<s> Winningwith
Futures
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Winningwith
FuturesThe Smart Way to RecognizeOpportunities, Calculate Risk,and Maximize Profits
Michael C. Thomsett
American Management AssociationNew York • Atlanta • Brussels • Chicago • Mexico City • San FranciscoShanghai • Tokyo • Toronto • Washington, D.C.
Special discounts on bulk quantities of AMACOM books areavailable to corporations, professional associations, and otherorganizations. For details, contact Special Sales Department,AMACOM, a division of American Management Association,1601 Broadway, New York, NY 10019.Tel.: 212–903–8316. Fax: 212–903–8083.Web site: www.amacombooks.orgThis publication is designed to provide accurate and authoritativeinformation in regard to the subject matter covered. It is sold withthe understanding that the publisher is not engaged in renderinglegal, accounting, or other professional service. If legal advice orother expert assistance is required, the services of a competentprofessional person should be sought.
Library of Congress Cataloging-in-Publication DataThomsett, Michael C.Winning with futures : the smart way to recognize opportunities, calculate risk, andmaximize proﬁts / Michael C. Thomsett.p. cm.Includes index.ISBN-13: 978-0-8144-0987-9ISBN-10: 0-8144-0987-31. Futures. 2. Futures market. 3. Investments. I. Title.HG6024.A3T478 2009332.64⬘52—dc222008026399䉷 2009 Michael C. Thomsett.All rights reserved.Printed in the United States of America.This publication may not be reproduced, stored in a retrieval system, or transmitted inwhole or in part, in any form or by any means, electronic, mechanical, photocopying,recording, or otherwise, without the prior written permission of AMACOM, a division ofAmerican Management Association, 1601 Broadway, New York, NY 10019.Printing number10 9 8 7 6 5 4 3 2 1
CONTENTSPreface
vii
PART 1: KNOWING YOUR MARKETChapter 1—What Is a Futures Contract?
3
Chapter 2—How Futures Trades Are Made
22
Chapter 3—Reading Futures Prices
38
Chapter 4—Risk Levels of Futures
53
PART 2: REACHING THE MARKETChapter 5—Order Placement
79
Chapter 6—Fundamental Analysis of Futures
89
Chapter 7—Technical Analysis of Futures
103
Chapter 8—The Leveraged Approach: Options on Futures
122
PART 3: CLASSIFICATIONS OF FUTURESChapter 9—The Energy Market
147
Chapter 10—Agriculture
170
Chapter 11—Livestock
192
Chapter 12—Precious Metals
200v
vi
Contents
Chapter 13—Imports and Tropical Products
212
Chapter 14—Financial, Index, and Stock Futures
221
Conclusion
237
Index
241
PREFACEVirtually anyone can become adept in the futures market. Withpractice and study, what may seem a complex and high-risk marketcan be tailored to ﬁt a niche for virtually any investor seeking proﬁtopportunities and diversiﬁcation. You have to realize, however, thatrisks vary, and any entry into this market should be a sensible andsuitable match between the avenue you pick and your personal levelof risk tolerance.A future is a contract granting its buyer the right to buy a speciﬁed amount of a commodity, shares in a stock market index, ora foreign currency. Very few purchasers of futures actually takepossession of the commodity underlying the contract. Most futurestrading is undertaken with the goal of closing out the contract at afavorable price.In comparison, an option is a contract on stocks and indices.Most stock-related options are traded speculatively. A long positionis entered hoping its value will rise so that the option can be closedat a proﬁt. Short sellers have the opposite goal, and will sell anoption hoping the stock’s value will fall. When that happens, theoption can be bought and closed at a lower price. Options tradersalso use options to protect long stock positions or to swing trade inthe very short term.Both futures and options can be high risk or highly conservative, depending on how they are used. Futures are often perceivedas very high risk. However, alternative methods of investing in thefutures market can mitigate the risk, and futures can be effectiveportfolio hedging tools; trading and cyclical choices; and in manysituations, used to take advantage of short-term cyclical changes.vii
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The terms ‘‘futures’’ and ‘‘commodities’’ are used interchangeably in the market; however, an accurate deﬁnition makes a distinction between all futures contracts, which may be written on a rangeof commodities as well as ﬁnancial instruments and market indices.A commodity in the strict sense excludes currencies and indicesand is limited to energy, grains and oilseeds, livestock, lumber, precious metals, and imported materials.This book is aimed at the novice, including experienced stockmarket investors with little or no knowledge about the futures market. The intention of this book is to explain the market in a spectrum of risks and opportunities, so that you will be able to make aninformed decision about how to enter this market, and how yourown acceptable risk levels match to futures speculation.You can also employ these interesting instruments to diversifya stock portfolio, or to hedge against other positions. For example,if you own shares of an oil company stock, a futures contract anticipating a drop in oil prices works as a possible hedge. If the stockvalue falls, the value of the future may offset the loss. Many opportunities like this exist. Another example involves the use of futureson foreign currency. If the U.S. stock market is going to sufferfrom the effects of exchange rates, you can pick stocks defensively(or limit your investments to companies doing most of their business in other countries). You can also hedge your stock