Grain-Price Volatility Propels Frenzied Boom in Futures

It's tornado season across the Midwest and, apparently, inside the Chicago Board of Trade: Every day a twister seems to bound off the prairie, whip down its tail, and scour the CBOT's futures trading pits.

Traders have churned their way since March to the highest sales volumes for grain futures and options contracts in two decades.

"It's like an all-day rugby scrum," says floor trader Brian Scott, shouting over the trading floor's full-throated mayhem.

The CBOT is the epicenter for tumultuous grain-price volatility kicked up by several forces: rising worldwide demand for grain, foul weather, a phase-out of government farm subsidies, and falling grain stocks. Trading in corn futures last month surged 169 percent above the 1995 level. Wheat options changed hands at a volume 612 percent higher than last April's level.

With grain stocks and yields scant, there is no end in sight for the turmoil, say traders and agricultural economists.

A look at the grain economy from fields and grain elevators to mills, distributors, and supermarket shelves reveals many pocket-jingling winners and wallet-wasted losers in the Great Grain Price Churn of 1996.

Within the CBOT itself, the current commotion shows how the volatility can cut both ways.

From the vantage of a 40th-floor dining room, exchange chairman Patrick Arbor recently depicted the trading-pit pandemonium as the dawning of "golden times and golden opportunities." The CBOT, of course, profits from its customers' risk-management and speculative trading. Mr. Arbor says the stratospheric volume has created "good problems, not bad problems," for the CBOT.

But several floors below, amid the baying bedlam of the pits, traders see things differently.

"I'm tired, I'm real tired. Come Friday I just want to crawl home," says Roy Huckabay, a floor trader at LIT Investor Services in Chicago. Since March, he has endured several back-to-back, 13-hour days as grain prices have routinely careened as much as 40 percent within a 10-day period.

The high volume and whipsaw volatility has packed the pits to overflowing, delayed the filing and completion of orders, prompted huge errors, and triggered a steady barrage of customer complaints. Several stressed traders have raised their fees by 20 percent, in part to compensate for the hefty penalties for mistakes, traders say.

Arbor acknowledges that the CBOT could lose customers if it fails to smoothly handle this spring's relentless stream of high-volume days. In recent years, the CBOT has steadily lost market share to rival exchanges and screen-based computer trading.

ON Wednesday, the board approved several of what Arbor calls "preemptive, anticipatory measures" to streamline trading, forestall errors, and reinforce customer confidence. The initiatives include using wireless headsets to link order desks with brokers in the pits, stiffening trade-checking rules, and a possible redesign of the trading floor.

The two-edged sword of price volatility is also sweeping through the other stages of the grain economy. High prices have cut into the profits of farmers, grain elevator operators, livestock owners, and grain millers who failed to anticipate the trend. Those who bought risk-hedging contracts aggressively are probably the most financially secure, experts say.

The chaotic price swings have strained relations between farmers and elevator operators. Many farmers routinely contract to deliver to an elevator in the future a quantity of grain at a set price.

The recent spike in grain prices has hurt farmers and elevator operators who bet on lower prices or hedged insufficiently. Many farmers have tried to pull out of deals requiring them to deliver grain at far below the spot price, analysts say. Elevator operators that are denied deliveries of grain cannot fulfill their CBOT grain contracts. Many operators have agreed to sell grain at far below the current price.

High grain prices have also squeezed profits of livestock growers. Hog, chicken, and especially beef farmers have stepped up slaughtering to curtail feed purchases. Many are holding back on severe "liquidation" in hopes of an ample grain harvest.

But with an ample harvest far from certain, the grain-market mayhem could intensify. Wheat supplies are at the lowest level in 50 years, and the winter wheat harvest will fall 12 percent below last year's depressed level, the government forecast last week.

Meanwhile, corn reserves are at their lowest level since 1948, the government said Monday.

"What is really creating the volatility is the absence of any surplus inventory," says Donald Ratajczak, director of economic forecasting at Georgia State University in Atlanta. "Inventory is our shock absorber."