The Commodities Market: You've Really Got to Be an Animal

Where were you on May 1, 1976? That was a Saturday, remember? What were you doing? Painting your porch? Watching a ball game on TV? Thinking about the five contracts of soybeans you had bought the day before?

Soybeans? Yeah, you know; they're small and round and yellow. They contain a lot of protein. The Japanese are crazy about them--soy sauce, bean curd, that kind of thing.

Let's do some supposing. Let's suppose it is springtime 1976. You are contemplating your future. You are worried about inflation. You see the purchasing power of your life insurance and savings and Social Security shrinking like wet wool in a hot drier. You know the cost of living has gone up about 80 percent in the past decade. You think the real energy crisis is yet to come and that the winter was just the tip of the glacier. You believe the price of such basic energy sources as crude oil and coal--and, therefore, the price of almost everything else--has nowhere to go but up. The world seems to be going out of its collective mind, swelling like a balloon about to burst.

On that Friday before May first, you unearth the $10,000 you have buried in your basement for your Sunset Cruise. You say to yourself, "By the time I'm ready to retire, this won't buy me a round trip on the Staten Island Ferry. I'd better put it into something that inflates with inflation."

You have asked yourself what moves with the tide, what goes with the flow. Real estate? The stock market? Art? Mining ventures? Mutual funds? City bonds? State lotteries?

Oh, yes, you have reviewed the possibilities. Each of them makes your gut tighten and your teeth itch. But there is one area of investment you have heard about that seems worth exploring: the commodities market. You have heard apocryphal stories about overnight successes in commodities: the Chicago dentist who put $3000 into pork bellies and pyramided $100,000 in six months; the California lawyer who simply handed his account executive (the same as a stockbroker) a small inheritance of $10,000 and forgot about it until he learned he had just made $250,000 in plywood. "I wouldn't mind something like that," you say modestly to yourself. "I could stand it." You settle on commodity trading as your thing.

You have been watching the markets. You--you salty dog--have this feeling that soybeans are underpriced. Never mind for the moment how you got the feeling. It is simply there. And on that Friday before May first, you drink one last cognac, flip your scarf around your neck, pull your goggles down and call your account executive and say firmly, "Buy five contracts of November soybeans."

Basic truth in commodity trading: You buy when you think the price of a commodity is going up; you sell when you expect the price to go down. It is a two-way street. You can make money in either direction. It is this thought that you might find hardest to grasp. You can enter the market as either a buyer or a seller of a commodity. When you buy or sell, it means you are willing to take the risk for the market price of that commodity while you hold the contract. Since you have told your account executive that you want him to buy soybeans, this means that if all works well, you will buy the beans at a relatively low price. While you are responsible for them, you hope the price will rise. You will ride the price up. Then you will sell them back at a higher price. Your account will then be cleared and you will have made money.

If you had thought the price of soybeans was going to drop, you would have sold the contracts, ridden the price down and then bought them back. Again, your account would have been cleared and you would have made money.

It is a Kafkaesque world, very modern and complex, something you might expect to find in a comic novel. You can, in effect, sell what isn't yours. You can buy it back later. You can make money while prices fall. You might lose money as the price goes up (you will lose money if you sell a commodity and the price goes up). In all cases, you pay only a small percentage of what the commodity is actually worth. It is something like Milo Minderbinder's selling Egyptian cotton, buying Italian grapes, coating them all with chocolate to trade for African gold with the understanding that everyone will get a cut--depending on the price of goats on Crete and the shipping tonnage in the Suez Canal. The logic is there if you want it to be. Surely, this is the bottom line for all economic systems: We subscribe to them and they are reflections of us. They are the mirror, not the cause, of our complexities.

Anyway, you think soybeans are about to take off. You had your account executive buy five contracts--that is, 25,000 bushels--due for November delivery (i.e., by the end of November, that contract will close out and be taken off the board). Sure, soybeans have been piddling around in a narrow price range for six months, whipsawing back and forth between $4.80 and $5.20 per bushel. And, yes, that minimal price movement has been wiping out traders who were trying to outguess the trend. But no matter. You are ready to put about $10,000 into a purchase of soybean contracts, because you believe the price of beans is going up. Maybe you are psychic. Maybe you are depending on your luck. Maybe you have an indecent relationship with the wife of the Bulgarian military attaché in Moscow, and maybe she is sending you photocopies of her husband's on-site crop-inspection reports that indicate deteriorating conditions in Russia (and therefore the need for Russia to buy grain from the U.S.A.). Whatever your reasons, you buy the soybean futures on the Chicago Board of Trade, which is the most common place to trade soybean futures.

Let's take a simplified look at the mechanics of the market: Your order has progressed along a chain of people. From your account executive, who took your order on the phone, your "Buy 25,000 bushels of November beans" order is directed to the floor of the Chicago Board of Trade. The floor of the board happens to be one of the most interesting places in the world. The room where futures contracts are traded is as large as an old railroad-station waiting room, with each commodity having its own "pit." The activity down on the floor is as frantic as a beehive on speed. Teletypes clatter, people run around, current prices are flashed on the boards high on the walls and, through it all, you hear a sound--something like an ocean's ebb and swell. That is the sound of some 1000 people calling out their orders, often at the same time. It is the ultimate primal scream, a chant of financial dealing that carries echoes of the oldest bazaar on the most ancient camel route.

Your soybean-futures order is received over a phone or a teletype at the desk of the commission house with which you are dealing. These desks line the edges of the floor of the board. A phone clerk writes out your order, time-stamps it and hands it to a messenger wearing a loose blue jacket. The messenger hustles through the crowd to the soybean pit, moving through the pack like O. J. Simpson on a good day. The soybean pit is an octagonal structure made up of several wooden risers. Your messenger climbs the few steps to the top of the pit. Inside this edged circle stand the brokers and the traders. They jam together on the steps that converge down toward the center of the pit. They stand like this through the trading day, shouting into each other's faces. Most of the people trading are men. They yell and signal with their hands. Sometimes they seem to panic. So would you if you had a few hundred thousand dollars riding on whether or not you were heard.

This system of trading in the pits is called open outcry. The orders for both buyers and sellers are supposed to be traded openly. The price is always vocal (or by hand signal) and is not supposed to be secret. Clerks stand at a rostrum above the pits and listen for the latest prices being called out. As they hear changes from moment to moment, they feed the information into an electronic ticker that signals the current price to all those interested in the market. The quotations go to wire services, commission houses, Government agencies, foreign banks, county grain elevators, private individuals who are willing to pay the freight of a commodities service over their phone line and many others.

In theory, you are supposed to have as much of a chance to get your order filled fairly as anyone else. But, like the rest of life, theory does not reflect reality.

The messenger carrying your order slips through the crowded pit and hands it to the broker for your commission house who is in charge of all that firm's November soybean contracts. He happens(continued on page 148)Commodities Market(continued from page 124) to be holding some very large orders for many thousands of bushels, so he is not exactly awed by your five-contract buy order. But he will do the best he can for you--usually. If you have named a price, he will try to buy the soybeans at that price. If you have sent in a market order (that is, you agree to pay whatever price he can get for you), then there is more room for him to maneuver. Of course, he might maneuver for himself instead of for you, but more on that later.