portfolioby taking positions in currency futures.The point is that there are many ways to augment or protectstock positions in your portfolio, and futures contracts may play apart in that. Few investors today can safely put all their money intostocks and simply wait for long-term appreciation. This traditionalmodel (often called value investing) will work in some companies,and is suitable for some people. But today, many investors are realizing that their portfolio can be further enhanced and diversiﬁedby expanding beyond stocks. This means using options, exchangetraded funds (ETFs) and traditional mutual funds, real estate, andof course, futures—all as part of a more sophisticated portfoliostrategy. By reaching not only an expanded menu of products, butan international and multisector strategy, you can compete todayin a way that, in the past, only large institutional investors could.This expanded capability has been made both accessible and
Preface
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affordable through the Internet. In the past, many markets like thefutures exchanges were simply too expensive for those with modestcapital resources; and the cost of transacting was so prohibitive thatmost people could not consider futures and similar products asviable instruments. Today, this has all changed. As long as you areable to educate yourself about the risks, strategies, and opportunities, all markets have become available.The speed and low cost of modern investing, made possible bythe Internet, represents an incredible revolution in the investingworld. It only remains for the average investor to gain the knowledge needed to effectively enter into new markets. Only with a goodworking understanding of the market can you (a) identify risk andopportunity, (b) select appropriate strategies, given your risk proﬁle, and (c) begin an expanded program of allocating resources inyour portfolio beyond the traditional ownership of stock.In Winning with Futures, you ﬁnd a comprehensive but basicintroduction to this market. The format and presentation are designed to help answer your questions and to ﬁnd additional resources to expand your study of the futures market. The AMACOMseries of ‘‘Winning with . . .’’ books are all designed in the sameway. The objective in this series is to provide readers with a complete, nontechnical, and practical overview of a speciﬁc investment.The result is that you, as the reader, will gain the conﬁdence andknowledge you need to ask the right questions. The ﬁrst of these,of course, is How do I know that the market is appropriate forme? This appropriate and key question should always serve as yourstarting point. In this and other books in the series, this is the question that is constantly present in all discussions. These books arereader-oriented and based on the assumption that you can onlyanswer this key question if you have all the information you needto understand the advantages, risks, and strategic requirements ofinvesting.Many investors have simply given up trying to diversify theirportfolio because they cannot ﬁnd basic information about marketsbeyond the basic stock-based strategies. This explains the popularity of mutual funds over the past half century. As successful andproﬁtable as mutual funds have been, however, for many investorsthere are other alternatives worth exploring. This is why the ‘‘Win-
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Preface
ning with . . .’’ series was started; it ﬁlls an important niche ininvestment education by providing the essentials on many differentmarkets. In Winning with Futures, you will not ﬁnd technical jargonor complex formulas. You will ﬁnd basic, nontechnical, and practical advice and information, enabling you to take the next step foryourself.
Winningwith
Futures
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P A R T
1
KNOWINGY O U R MARK E T
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WHAT IS A FUTURESCONTRACT?
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f you could know the future value of anything, you would naturallybe able to get rich. In all public markets, investors and traders sharethis common dream, and the anticipation of future price movementdictates how and where investment decisions get made. In fact,the futures market is a formalized version of this forward-lookingpattern. But it involves commodities, indices, and ﬁnancial instruments rather than stocks.One famous writer spoke of the future as ‘‘That period of timein which our affairs prosper, our friends are true and our happinessis assured.’’1 This makes an important point about all forms of investing. Optimism is often a ruling force, and those investors wholook optimistically to the future expect prices to rise, hopefully immediately after they take up a position in the stock, bond, or futurescontract.As a philosophy of investing, the futures market contains anever-ending series of price estimates for future goods: oil, grain,livestock, metals, coffee, currency exchange, and even stocks. Futures contracts set a price of future delivery. This does not meanthat if you buy a futures contract, you expect to actually take delivery of the product involved; it does mean that if the actual price3
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Knowing Your Market
moves higher than the ﬁxed price of the futures contract, you cansell that contract and take a proﬁt.This is only one basic explanation of how futures contractswork and are traded. The variations involve not only different positions (long or short) but different structures as well (direct trades,indices, or exchange-traded funds, for example).
