An untold leadership story
AMES – While the futures contracts have become an invaluable tool in the commodity markets for price discovery and risk management, there was a time, not that long ago, when people demonized the futures markets as mere gambling dens.
“At any point before 1960, it wasn’t at all clear that futures markets would survive,” said Dr. Scott Irwin, an international leader in agricultural economics, who spoke at Iowa State University recently about “How Agricultural Economics Saved the Futures Markets.”
Starting in the Populist era – the 1880s to 1915 – people began to associate the futures markets with soaring food prices and other economic upheavals that were reshaping society, said Irwin, an ISU ag business alumnus.
He noted that federal lawmakers introduced more than one bill per year from 1884 to 1953 to ban futures markets, which were derided as “engines of wrong and oppression.”
Into this long-running public fray entered three agricultural economists who played a crucial role in changing perceptions of the futures markets as valuable market institutions.
“These economists showed that the futures markets are not mere speculative vehicles, but they contribute to the economic welfare of society by making the system more efficient,” said Irwin, who grew up on a farm near Bagley and is now the Laurence J. Norton Chair of Agricultural Marketing at the University of Illinois.
New twist on old debate
The first of these distinguished economists, who ushered in the modern era of futures markets, was Dr. Holbrook Working, whom Irwin called “the theorist.”
“His revolutionary idea was that the market sends important signals about the need to draw up or draw down inventories,”?Irwin said. “This was a major step forward to show why futures markets aren’t mere gambling.”
Working, a faculty member at the Food Research Institute at Stanford University, challenged the common misperception that futures markets are driven by speculators.
His work from the 1950s still resonates today, said Irwin, who noted that the futures markets are primarily hedging markets, not speculative ventures.
“People can still be perplexed by the daily gyrations in the market, but price movements will be sharp and jagged when a market is working properly.”
The second economist was Dr. Roger Gray, whom Irwin dubbed “a provocateur of the first order.”
Gray’s name, who was also a faculty member at the Food Research Institute, will be forever linked to onions.
After World War II, onion futures were one of the most popular contracts traded on the at the Chicago Board of Trade, said Irwin, who noted that onion futures represented more than 20 percent of the CBOT’s trading volume at one point.
By the 1950s, however, some members of the public and lawmakers began blaming onion futures trading for unwarranted fluctuations in the market.
“The 1958 Onion Futures Act, which was introduced by a rookie U.S. Congressman named Gerald Ford, is still the law of the land,” Irwin said.
Gray, a writer of uncommon wit and flair, tackled the issue in his four-page paper Onions Revisited.
“As he detailed the death sentence meted out to the onions futures market,”?Irwin said, “he argued that a futures market widens opportunities to buy a commodity during the harvest surplus and sell the commodity later.
“His work showed that the ban on onion futures trading costs both onion growers and consumers.”
Today, the onion industry is still based on a cash market where onion prices gyrate wildly, Irwin added. “Onion growers have pushed for a futures market to help deal with this volatility.”
For corn and soybean growers, it’s tough to imagine a world where this pricing mechanism isn’t available, noted Irwin.
He credits Dr. Thomas Hieronymous, an ag economist at the University of Illinois, for popularizing the futures markets in the 1950s and 1960s.
“I call Dr. Hieronymous ‘the evangelist,’ because of his gift for explaining things clearly and his genius for penetrating the mysteries of the futures markets.”
Hieronymous wrote a number of influential publications including, “Hedging for Country Elevators,” which was distributed to thousands of elevators and cooperatives.
His opus was his textbook, “Economics of Futures Trading,” which was first published in 1971. “This is still one of the best introductions to the ag futures markets, and I require all my graduate students to read it,” Irwin said.
The legacy of Hieronymous, Working and Gray remains relevant today, said Irwin, who cited the public’s growing concern that the markets are increasingly speculative.
“The futures markets have once again become the scapegoat for unpleasant economic realities,”?Irwin said. “As the drum beat against the futures markets continues to get louder, I’ve been unable to find the smoking gun that convicts the index investors.
“Where we are headed is unclear, but everyone who eats food or drives a vehicle has a stake in this issue.”
You can contact Darcy Dougherty Maulsby by e-mail at firstname.lastname@example.org.
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