Your broker reads your order quickly. He starts waving his hands and yelling. If it is a busy day, the action is very physical. Sometimes there are fights. Sometimes people collapse right there in the pit. It is a tough business, with more than financial risks. Anyone who argues that emotions do not move markets has not seen the hysteria that can sweep the pits. It can be frightening to the novice.

Signaling, bellowing, threatening and cajoling, your broker gets the nod or the sign or the call from someone else in the pit who is willing to sell the soybean futures you want to buy. Your contracts are bought. Your broker scribbles the transaction price on the order form, along with the name of the party with whom he traded and the bracket (the hour during which the trade was made--not the exact minute but the hour). He either gives the completed order to the messenger, if he can find him, or tosses the order toward the edge of the pit, where it will be picked up and taken back to the commission-house desk at the edge of the trading floor. There your order will be time-stamped again by the phone clerk, who will notify your account executive that your order has been filled. Your account executive calls you to report that your soybean contracts were bought at such and such a price. Meanwhile, back on the floor of the Board of Trade, the action continues. The trading hours in the grain pits are from 9:30 a.m. to 1:15 p.m. Seconds after your order has been filled, you could be making or losing money. The action happens just that fast. Price changes occur so quickly sometimes that an order is deeply in debt or high in profits before the customer even knows he has a "fill."

Caution! Each step in the process just described is open to some weighty questions--from how much information you actually had available to you to help you make a sensible buy or sell decision, to what kind of account executive and commission house you were dealing with, to how fairly and accurately your order was filled on the floor of the board.

Double Caution! You paid an initial margin of about $8750 for your five soybean contracts. That is only a percentage of the total value. Assuming those beans were worth about five dollars a bushel when you bought them, their net worth was $125,000 at the time of purchase (five dollars a bushel X 25,000 bushels = $125,000). You control a lot of soybean contracts for not much money. Such financial leverage can lead to glory or ruin. The risk is large. By the way, you will also pay a commission to your account executive and the commission house that bought the soybean contracts for you. That commission--about $40 per contract--may not seem like much, but it does something interesting to your chances of making any money. It starts you off behind, it does, on each and every trade you make.

Triple-Quadruple-Infinite Caution! If things go against you in the market, you may not be able to get out when you want to. This is a brutal fact and the chance you must take if you deal in commodities. If you were wrong in your decision to buy November soybean futures, and if the price starts to drop, so that you are losing instead of winning, it is conceivable that you will be locked into those contracts for several days, maybe longer. It does happen. You could scream at your account executive. You could write letters to your Senator. You could picket the Board of Trade. You could wear a sign around your neck that reads, I am losing $5000 a Day--Help! But part of the tremendous risk you have assumed in this soybean speculation is just such a frozen situation. If the market goes "down limit" for several days after you buy your soybean contracts, you will be losing $5000 per day.

Down limit? This refers to the fact that the market can move only so far on any given day. That is a rule of most commodity exchanges. On the Chicago Board of Trade, for example, the limit in soybeans is usually 20 cents above or below the previous day's settlement price (the final averaged closing price). Two thin dimes' worth of movement may not sound like much to you. Until you do some arithmetic. Here are the numbers on those soybean futures you bought: If you own a single contract (5000 bushels), you stand to make or lose $50 for each penny the price goes up or down; since you own five contracts, you are risking $250 for each cent of price change ($50 X 5); therefore, on each limit move, your risk is $1000 per contract ($50 X 20 points of movement = $1000), or $5000 for your five contracts. As you can see, limit moves often leave speculators wearing an expression closely akin to that of the captain of the Titanic as he asked, "Iceberg? What iceberg?"

Limit moves are something a soybean speculator has to learn to live with. They happen frequently in that market. They happen very fast. It is not unusual for the market to be up or down limit within a few minutes of the opening bell. In these situations, the small speculator has about as much chance of getting an order filled as Joe Garagiola would have of throwing out the Road Runner on a steal of second base. When the market is hot and limit moves are happening, you might as well sit back and write out the checks for the required "maintenance margins." That's right, good buddy, you pay as you go in commodities. And, no, they don't take Master Charge or American Express. If your position is vulnerable and you are locked into the market, you can expect a daily call from your account executive for more money. You are legally bound to pay until you can get out. It can be a terrifying situation.

The limit rule is supposedly there to protect you. It is there to prevent total panic in the market. Since prices cannot rise or drop too far in a day, due to this arbitrary halt in trading, the market can cool down a little and hope for some counterbalancing news.

Question: Are you still game to invest in soybeans? Or are you doing that Commodity Shuffle right out of town?

Let's suppose you really are the tiger that you tell the girls you are. Let's suppose you have not been fazed by the problems already described and that you accept the risks because you want the quick profits that can accrue. We are back at May first. You have bought your five contracts of November soybean futures. Your neighbors are walking their dogs and trimming their hedges and swinging their golf clubs. They are pretending that they will be able to afford to send their kids to college. They are assuming that fixed retirement incomes will keep up with inflation and will survive depression. This next generation of oldsters--you and me, quickly aging here--is carrying on the civilized fantasy that all's well with the world, at least within reason.

And you? What are you worried about? Well, you are wondering how you'll keep up with all the changes you suspect are ahead. You would not be gambling with your $10,000 and submitting yourself to such psychological and financial pressure(continued on page 162)Commodities Market(continued from page 148) if you were a contented citizen. But to clear the air of one common misconception, there is one thing you are not worried about: You are not expecting a convoy of grain trailers to arrive and dump 25,000 bushels of soybeans on your front lawn. There will be no Soybean Happening in your neighborhood. You made a paper trade when you bought soybean futures. You paid only a percentage of the total cost of the actual beans. You bought five contracts for something, not the thing itself. Your contracts will not expire until the end of November. That gives you half a year to sell back the contracts you bought. At that point, your account will be cleared (except for whatever profit or loss that trade shows, plus the commission). If you held those soybean futures for all their slippery life, you would still be dealing with warehouse receipts at the end. It is exclusively a paper chase. And so it is for some 97 percent of all the trades made. Very few people take actual delivery of a commodity. So if you avoided the markets because your freezer couldn't hold 36,000 pounds of pork bellies, you can relax. Sort of.

Back to May first. You are hoping, obviously, that the price of soybeans will go up. You bought, remember? You will make money only if the price goes up. You will lose money if the price goes down. You will also lose money if the price stays the same, because the commission starts you out behind the eight ball.

What happens? Let's suppose you bought the contracts at five dollars a bushel. Guess what? In three Weeks, November soybeans go from five dollars to $5.50 a bushel. It is not a straight line up, understand. You have nervous moments as prices rise and fall each day. The pattern seems very unclear at close range. The market moves up and down, all around. You are ahead, and then you are not. You have big profits, and then you lose them. Day by day, trading takes nerve. Like a mystery story or a puzzle, the picture looks clear only in retrospect. You are on the phone to your account executive several times a day. You start buying an evening paper again just to read the closing commodity quotations. With risk comes worry. But you hang in there and in three weeks you see your soybeans go up 50 cents a bushel. That means you have made $12,500 on top of your original investment. (Remember that one of your contracts makes $50 for each cent's rise in price. Five contracts make $250 per penny, or point. Therefore, $250 x 50 points = $12,500.)

