The produce exchanges are strikingly similar to the stock exchanges. The points of resemblance will ap pear one by one as we examine the operations and methods of the produce markets. In general organi zation they are almost identical. They represent the highest development in marketing efficiency.
3. "Spots" and "futures."—Perhaps the most im portant feature of the produce exchanges is the preval ence of "future" trading. In the case of the Euro pean stock exchanges, or bourses, we have seen that securities may be bought for "cash," or "money," that is, immediate payment and delivery, or "for the ac count," or "futures," in which case neither immediate payment nor delivery is contemplated. Much the same system prevails on the produce markets. We have, on the one hand, "spot" wheat or "spot" cotton, which involves a sale for cash for immediate delivery, and we have "futures" in wheat, corn, oats, cotton, coffee and sugar. The great majority of speculative operations are conducted in "futures." Spot transactions not only call for immediate full filment and delivery, but their very nature implies the present existence of the commodity in question. Not so with futures. Grain and cotton, of course, can be had several months after the contract is made— that is, whenever the crop matures. Hence the term "future." The United States Bureau of Corpora tions thus defines futures : The system of future trading is based on contracts on the part of the seller to deliver, and consequently on the part of the buyer to receive, at a time subsequent to the making of the contract, a certain quantity of the produce at a stipu lated price. . . . A future transaction differs from a spot transaction in that the latter invariably represents goods actually on hand or instantly available at the time the con tract is made, and moreover contemplates an immediate or an approximately immediate delivery.
4. Future trading illustrated.—The process in volved may be explained by the following simple il lustration. A is a farmer who has grain in the process of growth—wheat, rye, corn, oats or other cereal. B is a merchant who approaches A and makes a con tract requiring A to sell B a certain portion of his crop at a definite price. Let us assume, further, that the bargain was made in July, and that the produce will be harvested in September. Meanwhile B is the
legal and practical owner of that portion of the final yield that he has purchased, and he is bound by con tract to keep the terms of sale. Several weeks later, B sees an opportunity to sell his September crop to C at an advanced price, and he unloads as a conse quence. This process may continue indefinitely, the future crop passing successively into the possession of many persons, and each owner, in turn, selling it to another person to take advantage of a rise in price. When the month of September arrives, the harvesting of the grain that has been sold begins, and that por tion which was sold to A is shipped, not to him but to the last buyer in the series, say M.
5. "Contract" trade, another name for future trad ing.—Future trading is also known as "contract" trad ing, because the broker contracts to deliver in the future a specified amount of a specified grade of wheat or cotton. The word contract comes to have the same meaning as unit, and is used accordingly. The standard unit for speculation in future grain dealings is 5,000 bushels. If a man wants more he calls out the number of thousands desired. Thus, when a broker wishes to bid on the exchange for 50, 000 bushels, he merely shouts, "Fifty." If he does not mention any amount, it is assumed that he wants 5,000 bushels. For purposes of comparison, it might be noted that if wheat is selling at $1 a bushel, 5,000 bushels are approximately equivalent to 50 shares at $100 a share; 10,000 bushels are equivalent to 100 shares at $100 a share, etc. Wheat can be bought and sold in 1,000 bushel lots, but dealings in corn and oats are confined to full lots of 5,000 bushels or more. Wheat fluctuates by eighths of a cent per bushel. Thus, wheat at means wheat at per bushel. Each eighth of a point is equiva lent to $6.25 on a contract of 5,000 bushels.
Futures are classified according to months. In other words, the trader always buys or sells wheat or cotton bearing the name of the month. In fact the term, month, is often used as a synonym for the word, future. Other words that have the same mean ing are delivery and option.