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Essential DefinitionsA good starting point is to carefully define the futures contract. Thisis an agreement involving the purchase and sale of a specifiedamount of a commodity (or index, currency, or other asset ofvalue). The contract sets the value as well as the delivery date; it isstandardized, meaning that the expiration cycles are set ahead oftime, monthly or quarterly. So delivery occurs every three months.The reason for standardizing futures contracts is to make themmore easily exchanged in the market. When every futures contractis set by date and amount, traders have an efficient market and caneasily find the value of every existing contract. The futures contractcan only be bought or sold on the futures exchange, and only amember of that exchange can execute the transaction.In a futures contract, a good-faith margin deposit is requiredat the time the contract is originated. The basic transaction is speculative, but it is based on anticipation of price movement. If youbuy a futures contract and the value of the underlying commodityrises, then the value of that contract will rise as well. However, youcan take out your profits or close out the contract whenever youwant. This feature, escapability, makes futures speculation relatively easy, so that speculation in futures works very much likespeculation in the options market.Investors buy and sell futures contracts for several reasons,using contracts directly or other investments designed to poolmoney. For example, many exchange-traded funds (ETFs) are designed specifically to provide investors with a range of coverage inseveral assets. There are a number of ways to participate in themarket. First is pure speculation, with a trade entered in the beliefthat value is going to move either up or down. Second is to hedgeother positions; for example, if you bought shares in an oil com-
What Is a Futures Contract?
5
pany, you may also go short in an oil ETF; that is one example of ahedge, meaning that a loss in one position will be offset by a gainin another.The third section of this book will explain specific futures. Fornow, to provide an overview of the entire futures market, the following is a list of the major commodities by type:energy—crude oil, natural gas, coal, nuclear power, solar andwind power, electricity, ethanolgrains and oilseeds—corn, wheat, soybeans, soybean oil andmeal, sugar, cottonlivestock—live cattle, feeder cattle, lean hogs, pork bellies,lumberprecious metals—gold, silver, platinum, aluminum, copper,palladium, nickel, zincimports and tropical products—frozen concentrated orangejuice, coffee, cocoa, ricefinancial futures—noncommodity contracts including those onsingle stocks, indices, and currenciesAnother way to think about the futures market involves risk andrisk transfer. The futures market not only helps anticipate the future prices of products, it also helps investors and those wanting tohedge positions transfer risks to speculators who are willing to accept those risks in exchange for profit potential. It is this risk exchange that makes futures contracts so interesting. As specificcommodity prices rise and fall, corresponding action and pricemovement in futures contracts will react at once (when the marketis open), and traders react by trading in those contracts.
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The Contract and How It WorksAnyone who buys a futures contract, directly or through one of thepooled investment alternatives (like ETFs, for example) takes up along position. Just as stockholders who buy shares of stock ‘‘golong,’’ the same important definition applies to futures buyers as
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Knowing Your Market
well. In a long position, the sequence of events is ‘‘buy, hold, sell,’’a well-known and common method of investing.A short position is the opposite. This involves first selling a futures contract (or shares of stock) and then later closing the position with a closing purchase transaction. The sequence of events ina short position is ‘‘sell, hold, buy.’’One of the most crucial elements of the contract is whether youtake up a long or a short position. You can do either, and, becausethe market is facilitated by the futures exchanges, every short position is offset by a corresponding long position, and vice versa.The decision to go long or short defines and distinguishes riskas well. The level of risk in short positions in futures or in any othermarket is usually much higher-risk than the better-known long position. Those traders who understand markets well and who arewilling to accept the risk may want to sell short when they believeprices are going to move down.Taking a short position is one way to hedge other investmentpositions. If you own shares of stock in a company whose price issensitive to futures values, selling a futures contract short is oneway to hedge the long stock position. Hedging can also be morecomplex and creative. For example, to offset a stock position, youcan short an ETF for the market sector to which that companybelongs.Some traders who are involved in short positions on futurescontracts (or on both long and short) are operating not as hedgersbut as speculators. If they believe short-term prices are going torise, they go long; and if they think prices will fall, they go short.How much does a futures contract cost? The cash price of thecommodity, for example, also known as the spot price, is defined asthe current market value of the underlying commodity. The futuresprice is different. It is the price of a contract that anticipates futurespot price levels. Futures prices tend to track spot prices, meaningthat if the cost of a barrel of oil rises today, the various futurescontracts for oil are going to rise too. The closest delivery month isgoing to be most sensitive to commodity value and how it changes,and delivery months further out will tend to change less responsively. The distinction is an important one. The spot price reflects
What Is a Futures Contract?