Think you can make that at your local savings and loan? Your neighbor over there, he rejoices when Baba Wawa reports a point or two rise in the Dow Jones Industrial Average. "Beeg deal," you say with a yawn. "I'm in with the high rollers now. I can't mess around with that penny-ante stuff."

Do you take your profits in soybean futures and run? Nope. You stay with those beans. Maybe you're lucky. Maybe you're shrewd. Maybe the wife of the Bulgarian military attaché in Moscow misses you so much that she is sending you soil samples from the Ukraine. Since she is possibly also sending samples to the CIA and one or two grain companies, it keeps you even with the big boys. Whatever your reasons, you stay with your beans. It is a smooth move, too. In another two weeks they climb, spasmodically, to six dollars a bushel. You have now made $25,000. And in approximately two more weeks, your contracts go to $6.50 a bushel. You are now ahead by $37,500.

Isn't this fun? Doesn't it sound easy? Why didn't you think of this before?

Of course, in every life a few setbacks must occur. You are no exception. For one thing, at some point you will be ordered to add more money to your account (a margin call), even though you are ahead of the game. This is because the market is volatile. It takes bigger stakes to stay and play. For another, the third and fourth weeks of June are tough for you. First you see your beans go up to $6.90 a bushel, at which point you are staring at a profit of $47,500. No chicken, you, you stay in the market as you watch it undergo a reaction to its dizzy pace. Prices slide to about $6.30 a bushel. While that may not sound like much, it means you see $15,000 slip through your fingers while you tough it out. But you're smart. You're able. You were born at night, but it wasn't last night. You keep the contracts. You refuse to sell them back and get out of the market.

What a great decision! You old knife fighter, you! In the first couple of weeks of July, those beans hit $7.70. Not only that but you know enough to get out of the market at that high point. Never mind how you know--you just know. It's a certain instinctive sixth sense you've had all your life, right? Brando and Redford and Nicholson and you all have it. You sell your contracts back, going through your account executive and the Chicago Board of Trade again, and you count in your countinghouse a glorious $67,500 profit.

Holy Commodity! The summer of '76! Will you ever forget it? In nine weeks, you have made $67,500. You have paid your account executive a few hundred bucks in commission. The rest of the money is yours to play with. What will you do with it? Go on a spending spree? Pay off the mortgage? Buy a Rolls-Royce Corniche? Or maybe you should pile that money right back into the commodities market? How about that, Walter Mitty? Could you triple that profit in another nine weeks?

"All I know," says an old hand in the commodities business as he lights a Cuban cigar, "is if you screw around long enough with a horse, you'll get syphilis sooner or later."

He is referring to you, Stud. You of the $67,500 profit. He means that if you are so greedy and so foolish as to put your money back into the market, you are probably going to lose all of it--and possibly more--within the year. Those are the odds.

•

Wait a minute! What are the odds? Does anybody know? What are the odds that a small speculator will make money in commodities? You deserve to know the risks you are assuming. That is just rudimentary. A roulette player can tell you the differences in odds between a wheel with one and two zeros. An investor in fast-food enterprises can find out how many have folded in the past years.

Well, then, what are the odds for a small speculator in commodities? How many of them made money last year? How many lost? How much did they win or lose? How does that compare with their performance in previous years? What is the total dollar volume of small-speculator investments in commodities? Choosing an arbitrary figure of, say, $20,000 as the maximum size of a small account, have any speculators in that area gone bankrupt through commodity trading? We are not asking for state secrets. Just give us industry-wide figures.

There is a problem here, sports fans. As strange as it may seem, if anyone is keeping records on the success and failure rates of small speculators, those records have not been revealed.

"I'm not going to release any information concerning the accounts of E. F. Hutton to anybody outside the firm," says David Johnston. "You just don't do that. I don't care whether the figures are fantastic or terrible." Johnston, who is head of Hutton's commodity division in New York, goes on to argue that the risks of commodity investment are worth it for those people who can afford it, because the rewards can be so great. He does not want to be pinned down to specifics about the track records of small speculators or his own account executives. He is very nice in his refusal and he reflects the general attitude of most of his profession. Theoretical discussion, si! Facts, no!

If people selling the service itself are not going to tell you what the odds are, where do you go to find out? How about the Government? There is an agency in Washington, D.C., charged with the task of overseeing America's commodities market. It is called the Commodity Futures Trading Commission (CFTC). It must be doing something about keeping track records of the American public's performance in the market, right?

Wrong. You ask one of the CFTC commissioners, Gary Seevers, if the agency has anything to report on customer longevity in the market. "No," he says, "we do not."

Dr. Mark Powers, chief economist for the CFTC, refers to three--count 'em, three--studies that have been done on winners and losers in the past 40 years. He does not sound too sure about the reliability of any of them. He knows of no current studies being done, in or out of Government, that might help the small investor determine whether the commodities market is the place for him.

It is a lonesome old world, cowboy. These people talk as if any tabulation of the records of individual speculators would take years to accomplish, as if little old ladies with bifocals would have to leaf through dusty ledgers in dingy attics, as if computers had not been invented, as if most professionals don't have a damned good idea right now, as if each commission house does not know to the penny how each of its customers (and its account executives) is doing. To reverse the old joke, in a room full of ponies, there must be manure somewhere.

What is going on? Why is it so difficult to compile basic statistics? Why the hemming and hawing, the side-stepping, the delicacy from commodity people who are not usually known for their delicacy? It seems as if it would be a simple matter to total the number of small investors in each commission house and then to report at least annually that a certain number of people profited and a certain number of people lost. Is such a task really beyond the industry and our Government? They can count, can't they? The commodities market is open to all citizens who meet fairly loose requirements (considering the financial risks they will be running). Do they know and understand what the odds really are?

In the midst of the economic clichés and platitudes put forth by most of the professionals in the commodities field, there are still a few hardy souls who are not content to mouth standard propaganda. One of those special people is Robert Raclin, senior vice-president of Paine Webber. In talking with Raclin, you get the feeling that he has traveled beyond hackneyed responses and publicity handouts. He does not act as if all is hunky-dory in the market. He does not pretend that Adam Smith (the 18th Century Adam Smith, that is) was the last valid economist in the Western world. Raclin does not even parade the usual knee-jerk responses to the thought of Government regulation of commodity trading. "There's always been a referee in any boxing match I've ever seen," he says.

