Last spring the futures industry lost a great contributor and teacher when Reynold Dahl passed away. Nearly 50 years ago, Reese (as he was known) developed the first course dedicated to futures markets at the University of Minnesota. He was my graduate school advisor when I took his course in 1980. Reese blended academic theory and real-world knowledge to introduce students to futures trading and the principles of price risk management.
Today, I teach “Futures and Options Markets.” I continue to use Reese’s outline and emphasize the same principles of risk management. But even Reese would agree that much has changed since 1980. Here are a few of those changes:
• Options were reintroduced:Options trading has exploded. Today, the volume of trade in corn and soybean options can easily top 100,000 contracts/month. Puts and calls have added new dimensions to risk management. One of the wonders (horrors?) of options is the ability to combine purchases and sales of puts and calls at different strike prices to construct countless pricing strategies. Call me old-fashioned, but I cut my teeth on the use of futures in hedging – I still prefer them over options for price risk management.
• Exchange ownership has gone public: Commodity exchanges were originally formed as non-profit institutions, organized for members’ benefit. Today, most exchanges are publicly held. You can buy shares and invest in the CME. (I wish I had.)
• Pit trading gave way to electronic trading: I started my career as a pit trader at the Minneapolis Grain Exchange (MGEX), trading spring-wheat futures for a large milling company. That was eight great years of my life, but I will never do it again – the MGEX closed its pit in December 2008. Despite protests to the contrary, all pit trading will soon be a thing of the past. Today, 95% of the volume of all futures trading occurs in the electronic marketplace, and the industry thrives.
• The growth of trading in non-agricultural contracts: The roots of the futures industry go back 135 years, to wheat, corn and oats contracts. Soybeans started 60 years later; cattle and hogs took another 30 years. Ag commodities were the base of the industry for over 100 years. The largest contracts traded today – Eurodollars, bonds, Treasury notes, stock indexes and crude oil – got their start in the 1980s. The trading of non-ag contracts has eclipsed the traditional base.
As recently as 1993 (when I first taught Reese’s course), I felt compelled to dedicate several weeks to discuss “new” markets such as interest-rate and stock-index futures. No more – every business school today will have a number of courses to choose from in the study of derivative markets.
• Futures contracts became derivatives: Speaking of derivatives, when exactly did a futures contract become a derivative? How did a futures contract – liquid, transparent, standardized and marked-to-market daily – get lumped together with (for example) mortgage derivatives, a product devoid of these attributes? Collateralized debt obligations and their ilk have transformed the term “derivative” into the longest four-letter word in the English language.
While change is constant, the need for a profitable farm doesn’t change. Do you have a marketing plan? Are you using the right tools – futures and/or options – in the best way to execute your plan? The industry evolves, but principles of price risk management remain the same.