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supply and demand in the market today; futures prices are the sumof expectations about future price movement.Another important aspect of the contract is the method bywhich a trade order moves through from initiation to completion.The futures exchanges are clearinghouses for execution of tradesby both buyers and sellers, and supply and demand define pricelevels and price movements. So large exchanges, including theChicago Board of Trade (CBOT), Chicago Mercantile Exchange(CME), and the New York Mercantile Exchange (NYMEX) contain brokers who match up each side of the transaction and ensurethat the trades are made in a timely manner.Valuable Resource: The three major futures exchanges can be found online, at:Chicago Board of Trade: www.cbot.comChicago Mercantile Exchange: www.cme.comNew York Mercantile Exchange: www.nymex.com
All trades go through one of the exchanges. Several regionalexchanges, including the Kansas City Board of Trade (www.kcbt.com) and the Minneapolis Grain Exchange (www.mgex.com),manage trades through their own brokers located on the floor ofthe larger national exchanges. Other, smaller futures exchangesmake the trading world confusing; but it is likely that with improved Internet systems in the future, you will see mergers alongthe smaller exchanges or acquisitions by the larger ones. These exchanges facilitate international trading throughout the world.When exchange members need to buy futures contracts, theypresent bids. Sellers present offers in the ask price. The net difference between bid and ask price is called the spread, and this is theprofit brokers make for executing trades on the exchange floor. Bydefinition, a bid is the highest price the buyer is willing to pay, andthe ask is the lowest price a seller is willing to accept. The floorbroker has the task of filling orders for anyone outside of the exchange, including commodity brokers, financial institutions, portfolio management companies, and the general public. Most floorbrokers are excluded from trading on their own accounts.
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Knowing Your Market
Another type of trader is the local, those exchange memberstrading for their own accounts. These include day traders, positiontraders, and scalpers. A day trader is an individual who enters andexits positions within a single trading day, often many times. Typically, day traders limit their open positions to a few hours, and maycomplete their transactions within a matter of a few minutes. Aposition trader holds a futures contract open for several days or afew weeks. A scalper moves positions around very rapidly, oftenmatching buyers and sellers to ‘‘scalp’’ the spread. Big volumeequals small spreads, but a lot of small spreads can add up quickly.Scalpers provide a valuable function by matching long and shortpositions throughout the trading day.Orders move from the customer, to the broker, and then to theexchange floor; from the trading floor desk, orders go directly tothe trading pit to be executed. Then the process is confirmed, withinformation flowing back to the trading floor desk, to the exchangefloor, then to the broker, and finally back to the customer. Mostpeople tracking their trades are going to be aware of only one person, their broker, and may not realize how many steps are involvedin the placement of the trade.
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The Investment Value of FuturesIt is a mistake to think of futures trading as an investment. By definition, investing usually involves buying a product and holding ituntil it grows in value, or earning current income (interest on debtsecurities or dividends on equities). But beyond investing is an activity known as speculation. Because futures are intangible contracts and not products, they are not investments but speculativeplays. The entire futures market is a series of speculative tradingdecisions. The use of futures contracts as hedging strategies cancertainly augment a long-term investment portfolio; but futures arenot the same as tangible products like shares of stock.Earning a profit from futures trading is more difficult than itmight seem on paper. Many people have convinced themselves thatby speculating on futures full time, they can retire from their jobsand make a living as traders, perhaps even get rich. The truth, however, is that this is a risky idea. You might make money on a series
What Is a Futures Contract?