A lean, tough, graying man, Raclin keeps his appointments in a Brooks Brothers Daily Diary. A decade's worth of the blue-and-gold volumes stands on a mahogany side table. His office has small touches of elegance. Stemless carnations float in a silver bowl. A computer terminal sits to the right of his large desk, within his immediate reach for market quotations and price charts. His office windows are completely curtained and bayed. The windows look out over Chicago's el tracks, but you would never know it. No noise penetrates the soft hiss of air conditioning. Three of the four oak-paneled walls are hung with Oriental ink drawings on rice paper, along with a brass barometer, a naval compass, framed documents. A single small photograph hangs on the fourth wall. It shows Raclin looking happy and dapper, in blue blazer and yellow slacks, standing beside a woman who appears to be kind and humorous. That is his wife, who died in 1976.

"The small investor starts out with a lot against him," says Raclin, without hedging his remarks. "The account executive's commission is against him, obviously. The investor starts out in the hole before the price has moved at all. In addition, the time-information lag is against the little guy in the market. He'll be the last to know when something important happens. Also, there's the fact that the average investor would rather buy a contract than sell a contract. The public is never more than 20 percent on the sell side of the market. The average guy would rather think about the price going up, like the stock market. He just doesn't use all the tools of the market.

"Now, we don't take anyone who walks in off the street as a client. It requires a minimum of $5000 to open an account here, plus a net worth of about $150,000. Any account under $20,000 is considered a small account. And I would guess that 85 percent of the small accounts lose whatever they have invested within a year or two. It might be 90 percent that lose, maybe more. A lot of money is being lost. Assume some 600 billion dollars of total contracts were traded last year. If the public accounted for six billion dollars, you've got a lot of money lost."

All right. The odds are becoming clearer. And they are not so hot. Roughly 90 percent of all the small investors in commodities are losing huge sums of money. If this is the case, as it seems to be--if the public is losing billions of dollars in contracts--what is the trade itself doing about this? Are the commission houses that push for new business also giving appropriate warnings of the risks involved?

Here is how one Merrill Lynch public mailing began:

If you have been one of the eight out of ten speculators who have lost money in the commodity-futures market, or if you are looking for an extremely attractive speculative medium with the potential of large profits with corresponding risks, our free booklet ... is must reading for you....

Commodity trading has been viewed as one of the last frontiers where anyone through his own ingenuity, common sense and strength of character can pyramid a sizable fortune from a modest investment. Whereas the rewards are great, the challenge is even greater.

Is there a familiar ring to this prospectus? Something like "The Merrill Corps Is Looking for a Few Good Investors"? Read it again to see what it takes: "strength of character," "ingenuity," "common sense." The market is "one of the last frontiers." Isn't that wonderful? Do you feel a little like Daniel Boone after that?

Please don't.

It could be argued that if Daniel Boone had faced the same odds as the small investor in commodities, the continent of North America would still be unpopulated west of the Appalachians by anyone but Indians.

Sure, you might make $67,500 in the markets.

Isn't might a funny word?

•

"It's like lambs to the slaughter." So says a reporter in the Chicago office of The Wall Street Journal. This is a person who follows the market daily and who writes news stories about it. "The average public speculator is usually driven out of the market within six months to a year of the time he enters. I'm talking about 95 percent of them. While they've got them trading, their account executives try to make as much in commissions as their customers originally invested. With the markets moving so fast, a lot of trades can be justified. It happens all the time. It's called churning an account. And, face it, commodity trading is tough to do. It's just not like the stock market, where there's been a long-term cyclical upturn. The behavior of commodity prices is much more random. So the trading record of most account executives is lousy, but the commission houses keep pulling in customers. This year, a couple of the biggest houses started a commodity mutual fund. They were down to one quarter of the total funds invested within a few months. That means they lost three quarters of everybody's money. But you never seem to hear about things like that. Accounts are turned over all the time. Customer longevity is terrible. Most people don't realize it, but the money they invest goes right into Treasury bills in the name of the commission house. Same for the commissions. The house makes a load of interest off the customers' funds, but the small accounts never see that money. Some of the big accounts do."

What is happening here? First you are lured into thinking you have made $67,500 in nine weeks. Now you are being told the odds are almost totally against such luck. Which is accurate?

Go back to May first again. Ask yourself a tough question this time: How did you arrive at the decision to buy soybeans when you did? Assume that it was more than luck. Assume that the wife of the Bulgarian military attaché in Moscow dropped you for the CIA, which was willing to pay her very good money to go out to assigned map coordinates at an assigned time to take leaf and soil samples at the same instant one of our spy satellites was passing overhead. She is making so much money getting what is called "ground truth" that she doesn't need you anymore. This time, you are strictly on your own. How do you come to a reasonable decision as your $10,000 is held at the ready?

Answer: There are basically two major ways to read and interpret commodities-market action. One approach is labeled fundamental. The other is called technical. You can use elements of both approaches, but for the moment, let's examine each one separately.

Fundamentals in soybeans include things that can make or break the crop: weather conditions, foreign and domestic demands, crop carry-over from the previous year, farmer planting intentions and a thousand other factors that add up to that deceptively simple phrase supply and demand.

As a fundamental trader, you spent your time trying to decipher the formula of supply and demand. You knew that as this formula changed, so would the price offered for soybeans. Therefore, April 1976 was a busy month for you. You researched such things as the amount of rainfall in the Ukraine, since the size of Russia's grain crop directly affects the size of our exports. You watched our own import figures on Malaysian palm oil, because that item is now in competition with American soybean oil (one of the by-products of the soybean, as is soybean meal, which is used for animal feed). The more palm oil we import, the less our soybean oil is needed; with less demand comes lower price. Brazil had most of its harvest completed (its seasons are the reverse of ours) and you were interested in Brazilian yield estimates. A reduced Brazilian harvest would boost American soybean prices, while a big Brazilian harvest might depress our own crop's value. You monitored such exotic details as the size of the Peruvian anchovy catch. Fish meal can be used as high-protein feed instead of soybean meal. Perhaps you even used econometrics (statistical method) to work out a sophisticated computer model.

By that Friday before May first, you had learned a number of things that made you think the price of soybeans might go up. There was a severe drought in the British Isles and it seemed to be spreading to Europe. Many meteorologists were predicting dry weather here in the United States. There were rumors that Russia might already be negotiating with several grain companies to purchase some of our 1976 soybean crop. If true, demand was on the increase and supply was shrinking before the soybean crop was in the ground. A reasonable argument could be made that soybeans, in the price doldrums for several months, were going to escalate in value.

But there was conflicting fundamental information. The picture was not clear to the average investor. Europe might have drought, but Russia was having better than normal rainfall. Would that not dampen Russia's buying enthusiasm? The published planting intentions of our own American farmers, compiled by the U.S. Department of Agriculture (USDA), were suspect in the soybean area. The figures, which were low, did not include acreage that would be put into soybeans in late May and June, after the winter-wheat crop was harvested. This method of "double cropping" (getting two crops off the land each year) might boost the amount of acreage in production. And as for the weathermen who were talking of drought, who could bet $10,000 on their charts of inverted jet streams and abnormal sunspot activity?

OK, big fella, what was your reason for that shrewd decision you made to buy soybean futures? In retrospect, you know you were right. But how did you know at the time? Was it based on fundamental information? How available is fundamental information, anyway?

