Agriculture Reference
In-Depth Information
Open outcry system
wheat is known to everyone regardless of partici-
pation in the auction. For both buyers and sellers,
the ability to estimate value based on the day's
trading in Kansas City, for example, and the
logistical difference between origins is a matter
of understanding differences in quality (e.g., US
No. 2 HRW vs. Australia hard).
Trading at the exchange is conducted by open
outcry, a public auction-style event during which
members of the exchange shout out bids to buy
and offers to sell. The event is held in a pit in full
view of others so trades are transparent. The
exchange house (e.g., KCBT) does not set prices;
rather, it acts as host for the daily auction. Prices
are discovered each day through actual bids and
offers by wheat traders who base their decisions
on their own assessment of supply and demand
factors and relationships between similar com-
modities. In Kansas City, traders negotiate on a
known class, quantity, and quality of wheat at a
specifi c geographical location. The KCBT wheat
futures contract represents 5,000 bushels of
HRW wheat graded at a minimum quality of
US No. 2 and delivered during specifi c times
to Kansas City. Other delivery points include
Wichita, Hutchinson, Salina, and Abilene,
Kansas.
Because only KCBT members can trade in the
pits and there must be a buyer for every sale and
a seller for every purchase, speculative traders
also are part of an exchange. These traders
perform the role of a risk taker. They help pro-
ducers and processors by taking the opposite of
the transaction when needed. Speculative traders
can be a buyer or seller for a future position in
the commodity. These investors intend neither
to take delivery on the grain nor to supply it to
a processor. They intend to profi t from price
changes in the contracts they buy and sell. A
further enhancement to the open outcry system
is found in the recent move to allow electronic
trading of futures and options. This service is
offered to the grain exchanges by the Chicago
Mercantile Exchange (CME). The CME through
its Globex platform allows both overnight and
side-by-side trading of the wheat classes available
in open outcry trading. This additional step has
helped to increase trading opportunities for fl oor
traders as well as electronic traders worldwide.
This system is attractive for both US farmers
and the world buyers because prices and transac-
tions that contribute to those prices are recorded
and updated as they occur; the relative value of
Farmer to elevator
Flow of wheat from farms through the distribu-
tion system to millers, whether down the road or
overseas, happens almost seamlessly. Farmers
harvest wheat when ripe and either store it in
on-farm bins or deliver it to a local elevator for
storage. Selling grain is not necessarily linked
with delivery to the elevator. United States
farmers retain control of ownership of their wheat
until they sell. If farmers deliver wheat to an off-
farm storage site, they pay a storage fee unless
they sell their grain at the time of delivery. This
practice differs from farmers operating in a
country with a single-desk system.
In the simplest transaction, a farmer delivers
grain at the time of harvest to the scale of the
elevator to be weighed. Grain is sampled and
evaluated for quality related to soundness and
storability. The elevator quotes a cash price for
the grain, which is the price they are willing to
pay that day. Inherent in the price is either an
agreed-upon sale to another elevator or mill or a
speculative view of the price at which the eleva-
tor might be able to sell the grain in the future.
The quoted price includes discounts for inferior
quality or premiums for superior quality and is
negotiated orally at the time of delivery. Weight
of the grain is used to determine the number of
bushels, and an elevator receipt is offered as
proof of delivery for settlement. A farmer who
does not agree to the offered price can either
store the grain and hope for a future improve-
ment in the price or take the grain to a competing
elevator.
Elevator to world
Wheat owned by a US elevator is available world-
wide. Grain trading companies trade their knowl-
