in the business of public warehousing-and especially if not located at a terminal market where futures are dealt in-will only exceptionally make delivery on the futures that are sold for hedging purposes, because the purpose of hedging is served as well if the future sale is closed by buying in the future and because, usually, if the grain is of good quality, it can be sold on sample at a premium.

DELIVERY WHEN GRAIN A “ DRUG ON THE MARKET."-There are times, when grain is said to be "a drug upon the market," in which terminal elevators make large deliveries upon futures sold as hedges. Terminal elevators hedge in the near option; for example, grain bought in October will be hedged in the December option. If the cash grain can not be sold the elevator delivers as soon as possible; that is, on the 1st of December, thus imposing the carrying charges on others. Speculators get it and perhaps deliver it to other speculators, since the opportunities for shipping out are so limited. It may be delivered between speculators repeatedly, and finally carried by some of them from one delivery month to another. But the elevators may prefer to retain the ownership of the grain and earn carrying charges by spreading between options, if they fear that shipments out of the market may become freer and thus deprive them of earnings from storage. Whether by freely making deliveries early in December or by holding back from buying-in their December hedges, they may be able to depress the December price below the May price so much that they can transfer their hedges to May at an insured difference sufficient to pay them for carrying the grain. The carrying charge in this case is made by the elevators refusing to buy when the speculators who have bought the December future try to sell. Almost the only buyers when the 1st of December has been reached will be the elevator companies who have hedges out. By refusing to buy when the speculators try to sell out their holdings the terminal elevator companies permit the price to weaken until it declines to a satisfactory difference under the May future. When the difference has widened sufficiently so that a good carrying charge from December to May has been reached, the terminal elevator companies buy back their hedges in December and put them out in the May future.

In one way or another, whether by directly paying storage charges or-more likely-by getting the losing end of the spread between options, the speculative trade carries the stored grain until the channels of consumption are ready to take it. There can also, though less often, be liberal deliveries where the holders of futures are waiting for the grain. Deliveries under such conditions occur late in the month.

DELIVERY BY SPECULATORS, OTHER THAN ELEVATORS, RARE.—In the case of a large speculator, the possibility of accepting delivery depends

somewhat upon the facilities he or his commission house may have for disposing of the grain in store, as well as upon market conditions. Short sellers with important grain-trade connections, when there was a corner, have been known to purchase and make delivery to the extent of many millions of bushels. For some years past, however, delivery has been initially made only by the terminal elevators, and it may be assumed that, in Chicago at least, they supply all grain for delivery. Where the intention of the terminal elevator is merely to hedge grain owned, it will deliver on the hedging contract if no satisfactory buyer is found.

WHY MILLERS SELDOM WANT DELIVERY.—In the case of millers hedging by the purchase of futures, there is usually some reluctance to accept delivery because of their uncertainty as to what kind of grain they will get, except that they know that grain of contract grade delivered under a future contract will usually be at the bottom of the grade. But the miller may prefer to hedge in a broad market even at the cost of having to exchange at the prevailing market difference grain he may get by delivery on futures for grain that he wants.

Millers, of course, do take delivery when they can not get grain from the country-at times of low receipts and scarcity, seasonal or other. A high average-quality crop will make them more disposed to get grain by this means. It is expected that the establishment of Federal grades will make them feel more sure of getting sound milling wheat on future delivery. There is a tendency on the part of large millers to provide themselves with sufficient storage capacity to obviate the necessity of often taking delivery on their hedges.

It is practically impossible to hedge, at least at Chicago, in the grade that is wanted by millers. Some wheat millers expressly state that they never expect to take delivery. But an elevator man says "the average miller prefers a well-blended, even run of wheat," except that the price is the controlling consideration and he may be able to get better bargains in the country. Oats seem to be rather more acceptable as taken on delivery than other grains, at least oats futures are sometimes purchased with a view to obtaining the actual grain for feeding. Millers of oats, however, want a whiter and heavier grade than that delivered on futures at Chicago. A large glucose manufacturer at times obtains his entire supply of raw material (corn) through futures. Even the poorest sample stuff can be utilized for alcohol or glucose. Differences of grade do not represent important differences in the feeding and manufacturing value of corn. Much the same may be said of oats. But corn tends to cause more trouble by getting out of condition and thus becoming undeliverable than any other grain, owing to its tendency to sour or heat, especially at the germinating period. The trouble already brewing may not become manifest till after delivery.

MIXING AND THE MANUFACTURE" OF CONTRACT GRADES.—Mixing, i. e., the intentional mixing of different grades, is a well-known practice of terminal elevators. This mixing occurs before the grain is put into public storage. There are also elevators, known as "hospitals," for the special treatment or "conditioning" of grain of inferior grade by drying and otherwise. These handle a good deal of off-grade grain, and are generally able to bring it up to grade. Most private terminals have machinery for accomplishing the same purpose, to a greater or less extent. Cleaning is an obvious means of raising the grade. This of itself may involve the use of expensive and intricate machinery, especially where it is necessary to separate two kinds of grain that have become mixed. Perhaps the most difficult grain to separate from others, or at least from wheat, is the wild oats that constitutes a greater or less percentage of most of the wheat raised in the Northwest. Bleaching of oats is also largely practiced, though it has reference to the idiosyncracies of certain classes of consumers, especially in New England, more than to the grading of the grain. Clipping of oats is done to increase the weight per measured bushel. Cleaning is the most particular process in the case of wheat. Drying is probably the most important in the case of corn.

All of these processes are subsidiary to the merchandising carried on by terminal elevators and have only in part the particular relation to increasing the volume of contract grade for delivery under future contracts which is most significant in the present connection. It is admitted by one large terminal operator of both private and public elevators that the former are used for the purpose of "manufacturing contract grades" as well as for merchandising purposes. Most of the grain that goes into public storage comes from the private terminals and is practically-although not always legally, owing to provisions of the Illinois warehouse law-owned by

them.