"There is no such thing as inside information in the grain business," testified Carlos Bradley, president of the Kansas City Board of Trade, before a Senate committee in 1974. It is a statement that would qualify him as a joke writer for Don Rickles. And Bradley got even funnier: "The only potential inside information that might exist would be Government reports.... If there are leaks in the Government, which we greatly doubt, this is something that should be stopped. But within the trade itself, there is no inside information."

There you have it! The real skinny! The chief executive of a major commodity exchange is willing to come up with this pap for the public only two years after the infamous Russian Wheat Deal, brought to you by the same folks who brought you loose Watergate, tight security and warm payoffs. Perhaps it would be useful to review a few of the many significant details of the 1972 Wheat Deal. Then ask yourself if "there is no inside information in the grain business." Ask yourself if you, the average guy, the small speculator, will ever know enough in time to trade on fundamental information.

In the spring of 1972, all pronouncements from Government quarters (in particular, the U.S.D.A.) suggested that the world wheat crop was in fine shape. Carry-over from the previous year was large. The current crop was doing well. It looked as if wheat prices would be at about the same level as in the past several years. Wheat had not gone above two dollars a bushel since 1964. The indications were that a wheat surplus was developing.

But what was actually happening during the winter of 1971-1972, unbeknownst to the American public, was the beginning of a major drought in Russia. It was a natural disaster that was going to have reverberations around the world, but, unlike tidal waves or volcanic eruptions, this one would elude the American public for some time. The Soviet Union was going to be a big buyer of grains for import. However, that news did not slip out beyond the market powers (the governments and the grain companies) until the sales had been completed.

In the scenario that follows, understand that you, as an investor (or farmer or baker or just plain consumer), would have known nothing of what was going on. Yes, it would affect your pocketbook and your life. But so it goes. The year is 1972:

• January. A line of credit was being arranged for the U.S.S.R. by the U.S.A. as part of the strategy of détente.

• February. The United States Agricultural Attaché in Moscow reported to Washington that there was inadequate snow cover for 2,500,000 acres of wheat. The same month found Clarence Palm-by, a high official of the U.S.D.A., talking secretly with officials of Continental Grain Company (one of the world's largest) about the possibilities of his employment with Continental. The only thing unusual about this was the timing of it, since there is a continuous revolving door of executives between the U.S.D.A. and the food industry.

• March. Palmby, still an official with U.S.D.A. who had access to many of the reports from Russia, bought a condominium in New York City. He also visited Continental again.

• April. Several of our Government agencies knew that Russia was having a dry spring after a dry winter. More importantly, an American team, consisting of such people as Palmby and Earl Butz, flew to the U.S.S.R. Along with Vladimir V. Matskevich, Soviet minister of agriculture, they traveled to the Ukraine, Russia's breadbasket. Butz himself suggested irrigation as a way to combat the drought. He handled the chernozem, the black earth of the Ukraine, and urged Matskevich to ask Brezhnev for irrigation funds, even if they had to come out of the defense budget. But when Butz and Palmby returned to the U.S.A., they publicly denied that the Russians had any interest in buying grain from us.

• May. The U.S.D.A. "Wheat Situation Report" made no mention of any Russian problems. The readers of this report, including the American farmer, had to assume we were in a surplus situation with grains.

• June. The U. S. Agricultural Attaché toured the Ukraine and Moldavia. He reported back to the Government that 27,000,000 acres of Russian wheat had been wiped out by the drought. This report was upgraded and more highly classified to keep it from leaking to the public. About this time, Palmby quit U.S.D.A. and went over to Continental as a vice-president. In Minneapolis and Memphis and New York, Russian negotiating teams were contacting all the major grain companies and placing large orders for grain purchases. Just for the record, the Russians did not have to make a lot of phone calls to contact all the big companies. You can count on one hand and another thumb the number of companies that control the shipping and delivery of 95 percent of the world's grain. There is a fancy word for that economic situation: oligopoly. It is a hard word to pronounce without swallowing your tongue. The American Heritage dictionary defines oligopoly as: "A market condition in which sellers are so few that the actions of any one of them will materially affect price and hence have a measurable impact upon competitors." The dictionary goes on with this understatement: "Profits above normal may persist in oligopoly."

• July. As the month began, wheat was selling for about $1.40 a bushel. The public had been led to believe that food prices would remain stable and that world grain crops were in good shape. The first inkling of some kind of change came on the eighth of July, when the Western White House at San Clemente announced a $750,000,000 credit agreement with the U.S.S.R. But it was not generally known at that time that the Soviets had already purchased 4,000,000 tons of wheat and 4,500,000 tons of other feed grains. Agriculture Secretary Butz reassured his country's citizens that the buying was over. "They have plenty of wheat for now," he said.

He was a little off. The Russians were going to buy 12,000,000 tons of wheat from the U.S.A., or about two thirds of all the wheat America would normally export in any one year. And in Moscow that July, temperatures were in the mid-90s during the day. East of the capital, in Shatura, the normally soggy peat bogs were on fire. Drought had made the peat moss vulnerable to careless fishermen and hunters and tourists. The fires traveled underground and surfaced in surprising places. Smoke from the fires floated into Moscow, making the city that much more uncomfortable. Such conditions were obvious to the people living there, including the American community of State Department, CIA, AID, U.S.D.A. and other officials. The same conditions were recorded by our spy satellites in orbit over Russia. Surely, the grain companies, whose intelligence systems are the finest in the world as far as agricultural matters are concerned, knew what was happening. But nothing was revealed to the American public.

• August. A grain-trade publication edited by Morton Sosland printed the first news that the Russians were in the grain market in a big way. Sosland got this information not by hard journalistic research but by a strange series of phone calls from a source never completely identified, probably a Russian agent or a disgruntled American Government employee who was privy to the machinations at the highest levels of our Government. Anyway, the news was out. The next day, a Reuters dispatch reported: "Russian trade delegates, currently in New York, are placing buying orders for further substantial quantities of U. S. wheat and feed grains." The wheat market began its climb.

By the winter of 1973, wheat listed at about five dollars a bushel, heading up to $6.50 a bushel by early 1974. Soybean prices rose even more dramatically. They went from about four dollars a bushel to $12 a bushel within a year of the Wheat Deal. From the summer of 1972 to the autumn of 1973, the Commodity Research Bureau's Price Index (something like the Dow Jones Average for common stocks) rocketed up by more than 130 percent. Fortunes were made and lost. One trader in the soybean pit at the Chicago Board of Trade reportedly made $13,000,000 on the 1972-1973 soybean action.

At the same time, farmers and grain-elevator operators who had sold grain contracts on the Board of Trade to try to protect a price (an operation called hedging) found themselves locked into tremendous losses. As the prices went up, those contracts that had been sold lost more and more money. People were caught in a squeeze that became untenable. Meantime, the grain companies were double-hedging; that is, they were taking the same positions on the board that they took in the field (i.e., they bought all the grain they could before the farmers realized what the fundamentals were). The big traders and brokers in the grain pits followed the grain companies' action, putting even more upward pressure on prices. While some farmers and elevator operators suffered financial setbacks, the grain companies were receiving special untaxed export subsidies from the American taxpayer. The next two years after the Wheat Deal saw some grain companies report earnings as much as six times greater than in previous years.

