By Holter, James T.
Futures (Cedar Falls, IA) , Vol. 26, No. 1
Whether your forte is fundamental or technical analysis, knowing exactly what you're trading is important. Here, we examine the basics of the Chicago Board of Trade's (CBOT) grain futures and what fundamental factors affect them.
Editor's note: In the series, we'll tackle the fundamental and technical side of trading on alternate months. Every other month we'll spotlight a market and explain its fundamentals, and then test traditional indicators and explain their use. Taken together, these articles will provide any beginning trader with the first step toward understanding the futures markets.
The roots of the first grain futures born in Chicago Jan. 2, 1877, stretch over three continents. The Chinese began using soybeans in 3000 B.C. Native Americans embraced corn as early as 5000 B.C. And 9,000 years ago, Mediterranean countries began producing wheat.
Today we use these commodities in everything from gas tanks to diapers. Without the liquidity of a futures market, achieving the required price discovery for such flexible usage would be like wrestling the stalks of wheat from the statue of Ceres atop the CBOT.
Futures provide this liquidity by matching, and complimenting, the cash market. The CBOT's corn futures, for example, call for the delivery of #2 yellow corn with a maximum moisture content of 15%. Sellers can deliver # 1 yellow corn at a 1 1/2[cents] per bu. premium or #3 yellow corn at a 1 1/2[cents] per bu. discount.
"Because 15% [moisture content] is now the merchantable grade, we switched the contract so that it mimics the cash market," says Glenn Hollander, CBOT member and partner with Hollander & Feuerhaken in Chicago.
Delivery points are just as inherent to the viability of the futures, but setting the right points isn't as simple as copying the cash market, adds Diane Klemme, director of grains for Grain Service Corp. in Atlanta.
"The delivery points must correspond with the cash market, but they can't be viewed as perfect substitutes either. . .because then all you have is just another cash market," she says.
Whether you're a fundamental or technical trader, understanding how grain prices react to the real world is vital, says Carl Zapffe, grain trader and CBOT member. At the most, it's philosophically pleasing - your hard earned dollars shouldn't be dumped into a concept you don't understand. At the least, it's financially prudent: "Having fundamental data can alert a trader to a broker who might be talking them into doing trades not in their best interest or over trade them based on technical signals," Zapffe says.
Buying into grain trading, as compared to a managed fund, for example, is the same as deciding to lease or buy a car, Zapffe says. Traders should know the details of what they're trading before they make a commitment. The largest buyers into the markets sure do.
Market makers As the Sumitomo incident showed for copper, often the physical players can be fundamental factors themselves. What large processors do with their massive stocks surely affects the markets.
The Commodity Futures Trading Commission (CFTC) does provide a window into large player positions with its Commitments of Traders (COT) reports. COT reports list recent open interest by large hedgers, large traders and small traders, showing how many in each category are long or short. The CFTC releases COT reports every other Friday, but the data is broken down by week.
Numerous interpretations exist for COT reports (see "Making A Commitment," Futures, November 1996). These basically revolve around the idea that it's the large hedgers who know the market best. But Hollander warns COT reports come out after the fact and shouldn't be relied on solely for information. Sources on the trading floor (such as your broker) have a much more timely idea about the positions of major players, he says.
Who the international buyers and sellers are depends on the grain. …