
the market is called "a bull/' The trader who does the oppo-
site is called a "bear." The entire trading body as well as the
public, so far as it takes any part in the making of the market,
is thus divided into bulls and bears as on a stock or
Buiis and Bears cotton exchange. If a man with money to in-
vest or risk in a business transaction buys a vacant
lot in a suburb and sells it a month or a year later at a certain
advance or a certain loss he has engaged in what the trade and
the public call speculation.
It is a simple matter to apply the same attempt at profit
making to the products of the soil. The grain trader goes into
the open market where he meets hundreds of others and makes
trades makes contracts for future delivery under the fixed
rules of the exchange in grain. He buys in midwinter or
early spring on May contracts or in the summer or fall on
September or December contracts. While he is
doing this another member has made a sale of a
certain quantity of a specified kind of grain to be
delivered in May, July, September or any other month. Long
before the month named arrives, the man who had the grain
410 PRODUCE EXCHANGE.
bought finding himself with a profit of several cents, goes into
the same open market and sells out a like amount. The mem-
ber who sold originally finds the market several cents against
him. He goes into the market and buys a like amount. The
one draws down profits from the clearing house. The other
puts his check into the clearing house to make good his losses.
Both are even on the market. Both have engaged in speculation
in its simplest form.
Assume that the original trades stood on the books without
any offsetting transactions until "delivery day," the last day of
the month named in the contracts. Then at that date, under
the rules, the buyer must be in a position to take the 5,000,
10,000 or 50,000 bushels named in the contract and pay for them.
He then has to deal with cash property and he
Delivery Day has turned over to him warehouse certificates call-
ing for the actual property for which he must
draw his check in settlement. The original seller, on the other
hand, may tender the amount of grain named on "delivery day"
or he can deliver the same at fixed hours on any trading day of
the month named in the contract.
The member or house which for his own account or on
orders from a principal continues to buy certain cereal for
some future month on a large scale for weeks or months in ad-
vance becomes a factor in the market to the extent perhaps of
causing a marked upturn in the price. Those who have thus
bought are termed in the principal "longs" or holders in that
particular cereal on that exchange. Those who have sold to
this large buyer or to others, day after day are termed "shorts."
These latter may find the market going too much
shorts and against them and through fear of heavy losses
may switch suddenly to the buying side for pro-
tection. This is called "covering," a performance which often
adds great force to the buying side and results in a sharp ad-
vance in the price for the time being. On such a swell in the
LONGS AND SHORTS. 411
price the large holders may reduce their lines at good profits
or may continue to buy up to delivery day when they can demand
the actual property. This condition may be reversed. The
holder may find the market each day going against him. The
sellers may grow bold, pressing the market lower until the longs
are forced to abandon their position. If they sell out to prevent
further losses it is called forced liquidation just the opposite
of covering by shorts. The short sellers, with a decided ad-
vantage in the market because of the decline, may buy back
to offset previous sales or may continue short until delivery
day when they are obliged under the rules to produce the
property sold having the entire month to make the delivery.
This kind of trading gives rise to all the turns in prices in a
speculative market. When carried to extremes it gives rise
to violent fluctuations in prices by which smaller or more con-
servative traders are greatly inconvenienced and often finan-
Following up the foregoing methods of trading a "corner"
develops under certain conditions. A strong house or a group
of leaders in the trade may decide that the wheat, corn or oats
market is in a condition to be easily controlled and the price
manipulated. The shipping demand for a certain cereal ha?
reduced stocks. The country roads are bad or farmers too
busy to market grain freely. Perhaps some injury threatens
the growing crop and makes the country unwilling to part with
reserves. If the warehouses contain but 2,000,000 bushels of
the grade required to fill contracts and the man who contem-
plates running a corner sees that another 2,000,000 bushels is
all the country tributary to the market is likely
comer to furnish, even with the inducement of high
prices, then his plan is to keep on buying until
he has accumulated a line of about 10,000,000 bushels. Of this
amount the sellers of 4,000,000 bushels will have the actual
grain from the country and from the elevators to deliver when
412 PRODUCE EXCHANGE.
the month for which it is sold arrives. The sellers of the other
6,000,000 bushels are caught "short." They have sold what
they can by no means deliver. If these shorts take alarm and
rush into the open market to buy or "cover" for protection then
the excitement begins. Prices may be advanced several cents
in a single day. After prices are thus carried far above a
natural level others of the short sellers may seek to make private
settlements on large lines outside of the regular trading channels.