Question: Do you still believe "there is no inside information"? Are you ready to rely on "common sense" and "strength of character"? If so, good luck to you. The 1972 Wheat Deal showed how much money (billions) could be riding on privileged information. In the commodity business, information is power; power leads to money. Deduction, my dear Watson: Information is therefore expensive and restricted. Timely information, that is. Timing is all, and if you know a week ahead of me that the President of the U. S. is going to call for a grain embargo, then you will make money and I probably will not.

It turns out that as a fundamental trader, you will wish devoutly for that unspeakable relationship with the wife of the Bulgarian military attaché in Moscow. It would also be nice to have certain intercepts of grain-company messages. While you are making up your Fundamental Trader's Shopping List, be sure to add the need for special contacts within various satellite-interpretation programs. A person who is trained in "multispectral remote sensing technology" (satellite reconnaissance) is a fine source for agricultural information.

The American public is led to believe that such agricultural espionage is still in a primitive state of advancement. "We can distinguish land mass from water," says a Public Information officer disarmingly. He works at the Earth Resources Observation Systems (EROS) just outside Sioux Falls, South Dakota. He claims that not much can yet be determined by satellites about such things as crop yields.

On August 30, 1976, the CBS Morning News carries an item narrated by Lee Thornton. The U.S.D.A. has just announced it is using satellites for space evaluation of agriculture in the U.S.A. and China. Russia is not mentioned. "The project," reports Thornton, "is still in experimental stages."

An ex-Reuters newsman--you know Reuters, known affectionately in some circles as the CIA School of Journalism because so many of its stories, supposedly originating in Europe and supposedly uncovered by European journalists, coincide in peculiar fashion with our own Government's propaganda--anyway, this ex-newsman (who is currently employed by a commission house) looks up from his preluncheon drink and says, as if by rote, "I suppose one day in the future they'll be able to do some very sophisticated things with satellites."

The impression given by all of these pronouncements is that what we have up there in the sky right now is a bunch of Space Brownies. You know, Kodak took some of its old 1930 box cameras, wrapped some housing insulation and aluminum foil around them and tied a rocket to the package and, by gosh and by golly, there are some nice family snapshots coming back from space! They aren't always too clear, and surely nothing like crop yields can be determined by them, but looky there, will you? You can even distinguish oceans and lakes!

One of the biggest stories of this decade is the total capability of various spies in the sky. Aside from their obvious military use, satellites can provide specific agricultural data for almost anything you want: infrared measurements of various crops, crop identification and crop yields, locations of mineral deposits, measurement of soil chemistry, microwave communication intercepts between Government agencies and other businesses, water temperatures, acreage planted and acreage harvested, as well as acreage being cleared for production, types of soil-conservation practices, volume of available grain storage, transportation capability, amount of agricultural machinery in the field, amount of machinery out of service, status of road and bridge repairs...the list is colossal. The state of the art in terms of camera-lens capability (not to mention the many other sensors that are in operation on a spy satellite) is such that from 600 miles in space, a good satellite interpreter can read car license plates; by now, the pictures are probably even more highly resolved than that.

Despite all their protestations and their calculated public naïveté, and despite the flood of other kinds of information they will be happy to provide (you can order some space photographs from EROS, for example), it is a fact that certain of our Government agencies (NSA and the CIA in particular) have tons of current and accurate fundamental agricultural information about every major country in the world. It is their job to have such information; and it is a fact that Russia takes a lot of pictures of us, too. Spaceship Earth is being very thoroughly monitored. But that is not the problem. The problem is that some people outside Government know more than others about the results of our intelligence efforts.

So when you read press releases from the U.S.D.A. about what is supposedly the latest word in fundamental information, or when your account executive whispers over the phone that he has just learned the real scoop about cotton yields in Zanzibar, take it all with a dose of caution. The big-money people had all that information long ago. The market has already reacted to it. You are out of sync with the market, suffering eternally from a disease you might call information lag. You will be the last to get the word. Like the person in Plato's cave, you will never see the fires of truth yourself. You are doomed to watching only shadows and reflections dance on the walls of your den.

"Some of these agencies running satellite-reconnaissance programs--the CIA, for example--could they be investing in the commodities market through some of their proprietary organizations? They have the best information about crop conditions. Couldn't they be making money on the side by running accounts through your commission house without your knowing it?" That question was asked of an American executive who handles commodity accounts for countries like Brazil.

"It's possible," he answers. "There's no way I could tell, really. If someone comes in from such and such a company, and they have a bank account and a board of directors, and so forth, how would I know they were a front? It could be happening. But I'll tell you something that I think is more scary. Nobody's talking about it out loud right now, but they will be. The number of foreign governments entering our commodities market is frightening. It makes our economy very damned vulnerable." (See Bargain-Basement Combat?, page 174.)

•

So. Enough talk about fundamentals. You can see how convoluted and inaccessible they are. It is doubtful that you would have risked your $10,000 in the spring of 1976 on the basis of fundamental information alone. So do you kiss your $67,500 goodbye? Not yet; because there is that one other major way of interpreting market action--technical analysis. Did you, on that Friday before May first, make your buy decision through technical interpretation of the soybean market?

Simply speaking, the technical trader is interested in price patterns. His primary tool is a chart that represents price movement. The technician operates on the assumption that if recent price changes have formed a pattern on the chart similar to price changes in the past, then the next price change ahead (i.e., the futures) will probably be similar to past performance. The technical trader keeps charts of each commodity (and each month in that commodity) in which he's interested.

Working also with mathematical averages and computer models (and using a rarefied vocabulary with terms such as trend lines and exhaustion gaps and head-and-shoulders formations), the technical trader is really not interested in fundamental information. You could tell him that the rootworm was attacking every cornstalk in the American Midwest (as may happen in a year or two, if the rootworm continues to develop resistance to all known pesticides) and that the supply of corn was bound to drop. The pure technician would sniff and say, "I'm watching my charts. Don't talk to me about supply-and-demand factors. You'll never get a complete picture of that."

Below left is a bar chart for November 1976 soybeans. The numbers on the sides of the chart represent the price in cents (points). Five hundred equals five dollars. The months of the year are listed at the bottom. The day-by-day price ranges are charted in the vertical bars running from left to right across the middle of the chart. Each vertical black line represents the extent to which the price moved up or down for the day.

As you can see, the price of November soybeans at the end of April was a few cents more than five dollars a bushel. For six months, the price had moved in a very narrow range as soybean prices go. A flat and undramatic line moves from December to May. The market was moving sideways. During that half year, traders who tried to stay in the market and guess the direction lost quite a bit of money. This includes many technical traders.

While with hindsight you might argue that a solid base of support was being built up for soybeans over that time period, still, there is nothing on the chart that indicates the timing of a price breakout. Timing was a matter of waiting. Those people with enough capital reserve stayed in the market and took their losses from the whipsaw price action because they wanted to be in on the ground floor when prices finally did make a major move. Needless to say, you, the small investor, could not survive six months of that. As a prudent person, you probably would have waited until a clear pattern seemed to establish itself (say after the price reached $5.50 or $5.80), points that began to break new ground for that contract month and that indicated soybeans might take off. Then, had you jumped into the market, you would still have made money-- but not $67,500 (assuming you knew when to get out of the market after prices began to break down from their highs).