It is because of the practice of mixing that it is to be assumed that grain coming from public storage and received on delivery under future contracts will be at the bottom of the grade. Wheat from public storage in Chicago is not wanted by millers and most of it goes into the export trade, when there is an outlet abroad. According to this allegation, the primary use to which such grain is put in this country is delivery on future contracts.

While it is in general the casual trader who is most reluctant to accept delivery, even dealers sometimes do not wish to handle the contract character of grain. It is not merely a question of facilities for merchandising but of limited demand for grain sold by grade alone and presumptively known to be mixed and reduced to the "bottom of the grade." The "country run" grain, though graded the same as

that coming out of elevators, is presumably worth more than the latter. Sometimes virgin grain of high grade is delivered on future contracts, but only under exceptional crop conditions and not in a way to offer any inducement to the purchaser of a future.

66 OUT OF CONDITION 99 STORED GRAIN. In case grain represented by public warehouse receipts gets out of condition, it is the owner who stands the loss. It is required of regular public warehouses that "the proprietors or managers of such warehouses shall promptly, by the proper publication, advise the trade and the public of any damage to grain or flaxseed held in store by them, whenever such damage shall occur to an extent that will render them unwilling to purchase and withdraw from store, at their own cost, all such damaged grain." 1 After such public notice the receipts affected are not good for delivery. Grain out of condition is charged against the oldest outstanding warehouse receipt. But the feeling of responsibility on the part of Chicago regular elevators is said to be such that the elevator companies have often taken the loss on damaged grain, substituting in the public bins deliverable grades for grain that had got out of condition. On the other hand, it is alleged that, at least in one case, a large quantity of grain delivered was reported as out of condition on the next business day. In reply to a complaint, in such a case of notification made to a new owner the day after the delivery, the president of the Chicago Board wrote (July, 1914) that the Board had no control over the public elevators, that the purchaser of old contract corn assumed the risk of its getting out of condition, and that inasmuch as the elevator company notified the Board that the corn was out of condition it had fulfilled the requirements. The secretary on a similar occasion also was at pains to say (letter3 of July 21, 1914) that the public warehouses" are in nowise the creations of this Board."

1 Article V of the Chicago Board's "requirements for grain warehouses in order that their receipts shall be regular for delivery on grain contracts." The alternative of purchase and withdrawal from store suggested in the regulation doubtless has reference to the presumptive fact that the grain in store actually belongs to the elevator company, and was put there by it.

2 Under the Toledo rules the seller guarantees the condition of grain three business days from delivery.

This letter also contains the following significant, though rather lengthy statement: "It appears that this corn is winter-shelled corn, and any one who has had experience knows that winter-shelled corn can not be carried into July safely. In my own experience, which has covered 40 years of handling corn, I have seen this proven more than once, indeed I have had 2-year old corn get out of order. Corn loses moisture in the cribs, and if shelled during the summer time when there is a long dry spell it will then carry indefinitely without trouble, but not so if shelled in the winter. Experience has proven many times that corn apparently sweet and in good condition to-day will smell a little sour the next day. In other words, there comes a time when it makes the turn from sweet corn to sour, and does this in the course of a few hours. The Government has now perfected a means for testing the acidity in corn and can determine a week or more in advance of the time it will be sour enough to be detected, and it is asserted that in the near future the acidity test will be a prominent feature in grading corn. I refer to it only to indicate that because corn was No. 2 when

All the more modern elevators now have highly developed methods of guarding against an increase in the temperature of grain in the bin, which is the best guaranty against the grain going wrong. Thermometric devices are located every few feet in each bin so that, through their wire supports and connections, the temperature at short-spaced intervals in each bin can be read and recorded from day to day in the office. Corn is the grain that causes most trouble. It should be remembered that the terminal elevators themselves are in the main the real owners of the grain used for delivery prior to the time when the warehouse receipt begins its travels in the delivery month.

Section 9.-Contract and deliverable grades on the various exchanges.

MEANING OF "CONTRACT GRADE."-Grading is independent of future trading and its existence presupposed in the choice and definition of grades deliverable on future contracts. The technique of the subject from the viewpoint of the serviceable classification of grains for commercial purposes is discussed in various publications of the Department of Agriculture. For the purposes of future trading certain recognized grades and varieties are selected for regular delivery on future contracts by each exchange that provides for this form of dealing.

The standard grade of grain deliverable in specific satisfaction of standard future contracts is prescribed by exchange rules and is known as the contract grade. There may be more than one variety of "contract grade," especially in the case of wheat. Few future contracts are made that specify the grade, though this is possible. The needs of the market call for homogeneous contracts and concentration of trading. The contract grade is distinguished from the broader term "deliverable grades" by the fact that it specifically satisfies the future contract. "Deliverable grades" includes anything that may be delivered on future contracts, though at a premium above or a discount below the contract price. In the actual usage of the grain trade, however, this distinction is not carefully observed. But it may be assumed, at least, that a price for "contract grade" is for the low number available for delivery without discount.

Chicago is perhaps less likely to set the standard for other exchanges in this respect than in other matters of future-trading technique, because much depends on the kind of grain shipped to

delivered to you, if winter shelled, as the date of receipts would show, it was a notice that it might turn sour at any time, and the moment the warehouseman detected that it was sour, in self-defense he would be obliged to post it. Sometimes warehousemen have bought up the receipts and taken the corn themselves and stood the loss rather than possibly injure the name of their house, but this is in nowise incumbent upon them, and is a matter of free choice on their part whenever they do it."