9
of consecutive trades, increasing your dollar positions each time.But it only takes one reversal to wipe out your profits. And reversalsare inevitable.Futures have to be viewed for what they are: speculative devicesbest used to hedge or to enter positions when you expect strongprice movement in the desired direction. It also is prudent only ifyou limit your risks to an affordable level. Selling all your equitiesand mortgaging your home to begin a new venture as a futurestrader is not a smart idea, even though some people in the businessmay promise you unimaginable riches.A perspective on futures requires a complete appreciation ofthe risks involved. Those futures relating to noncommodity items,like stocks or currency exchange, can move quickly, and relativevalues may change in a short time. Even commodities are not intended to act as investments, but to be bought and sold on the openmarket. The futures contract is a method for speculating on theprice of a commodity, based on changing supply and demand andbased on scarcity. For example, in 2007 a movement began in theUnited States to develop ethanol as an alternative energy source.But as a direct consequence of farmers beginning to grow morecorn, the prices of corn rose, affecting market-wide prices of manyother foods as well. Corn is not held in anyone’s account the waythat shares of stock are held; it is grown specifically to address ademand for corn. If corn were merely to be used as feed for livestock or as a key ingredient in so many different foods, the supplyand demand aspect of futures prices would be easily understood.Adding the competition between feed/food use and energy, supplyand demand for corn takes on a new dimension.This example demonstrates how a futures contract can changein value based on emerging market realities. Futures prices risebecause demand also rises. For example, as China continues togrow into an industrial power, its energy demands are growingmore rapidly than any other country. Oil is recognized as a finiteresource, and alarming estimates are continually made about whenwe will run out. (Actually, since 1910, ‘‘experts’’ have been predicting that oil is going to run out within a decade, and these estimatesare updated every decade. This topic is documented in Chapter 9in more detail.) Demand, or at least the perception of future de-
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Knowing Your Market
mand, is what most directly affects the price of oil futures contracts. This is sensitive. For example, if conflict is anticipated in theMiddle East in a way that could disrupt the flow of oil, future scarcity becomes one possibility that will affect the value of an oil futures contract.Some esoteric factors also affect futures prices. One is inflation. Many traders expect, at the very least, that commodity valuesshould match inflation. In other words, demand for ethanol mayincrease the price of corn. But even without increased demand,traders may argue that corn values (and oil, livestock, or lumber)should at least match the rate of inflation. This argument may holdduring times of moderate or low inflation, but what happens wheninflation rises? No one can know the answer to this, any more thanthey can predict future rates of inflation. Another factor is currencyexchange. What happens to prices of domestic commodities and toimports if the U.S. dollar declines against other currencies? Concern about this causes increased speculation in U.S. and other currency futures. However, it also affects futures contract values oncommodities.The expert estimates of long-term changes are not always right,any more than expert predictions about dwindling oil reserves havebeen wrong for at least 100 years. Many doom-and-gloom predictions have been made concerning shortages and famines. For example, the famous Paul R. Ehrlich predicted in 1967 that between1970 and 1985, a series of ever-worsening famines due to population growth would result from many resources running out. Notonly was Ehrlich wrong about the timing of these predictions; infact, the agri-technology of food production has improved in recentyears to the extent that the threat is to the profitability of farmingrather than to the ability of the human race to survive. Ehrlich’sideas led to the founding of the zero population growth movement,and he later published his predictions in book form as well.2It is impossible to predict future commodity prices with certainty, just as it is impossible to predict the market value of aparticular stock. Rational arguments can be made supporting thecontention that prices are going to change in a particular direction,but even the most compelling arguments may be wrong. When Ehrlich predicted worldwide famine in 1967, he could not imagine how
What Is a Futures Contract?
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populations would actually grow nor how agriculture would changeso that those people could be fed without running out of resources.Today, shortages of oil are more likely than concerns about faminenearly a half century ago.So the ‘‘investment value’’ of futures cannot be defined in thesame terms as the investment value of stocks or real estate. Futurescontracts are going to exist for a short period of time, and theyhave no specific value on their own. They are predictions anticipating future value. However, a speculative value can be identified, butthis is elusive. Anyone offering predictions about the future is justas likely to be wrong as a rank amateur. This fact makes futurestrading very interesting. Very few futurists have ever been rightabout the timing or extent of events. Those predicting serious bearmarkets, depressions, and famines are no more likely to be right.The ‘‘science’’ they use is not actually science, and use of the scientific method is not useful for estimating the future. Today’s globalwarming advocates have no actual science to prove what will happen in the future either, although many are ready to predict thathigher seas and warmer climates will definitely affect commodityprices. But these proponents of the belief rely on a consensus ofopinion rather than on actual data. No one really knows. And inthe futures market, that equals potential for profits. Because youcannot know the price of anything in three months, the speculativefutures market is the place to go to put your money down in anticipation of price direction.