Let's face it. Compared with the scarcity of well-timed and important fundamental information, the charts are a much more equal thing. There are several chart services to which you can subscribe as an investor (or you can keep your own, the way the real professionals do). Technical trading is much more accessible to the small investor. But some warnings are in order before you rush out and buy your charts.

First, it takes some real sophistication to read charts properly. There are people who make a living at it. They make mistakes. Some of them have Ph.D.s in statistical theory and such. It is difficult and demanding work, and it takes a talent that most of us do not have. Indeed, technical traders do not necessarily have any better trading records than fundamental traders. Also, it can be argued that technical systems require a good money supply to work well. That point may be debatable, but it seems as if technicians have to be in the market more often than the small investor can stand it in order for their trading strategies to function adequately. Finally, charts can be very deceptive instruments. They make price action in the past appear simple and inevitable. They can also broadcast false signals. For example, take a look at the chart below for July 1976 wheat.

In this chart, you will see one of the classic technical formations. It is called a head-and-shoulders pattern. (Note: Three arcs and the dotted line have been drawn in for emphasis.) The left shoulder was formed in January, the head in February--March, the right shoulder in April. This is a chart that caused the technical analysts to lose a lot of money. Why? Because a head-and-shoulders pattern is supposed to be a reliable indicator that the shift in market direction is about to be finalized.

Notice that wheat had seemed to be strong in January and February. It had climbed to about $4.10 a bushel (the head of the pattern). But that strength did not seem to hold. The question for investors during late February and March was this: Will wheat resume its climb? Or is the market definitely weak? Technicians were watching to see if the price of wheat would drop below that drawn-in dotted line. If prices broke through that imaginary barrier, then technically it was a neckline penetration, meaning that wheat was weak and would supposedly go right on down to about three dollars a bushel before any support could be found.

Once the price of July wheat penetrated $3.50 a bushel, a lot of technical systems sold that contract. They expected a further downward slide. But look what happened: July wheat turned right around and shot back up to $3.96 by early July. A lot of people lost a lot of money. Had you been following the chartist's theories, it would have taken a good supply of capital to ride out that surge. As a small investor, you probably would not have survived the price rise. Yes, it is true that wheat eventually collapsed. But you, with your small capacity to absorb error, probably would have been wiped out before that occurred.

There is one other point about technical trading that you need to be aware of before you enter the market: Computers are ideal companions to the technician. Sooner or later, someone will urge you to let the computer make the decisions for you--that person will want to sell you a technical computer trading system. You will get mail about it and you will receive phone calls about it. Since statistical theory and technical approaches are suited to computer programming, it can all be made to sound very scientific. But watch out. There are literally hundreds of computer programs to choose from. Almost all of them claim consistently profitable years. Many of them report gains of several hundred percent each year. As authoritative and glorious as they appear, they appeal especially to the novice in the markets.

You should know first that the advertising of these programs is unregulated. That does not mean they are all misleading in their presentations, but it does mean you have to keep an eye out for discrepancies in claims versus actual results. Know second that some of the programs report results that are based on theoretical advice only. In these, the assumption is that the computer does not have to compete for a "fill." It is up to you to fill the order through your account executive, and that simply may not be possible on some days. If the market has made a limit move in the first few minutes of trading, and if trading is not open to you, then it is hardly fair for the computer to assume you are filled. The computer might claim you are rich on paper, but, in fact, you might be frozen out of (or into) the market. Know, finally, that fast-talking account executives--and there are such animals around, just as in any other business--find computer programs ideal for churning accounts. Usually, the computer recommends a lot of trades, frequently in several commodities. The unscrupulous account executive can wring commissions out of you like King Kong squeezing oranges. Let a former subscriber to one such computer trading program tell you about it:

"It was my first year in the market," says a farm owner and manager from central Illinois. "I was trying to stay alive in the corn market. I got talked into this computer program. It sounded fantastic. Claimed to have made 1300 percent in soybeans the year before. Claimed to have a new theory of random numbers programmed into it. And the published trading record made it look very, very good. The only trouble was, I kept losing money. And every other day, my man at the commission house was calling me with some orders from the computer. Buy December corn at $2.60; sell at $2.58. Buy again at $2.63.' And so on. Three and four trades a week, sometimes more. And it was the computer I was up against, see? Not human judgment. Not my account executive. Nothing fallible like that. No, sir, it was that great calculator in the sky. And if I hesitated to make a trade, my man would come on with this sincere act. You know, 'Well, we just broke through a major support line and the box size has adjusted to it and I'd hate to see you abandon your strategy here--but, of course, if you think you know more than the computer....'

"I lost a few thousand dollars before I knew what hit me. I was going broke by being modest and not challenging the computer. My account executive was heading home with commissions from me every week. Sure, I quit him. But he dug deep before I got out."

One of the problems in researching a topic like the commodities market is that people don't want to talk about their losses. Usually, they just want to slink away and forget how dumb they've been. It hurts to admit you have been manipulated.

I should know.

That's me talking in that last quote.

•

So here you are, old buckeroo, and that $67,500 profit you thought you made in soybeans does not seem quite as possible now, right? You've seen the odds.

That leaves one vital question still unanswered: On that Friday before May first, when you placed your order to buy soybeans, was it treated fairly on the floor of the Chicago Board of Trade? That question leads to a larger one: Are there trading violations on the various commodity exchanges?

Such a question is not easy to answer. "People who have such knowledge [about trading violations] are reluctant to come forward and identify themselves, because they are part of the process as well. The next day, they may be doing business with the person they have accused...." So says Jacob Gross, a Chicago lawyer with vast experience in commodities cases.

Another Chicago lawyer who has criticized current exchange procedures is Harry Fortes. Short and heavy-set, Fortes wears glasses as thick as Coke-bottle bottoms. No amateur/rat fink/Commie/ freak, Fortes is a former vice-chairman of the Chicago Mercantile Exchange (C.M.E.). He became a member of the exchange in 1947 and was one of the principal authors of the trading specifications for the egg, potato, cattle and pork-belly contracts. Fortes is probably one of the most hated men at the Mercantile Exchange and the Board of Trade, because he does things like sue account executives and commission houses that have churned customer accounts.

Fortes does not have any doubt that there are trading violations that could affect your soybean order: "One of the most glaring conflict-of-interest situations exists in the fact that brokers who handle and have on hand thousands of customers' orders, and are fully aware at all times of where the buy and sell orders are, trade for their own accounts to the detriment of the trading public." Fortes is talking about something called dual trading. Under the present rules, it is legal. But it can hurt the small investor. The broker handling your order on the floor is allowed to trade for himself in the same commodity (and the same month) as your order. In a crunch, or when an obvious profit is available, he might take care of himself instead of taking care of you. It has been known to happen.

