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2008 KFB Futures
Market Trip to Chicago
Mark
Nelson
I had the good
fortune to accompany ten Kansas
Farm Bureau members on a futures
market education trip to Chicago
this past July 8th
and 9th. We not only
had the opportunity to tour the
newly created CME Group trading
floors (the CME Group is the
name of the recently merged
Chicago Mercantile Exchange
{CME} and Chicago Board of Trade
{CBT}, housed in the CBT
building) but also heard from a
couple of very informative
speakers regarding futures
markets and futures market
regulation.
Our trip began
the evening of July 8th
with some authentic,
“Chicago-style” pizza at Uno’s
Pizzeria. There, our group got
to know each other a little
better and we reviewed the
agenda for the next day’s stops.
The
one-day tour began bright and
early on July 9th.
We boarded a van that took us to
the Chicago Board of Trade
building, where we gathered for
the group photo below.
(2008 Futures
Market Trip to Chicago
participants included {front
row, Tyler Powelson, Lyn Spring,
Mary Luebbers, Amy O’Rourke,
Tammi Van Fleet and Terry
Silvius {back row} Brian McFall,
Terry Powelson, Bill Luebbers,
and Robert McFall)
Once inside, we
checked in at security and met
with Tom Clark, Associate
Director of Commodity Products,
CME Group. Tom took us to the
visitor gallery and explained
the various “trading pits,”
price boards and the roles and
duties of the people that were
beginning to gather on the floor
below us. Promptly at 9:30 a.m.
CST, the grain markets opened
and the shouting began. After
going to a second visitor
gallery where they were trading
livestock futures and options,
we worked our way to the
theater.
In the theater,
Tom gave a presentation about
the CME Group and its history,
how futures contracts came
about, their function, how they
are traded and why. A few
things we learned were:
1)
The primary
function of commodity futures
contracts and markets are to
provide a means for market
participants to transfer price
risk and to assist in commodity
price discovery. They provide a
venue where it is easy to buy or
sell; that allows all
participants to meet, share
information and “discover
price;” and that is available
year round, allowing for sales
and processing to be made on a
more orderly basis. The
presence of today’s futures
markets is what makes it
possible for us to set the price
for next years crop, so we have
the confidence to purchase the
inputs necessary to plant and
grow it.
2)
While commodity
futures markets are also
regulated by outside entities,
there are many strictly enforced
exchange-based rules and
regulations that participants
must follow. The reason for
this is that the futures market
is a “zero-sum” game, meaning
that the gains of one
participant must be offset by
the losses of another. Because
of this, futures exchanges must
be fair, transparent and
unbiased; otherwise,
participants would not invest
their time, effort and
definitely not their money, and
the exchanges would fail.
3)
Commodity
exchanges have been active and
evolving for over 150 years.
a.
The Chicago Board
of Trade (CBT) was established
in 1848 (KCBT in 1856) as a
“cash” grain market, with
standardized forward contracts.
b.
In the 1860’s,
the first “futures” contracts
were developed.
c.
1919 was the
inaugural year of the Chicago
Mercantile Exchange (CME), which
primarily traded livestock-based
commodities.
d.
In 1972 the first
“financial” contracts (i.e.
futures contracts for treasury
notes and bonds) were traded.
e.
The Globex
electronic trading platform was
developed in 1992. Today,
electronic trading makes up as
much as 80% of grain and 40% of
livestock trade volume on any
given day. In addition, through
electronic trading these markets
are available during both the
Asian and European daytime
market hours.
f.
The CME and the
CBT merged in 2007, forming a
single entity, the CME Group,
with the last trading floors
being completely transferred to
the CBT building in the spring
of 2008.
4)
While a primary
function of a futures market is
to assist owners of the
commodity in price risk
transference (hedging),
speculators, or, participants
who neither own nor deal in the
specific commodity traded, play
a vital role by providing
liquidity. When all of the
folks who own or deal in corn
want to sell, it is the
speculator, who takes the other
side of the contract. Without
speculators, commodity markets
would not function. That is an
important thing to remember in
these times when speculators are
being blamed for high prices.
We then heard a
presentation by David Kass,
Senior Economist in the Division
of Market Surveillance with the
Commodity Futures Trading
Commission (CFTC), the
regulatory agency charged with
providing oversight to futures
exchanges. He related that the
goal of market surveillance was
to, “detect and prevent price
manipulation or other disorderly
market conditions,” and to
“monitor compliance with CFTC or
exchange-based speculative
position limits and rules.”
In other words,
prices may rise and prices may
fall but the CFTC ensures that
it is market forces driving
prices and not the efforts of
participants wishing to unduly
influence the market.
To do this,
Market Surveillance staff
examines both public and private
data. Public data such as USDA
reports, data from the exchanges
and weather forecasts are used
to better understand the
perceptions and economic drivers
of traders. Private data
includes:
a)
Clearing Member
Data – Such as buy and sell
positions from the roughly 90
“clearing member” firms who are
the only entities who can trade
at the exchange. For example,
if you, I or your local elevator
wanted to take a position in the
futures market, we would have to
work with a broker associated
with a clearing member firm.
b)
Large Trader Data
– Detailed buy and sell
positions of the largest
traders. This private data
allows CFTC to aggregate data
across all clearing firms, just
in case a particular trader was
trying to circumvent position
limits by having several
accounts with different clearing
firms. So while we sometimes
think that electronic trading is
anonymous and unregulated,
through the Large Trader Data,
CFTC has intimate knowledge of
the positions of traders
representing 70% - 90% of all
open interest.
The CFTC uses
this private data to anticipate
the reasons and opportunities
for market manipulation so that
they can work to eliminate them
before they become a problem.
For example, as each futures
contract within each exchange
and commodity enters its
delivery month, CFTC monitors
and compares the buy/sell
positions of the larger traders,
relative to the deliverable
stocks available to the market.
In this way, they are in a
position to see who might
benefit from manipulating the
market and can respond
accordingly.
I walked away
from our visit to the CME Group
with much more confidence in the
integrity of our futures
exchanges, their role in price
discovery and the CFTC’s ability
to oversee them. While we not
only had the chance to see a
futures exchange up close and in
person, with both presentations,
our members had the opportunity
to ask questions and get answers
regarding issues making
headlines on a daily basis.
For more
information about the CME Group
and the futures and options
contracts traded there, go to
http://www.cmegroup.com/,
and to learn more about the
Commodity Futures Trading
Commission, go to
http://www.cftc.gov/ .
Our last stop of
the day was at the Chicago
Museum of Science and Industry,
where David Woody, Director of
Design and Exhibit Development
gave us a personal tour of their
Farm Tech exhibit. Farm
Tech explores the newest ag
innovations in automation,
chemistry, genetics and
engineering that make farming
more efficient and better for
the environment. It tries to
tell visitors how farmers use
technology to “deliver consumers
favorite foods in a safe and
sustainable way.” I thought it
was a great exhibit, presenting
agriculture in a positive light,
as technology users, and one
that I would recommend to anyone
visiting Chicago. To learn
more, go to,
http://www.msichicago.org/whats-here/exhibits/.
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