There is a third and last resort for those who sell and can not
deliver. They can default on their contracts and ask an arbitra-
tion committee to fix a fair settlement price. It should be
stated here that the laws of many states make the running of
such a corner illegal. On nearly all exchanges, also, there is legis-
lation against such operations. As a rule the man conducting a
deal of this kind is fortunate to escape losses in the end as he
has delivered to him such a volume of high priced grain that he
may not be able to distribute and market it until the expense of
storing, insuring and carrying the grain will offset the profits
he may have secured in his settlement with the short sellers.
One of the most important features of the exchange, under-
lying both the cash grain trade and the transactions in futures
is the matter of grain inspection. After the grain leaves the
farm and is thrown upon the open market at an exchange
point it becomes an element in the commerce of the world.
Banks make loans on grain in transit and in store,
inspection ^ mus ^ carr j insurance in most of its travels
from producer to consumer. Somebody must
vouch for it. The man who goes around the world needs
personal words of introduction and letters of credit. Grain the
chief product of American farms must start on its way in the
world of trade with a certificate to show its quality. Grain
inspection is conducted not by the exchange but by the state
in which the exchange is located. Thus, Missouri regulates
inspection for St. Louis, Minnesota for Minneapolis and Illinois
GRAIN INSPECTION. 418
for Chicago. The governor of the state appoints a Chief
Grain Inspector. This same official aided by a board of Rail-
road and Warehouse Commissioners appoints a Supervising In-
spector and as many assistants as the size of the railroad center
and the volume of grain handled suggest. These assistants
visit the railroad yards daily and by extracting samples from the
interior of the cars of grain fix upon its proper grade. These
grades usually range from No. 1 to No. 4 and below this it is
classed as no grade or rejected. It is with the higher grade
the greatest care is needed. Most exchanges specify that con-
tracts may be filled with No. 1 or No. 2 grain. If the state does
its work well other exchanges and grain merchants the world
over learn to accept its certificate of inspection without ques-
tion. The state not only inspects grain as it is received, and
before the samples are offered on the exchange, but it places in-
spectors at warehouses to certify to quality of cargoes withdrawn
from store for shipment by boat or rail to their destination. Mil-
lions of bushels of grain are sold every month in the year to
European buyers who rely on the grade given the grain at the
American exchange point by the state inspectors.
At times when sellers are making heroic efforts to rush grain
to market to fill large contracts it is often of the greatest im-
portance to have the receipts grade No. 2 instead of No. 3. The
one certificate will make it deliverable on a con-
GrldT gtl tract ma( ^ e on tne exchange, the other will not.
Growing out of this emergency, in attempting to
make grain good on contracts, there has grown up at each ex-
change point . a system of private elevators equipped with ma-
chinery for cleaning and drying grain to raise its grade. It is then
passed to a public elevator, is again inspected and may be deliv-
ered on contracts. What is known as "kiln dried" corn is very
desirable in commercial circles at certain months in the year
especially the germinating season when corn containing
moisture cannot be shipped long distances without heating or
414 PRODUCE EXCHANGE.
Before concluding this discussion of the Produce Exchange
it may be proper to refer to a species of gambling conducted
under the semblance of grain trading, and known as the oper-
ation of "bucket shops."
The bucket shop is an imitation of the commission house.
The one is an outlaw in most states in this country, the other
as legitimate as filling of orders for coal, lumber or merchandise.
The commission house fills orders entrusted to it in the open
market, where every purchase or sale has its effect in making the
prices, on which producers sell their crops and consumers both
domestic and foreign base their purchases. Every sale contem-
plates delivery and every purchase contemplates the ability of
the buyer to take the actual property on delivery
Bucket shops day. Bucket shops generally secure their quota-
tions, (which they mark up on a black-board,)
from the exchange by trickery. They never create a quotation,
except it be a false one to get the best of an innocent customer.
The bucket shop system is to take the wagers of its victims on
the next turn in the regular market, the money passing over the
desk as if betting on a horse race. Most trades are made on 1
cent a bushel margin and the bucket shop deducts its Jc or Jc
a bushel from the price when the outsider makes his bet. It is
a gamble pure and simple on what the market is about to do.
No bucket shop ever controls a bushel of grain, ever makes a
delivery or fills an order in the open market unless for protection.
Nearly all the highest state courts and the United States Su-
preme Court have ruled in test cases that regular exchange
methods are proper commercial transactions while the bucket
shop is declared an evil.