The cliché response from the commodity industry when dual trading is attacked comes in one word--liquidity. The argument is that without dual trading, there might not be enough trading. This rationale is offered by people engaged in trading more than 600 billion dollars in contracts this year. Six hundred billion dollars buys a lot of contracts. To put it in perspective, here is a quote from Time: "Congress has raised Ford's proposed budget for fiscal 1977 from 394 billion dollars to 413 billion dollars." Got that? The total value of contracts traded on American commodity exchanges is almost one half greater than the Federal budget! And we are supposed to worry about whether or not there will be enough liquidity?

"Better we should watch the other way," as one of my friends used to say.

There are other violations taking place on the exchanges. "I suppose," says one highly placed commodity executive, as he makes a Noel Coward exaggeration of the word, "I suppose there is trading outside the pits. I suppose there are little sweetheart deals between traders that are not by open outcry. I suppose a lot of the boys on the floor defer their taxes year after year by putting on false losses in spreads with no risk. I suppose some of the phone clerks are running their own accounts. I suppose commission houses are arranging bank loans for customers."

Yes, Virginia, there is some hanky-panky going on. And, no, trading is not as open for you as it is for some others. For every deal made illegally off the floor, for every order handed to a friend without any real open outcry, for every market order manipulated and "sleeved," you have been shut off from just one more trading opportunity. There are CFTC investigations going on right now in some of those areas. It remains to be seen whether or not they are effective--and whether or not the exchanges can truly regulate themselves.

Anyway, what about your order for those five contracts of November soybeans? Was it fairly handled and fairly filled? Let's put it this way: probably...maybe. There is no question that trading violations are taking place in some of the pits on some of the exchanges. But if you accept the fact that you might get shafted for a few dollars every now and then, you will be able to think about the more creative questions of which market you should enter, when and for how much.

•

In 1973, Fortes testified before a subcommittee of the House of Representatives. Gross was a special counsel to that subcommittee. Those two Chicago lawyers, both experienced in commodity trading and both unwilling to ignore the lax regulation and market manipulation that was going on, participated in frank discussions. One of the results of their efforts was the establishment of the CFTC. It's hoped that that agency will prove itself effective.

At one point in his testimony, Fortes took off on a far-reaching examination of our market system. Before you put your money into commodities, listen to Fortes. His words call into question the value of any small investor's trying to ride the tiger's back.

"Although millions of people have been enticed, to their sorrow, into the trading of commodity futures," said Fortes, "only a bare handful of commercial interests and professional pit traders really have the sophistication and know-how to successfully trade in commodities. When properly employed, this expertise serves a valuable economic function.... However, in many instances, this sophistication and know-how simply are utilized by certain commercial interests and professional traders, acting in concert with sufficient group power and money to squeeze and manipulate a market....

"I am convinced that there is a direct relationship between the futures trading and the unconscionable run-up in cash prices of food products that the American housewife buys for her table....

"We are all aware of the scarcity of feed grains and the exacerbated futures and cash-price increases resulting from the Russian export deal. The run-up of July soybeans from $3.31 to $12.90 could not have occurred without the cooperation of a handful of commercial houses.

It is my opinion that the last five or six dollars of the increase in July soybeans was the result of manipulative practices. It is significant that when the embargo was placed on exports, the price of soybeans dropped to below seven dollars. This occurred despite the fact that there was no significant increase in the supply, because July soybeans were an 'old crop' already harvested.... The only explanation for this phenomenon is that the $12.90 price was artificial, created by highly concentrated buying without regard for the actual value of soybeans....

"Manipulation results in price control, it results in disruption of our free-market price structure, it results in the geographic dislocation of commodities, it results in a complete breakdown of the hedge operation to the detriment of the grower and it results in inflated costs to the American housewife in millions of dollars."

Fortes has moved right into the overwhelming question: Does concentrated speculation exaggerate price movement? If it does, how does that affect each of us? To some people, the question is not so dramatic right now. But it will become so after the next drought or famine or climatic change or whatever else probably sits just over our horizon. The Seventies may well be our last dream decade. Of all the jokes--chemical, nuclear, biological, ecological--that may be waiting for us like metaphysical banana peels, perhaps none will be more ironic than the status of the food supply itself.

Here is a scenario to reckon with. The prediction may not come to pass, but consider it: When whatever is chewing through our cornstalks and destroying our soybean root systems and rusting our wheat, when pesticides are seen to be nerve gases and herbicides carcinogens, when our entire food chain is collapsing under the fire of our blindness, then let us go back to Malthus. He is still with us, even if these words were first published in 1798:

Population, when unchecked, increases in a geometrical ratio. Subsistence increases only in an arithmetical ratio. A slight acquaintance with numbers will show the immensity of the first power in comparison of the second.

This statement may mean more to us sometime soon. The exact timing of it is as difficult to assess as a market entry point. But it seems to have an inevitability about it.

Then it is, as the markets escalate up limit daily and as political measures such as embargoes have little effect, that prices might climb out of the range of reason.

Those in favor of a private marketing system will argue that we should let the prices go where they will. They will say, along with Leo Melamed of the Chicago Mercantile Exchange: "There are no commodity exchanges in Moscow; there is no Peking Duck Exchange in China; there is no Havana Cigar Board of Trade.... There, the governments themselves establish the prices they will pay.... Alas, by removing the risk, that system also removes the incentive."

Will we be willing to listen to that kind of argument then? If the prices of all our earthly products--grains, fuels, precious metals, livestock, meat, fats, oils, wood, eggs, potatoes, sugar, coffee, cocoa, orange juice, cotton, wool, Treasury bills, mortgage rates, plus all the other commodities that might be traded by that time, such as coal and propane and plutonium and who knows what else?--are ascending, will we be able to watch the brokers and the traders in their shouting matches without deciding that this has really gone too far? Will we be tolerant of them, those fallible, shrewd, sometimes cold, sometimes hysterical, sometimes tax-dodging characters? Or will we cry "Enough!"?

And where will you be? Riding soybeans to new highs? Locked into the wrong side of the market and pleading with your banker to lend you more money until you have a chance to get out? On the side lines, as wary as the rest of us about the rocket ride we are on?

Surely, momentous change is ahead and, just as surely, the commodities market will reflect that change.

And at some moment in either inflation or depression, as the basic needs of our lives are bid up beyond our price range, there will be a time warp. Shakespeare's Coriolanus will be played out in our own streets. Citizens will be rioting, demanding that the granaries be opened to feed the poor. Where will we be then? In ancient Rome? Elizabethan England? Modern America?

They ne'er cared for us yet! Suffer us to famish, and their storehouses cramm'd with grain; make edicts for usury, to support usurers; repeal daily any wholesome act established against the rich, and provide more piercing statutes daily to chain up and restrain the poor.

Such rhetoric may not read well on West Jackson Boulevard at the Chicago Board of Trade. But it will ring familiar in some other neighborhoods not too far away.

"Right, good buddy, you pay as you go in commodities. And they don't take Master Charge or American Express."

"If you avoided the markets because your freezer couldn't hold 36,000 pounds of pork bellies, you can relax. Sort of."