Chicago Board of Trade and Cargill Grain Terminal:
Today was the first day of the trip. We started the day off by going to the Chicago Board of Trade (CBOT) and having breakfast in their cafeteria. The Chicago board of trade was established in 1884 and is one of the oldest futures and options exchanges. In 2007 the Chicago Board of Trade merged with the Chicago Mercantile Exchange (CME) to establish the CME Group.
We met with Matt King the vice president of trading services who gave us a tour of the building and took us up to see the trading floor. The CBOT underwent some changes in the past few years as a result they now trade all in one room, however they are have begun to switch to online trading as that is becoming more popular. With online trading becoming more popular it is shown that the milliseconds really count for making deals.
During our tour Matt explained how their trading services work. Most futures trading are done online and so in the pit the only people trading are those working with options. As I understand it, futures are contracted prices that allow a person to buy an asset at a given price, at a set future date. Whereas, options on the other hand is a security contract that gives the buyer the right, but not the obligation to buy or sell an asset at a set price on or before a given date. One thing that was very clear to me was that futures have an unlimited amount of risk and options only have a limited amount of risk. If you are risk averse you probably want to stick with options.
We were also fortunate enough to have Steve Freed, the vice president of research talk to us about research on the global market, commodity prices and where he sees the future of the market heading. Trends that are influencing the market right now are the increase in technologies that are increasing yields and the efficiency at which we farm. He also mentioned that millennia’s are influencing decision makers more than we may think. Every food company right now is looking at the millennia’s and at what they consume, so as to base market decisions on what they eat, what they like in terms of quality and taste as well as how much income they are spending on food and eating out. One learning point that was gained from hearing Steve talk about the research done within the markets was about how influential people can be with just their daily routines and habits without really meaning to influence decisions and markets.
In the afternoon we headed to the Cargill grain terminal in Spring Valley that buys and sells grain on the world market and sends it down the Mississippi river to the Gulf of Mexico to be shipped across the ocean to Japan, the Middle East, Taiwan, Korea and China. Spring Valley terminal buys grains straight from the farmers, as well as from other country elevators. Shane who is the origination specialist is the person in charge of buying the grain. It was interesting to learn about how much grain is moved within a day and even a year out of one terminal. In 2012/2013 Spring Valley loaded out 32 million bushels and that was during a drought year. Within 1 barge in New Orleans there may be 50 or 60 thousand bushels. During a given day Spring Valley will load 6 barges and receive 389 trucks.
In terms of price setting and how Shane buys grain, Cargill is a basis trader, which means that options are set at 0 and the basis is either above or below 0. Basis is usually higher during post-harvest, planting and inventory tightening as grain is not being moved as much during those times of the year. It was very interesting to learn how Cargill sets its prices as well as how the terminal actually works.
The theme of the day was learning about the world market and how everything is interconnected and is based off that world market price set at the board of trade. The first learning point that was already mentioned was about how influential people can be without realizing that people are watching what they are doing. My second learning point was about the amount of grain that is moved each day. When you think about how many acres of grain are grown and that the grain needs to go somewhere it does make sense but I don’t think that I ever realized just how much grain there was. My third learning point was about how 1 decision no matter how insignificant you may think it is could have serious effects later down the processing line. For example Shane is buying grain in Spring Valley, Illinois that is being shipped across the world to Japan and if he makes a decision about certain moisture content that decision carriers through until that grain is off loaded in Japan.
My assessment of the day for the Chicago Board of Trade and Cargill Grain Terminal is that it was very interesting to see the trading floor and learn about how the market works and how prices are set. However, it was confusing at some times and I am not sure I still fully understand everything that we were told during our visit. Cargill Grain Terminal was very interesting to see the plant and to hear Shane talk who is the actual person buying the grain from farmers and deciding what is being shipped. It was helpful to understand the process of buying and selling grain and to actually see the terminal and how grain is transported.