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A History of the Futures MarketIt is worthwhile to understand how today’s futures market functions, and equally interesting to see how the whole market hasevolved over time. The concept of a futures contract is not a newidea.For hundreds of years, markets have been made orderly withthe use of contractual futures pricing arrangements. Without suchcontracts, markets would be very chaotic. For example, a farmerwould have to take his grain to the marketplace and hope for thebest possible price based on then-prevailing supply and demand.But with a futures market in place, speculation and hedging among
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traders and brokers will cover the farmers’ costs of growing theircrops. The same principle applies to noncommodity futures markets including stocks and indices, and currency exchange, eventhough a specific commodity is not being exchanged.In the United States, a futures market began in the Midwest inthe 1800s, when the geographic center of the United States wasthe natural region for growing crops and moving cattle. In addition,with transportation quite limited in the nineteenth century, Chicagowas a natural gathering place for the markets, both east and west.As long as the United States remained primarily an agriculturalsociety, farming and ranching commodities dominated. Even aslate as 1900, the majority of U.S. citizens lived on farms or in smalltowns, and few people ventured more than 20 miles from theirbirthplace during their lifetime.In this narrowly focused culture and economy, farmers andranchers needed a system that would protect them from unexpected price changes between the time products were generated(crops planted or cattle processed) and taken to market. At thattime, forward contracts were the standard. A buyer and seller couldenter a forward contract on any commodity, at any time, and forany amount. It was informal and, unlike the more specific deliverydates, amounts, and prices on a formal futures market, the forwardcontracts of the nineteenth century lacked any market liquidity (exchangeability). As a consequence, growers often had difficulty finding a forward contract buyer.On April 3, 1848, the first formalized commodities exchangewas formed. The CBOT focused at first on forward contracts, butin 1865 this was switched out and the modern standardized futurescontract became the norm. By the end of the nineteenth century,other futures exchanges were opened, including the Chicago Produce Exchange (1874, but renamed the Chicago Mercantile Exchange in 1898); and the Minneapolis Grain Exchange (1881).In the twentieth century, the futures market expanded beyondcommodity trading. In the 1970s, financial futures were introducedto speculate in futures on interest rates and currency exchange.Today’s worldwide futures business includes trading of $874 trillion per year (as of 2003).3 With Internet-based trading now possi-
What Is a Futures Contract?
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ble, execution time and efficiency of information has led to recordlevels of volume and dollars traded.Today’s futures market is complex not only in terms of its international market, but also in what combinations of futures aretraded. In the early nineteenth century, trades focused on grainsused to feed farm families and to trade in rather limited markets.Exporting involved lengthy ocean shipments and internationaltrade focused on commodities that would not spoil before reachingthe market. In that century, the economic observation that ‘‘cottonis king’’ held true not only within the United States, but internationally as well.For grains and grain by-products like flour, Chicago was strategically located as a future capital not only due to its proximity tofarmlands and central continental site. Its access via the GreatLakes was important; and development of the Erie Canal madeChicago-based commodities easily available in New York. The ErieCanal was probably the most important transportation improvement in the history of the United States. It made commodity products available for widespread use including exports, and led to theUnited States becoming an economic world power. Using the sameroutes, immigrants and manufactured goods had easy access to theMidwest and the West. The great westward settlement movementrelied greatly on movement of commodities as well as on improvedtransportation. So Chicago and St. Louis became key gateways forlaunching expansion to the Pacific territories. Without the advanced transportation systems and the orderly futures markets, thiskind of expansion would have taken much longer.The grain trade before the Civil War years was managed by anetwork of financial institutions, grain dealers and merchants, andbuying and selling agents in clearinghouses. The use of lines ofcredit within this acceptance system financed farming operations,using lines of credit secured by future commodity deliveries.On the other side of this commodity-based money market,commission agents secured warehouse receipts for quantities ofgrain held in storage by grain dealers. The lines of credit grantedearlier were exchanged for banknotes when delivery was madefrom storage facilities. So in a geographically