Betting on the Future

Last week's record-breaking sale of Canadian wheat to the Russians (see THE WORLD) stimulated more than the Canadian economy; it rang like a mating call for those iron-stomached speculators who go after big profits, and risk even bigger losses, by trading in commodity futures. The speculators rushed in to buy wheat futures, gambling that the Soviet crop failure would mean a larger market for U.S. wheat. They sent prices up as much as 13 1/2-c- on the Chicago Board of Trade, and the lucky ones were able to make a 130% profit on their investment in just five days.

Once, only professionals risked their money at the perilous pastime of making such esoteric guesses as how many potatoes would bud, the quality of hog bellies, the size of the soybean crop, and the number of cocoa beans on Ghanaian trees. But after tasting quick profits with the glamour stocks of the 1950s, thousands of amateurs--from house wives to retired mailmen--are trying for even quicker profits in the fitful, fickle commodity futures. Sales on the Chicago exchange have risen 80% in three years. Most often the amateurs lose, but the tales of what might have been keep them coming back like horserace fans after a daily-double killing. They were also betting last week that the troubles in Malaysia would send rubber futures climbing, that rain and winds in the Midwest would hurt the soybean harvest, and that the world shortages that sent sugar soaring earlier this year would do it again.

Horrendous Losses. The futures market basically involves trying to guess at what price one of the 30-odd commodities traded will be selling in a given month in the future. Experts study the weather, the size of plantings, inventories, probable demand and world political whims to make their judgments. For actual users of a commodity, the guess about the future is a practical way of stabilizing costs and protecting profits. If wheat gets scarcer and thus more expensive, the flour miller will make a profit on his futures contract--which is based on the price of wheat today--but the profit will be balanced by the fact that he will also have to pay more in the cash market for the wheat he actually needs. If the contract's value decreases because of a wheat glut, he will take a loss on his futures contract but hopefully make it up by buying his wheat more cheaply. While commodity users play the market largely to protect themselves, they could not do so without the speculator, whose purchase of a futures contract is simply a bet that the price will change in the direction he anticipates.

Profits can be big; a contract for 5,000 bushels of wheat costs only $500 down, and every rise of a cent a bushel adds $50 to the contract's value. But losses can be horrendous because, as the commodity's price drops, the speculator is called on to put up more margin to cover his investment. Often no one will buy his contract on a sharp price drop, and he is unable to get out. When the sugar price broke last spring, one New York speculator was getting margin calls for $20,000 a day, with no hope of selling out. On the other hand, many speculators who had bought sugar earlier and sold before the drop made huge profits.

Grand Design. Much of the risk in futures is generated by the unsteady nerves of the amateurs. A single cloud sighted over Manitoba two years ago was enough to cause a drop of $750 in flaxseed future contracts, which had been rising in the belief that a drought was destroying the crop. Last week the wheat speculators were nervously trying to gauge whether the U.S. would loosen its strict rules against trading with Communists and sell wheat to the Soviet bloc. Of course, they had no assurance that the Communists would try to buy. But many of them were actually willing to believe that the whole nuclear test ban treaty was a grand design of the Russians to soften the U.S. into selling them wheat.

This file is automatically generated by a robot program, so reader's discretion is required.