Day 2 - Monday

Chicago Board of Trade & Cargill South Valley Grain Transport

   by: Sarah Baker, Travis Riddell, Amanda Farrar, and Blake McKellar

The abnormal weather conditions during this past year's growing season have resulted in market conditions rarely seen before. These uncharted waters have left commodity analysts reeling and unable to predict what might happen next. " I don't know if I should fill my freezer with beef, stock up on canned goods or buy a gun and a lot of ammunition" Steve Freed* replied, when asked if there were things that were affected by the drought (he first mentioned that they were never even expecting a drought!). The Chicago Mercantile Exchange (CME) was the first stop on our Midwest tour, and what a place to start!

After arriving in Chicago Sunday evening we were treated to a wonderful complimentary buffet breakfast at the Chicago Board of Trade. Matt King, a 20 year veteran of the CME group, led us through the visitor centre where we viewed a brief video highlighting the operations of the CME group. This video served as background knowledge for the rest of the tour. The CME group is designed to manage the risk involved in trading commodities. The CME bought the Chicago Board of Trade (CBOT) in 2008 and relocated to the CBOT building. This exchange has been running for 160 years, conducting 2 billion trades annually valued at $1000 trillion dollars. By facilitating all trades in the market, the CME is able to take great pride in ensuring the integrity of each trade. Aside from the reliability of trading through the CME and the managed risk, the CME is the most liquid exchange board. They are able to maintain this liquid status because of their unmatchable market presence.

The commodities trade twenty four hours a day from North America to Asia to Europe and back again. This is accomplished by using Globex; an online trading service. Brokers are now able to sit at a computer anywhere in the world to make these trades; in fact, about 98% of trades are now done online and only 2% on the floor!

After watching the video we were taken up one of the biggest escalators in North America to the seventh floor, looking down on the fifth floor where agriculture commodities are traded. Mr. Freed met us there to discuss current market trends and give us his personal thoughts on the future. He started with the basics, supply and demand, which is what dictates price. The drought in the United States is significantly reducing the supply of most agricultural commodities. For example, corn in Illinois averages about 180-200 bushels/acre, this year they are predicting 50 bushels/acre yield! This trend is seen with all grains. As a result of these historically low supplies, the prices are at record highs; soybeans are trading at almost $17/bushel (that is almost double the usual price!). Corn is generally worth about $4/bushel and has recently doubled in value. The limited supply of these grains is impacting more than just cash croppers; livestock producers are suffering from record high feed prices. The only agriculture sector that seems to be remaining stable is the poultry industry, which is experiencing only minor setbacks.

Mr. Freed predicts that the US will run out of soybean oil by March 2012 and corn end stocks will be really tight to make it to the next harvest. He believes that the last time there was a drought this bad was 1934, followed by a more severe drought only 2 years later. Mr. Freed is concerned that we may be experiencing this same trend and that in 2 years we may be much worse off than we are now.

Mr. Freed then passed it over to Mr. King who went over some of the basics of trading in a "pit". He explained the variety of hand signals brokers use to indicate whether they are looking to buy or sell a commodity and for how much. There is an entirely different language spoken on the floor!

The final thought Mr. Freed left us with was that, in his opinion, if everything is done right in production for the next 30 years, with the right technology and the best possible scenarios, in 40 years, we will have run out of food. We need to be on the forefront of new technologies and think innovatively in order to sustain the future world population.

* Vice President of Research at the Chicago Mercantile Exchange

The second stop of the day was at the Cargill Terminal in Spring Valley Illinois, one of six terminals along the Illinois River. The plant we visited handles primarily corn, soybeans and soft red winter wheat. The plant is able to hold up to 4 million bushels of product. Last year they handled a total 74 million bushels! The group was split into 2 sections; one to learn about River Bid Sheets, and the second group was given a tour of the facility and debriefed on operating procedures.

River Bid Sheets outlined how Cargill is capable of buying and selling grain so efficiently. The sheets describe in detail how an individual elevator arrives at the cash price for the day. The group that went outside saw how the grain is processed at the plant and loaded onto barges. The barges travel down the Illinois River to the Mississippi River to the Gulf of Mexico. They are purchased by a business unit of Cargill located at the Gulf, and upon arrival the grain is loaded onto ocean vessels and can be shipped anywhere in the world.

The drought the US is experiencing is severely affecting this transportation method, as the water level in the river determines how much grain can be loaded into a single barge. Aside from the low water levels in the river this year, there is an even more unusual occurrence. Asian Carp are migrating through the United States river systems, and are a highly invasive species. The government is trying to slow the spread of these fish to prevent contamination of the Great Lakes; however these efforts have only been able to slow down, not eliminate the problem. The fish are about two kilograms in weight and when water is agitated around them they can jump meters out of the water! The jumping is not the issue; the extreme invasiveness of the species is the real concern. The tug boat the plant uses to move barges drove out to show us these fish in action, and it was remarkable how many jump once the water is stirred up.

Cargill employees pride themselves in plant safety and efficiency. They have not encountered a reportable safety issue in over 9 and a half years. The company has numerous Standard Operating Procedures in place to respond to possible environmental or safety emergencies. The facility boasts its state of the art elevator monitoring system. The system measures bearing temperature as well as belt tracking and other parameters. It tracks real time data and alerts operators immediately if an alarm sounds. In rare instances it may intervene and shut the entire system down if a catastrophic failure occurs.

Cargill was an interesting stop, and they went above and beyond to make our group feel welcome. After we finished the two discussions we met as a group for snacks provided by Cargill, and had a chance to talk to the employee's one on one.

Overall, it was a great first day! We learned how markets can be drastically affect ted by such a simple factor as weather. The volatile prices bring uncertainty and unpredictability to the marketplace. The importance of environmental condition was also exemplified in commodity transport. We had a first hand view of the threat and implication caused by invasive species and we realize the importance of protecting un-invaded ecosystems. The group is anxiously awaiting what the rest of the trip has in store!