Except for temporary relaxation of the rules because of special crop conditions-a need that is likely to develop in the case of corn more than any other grain-there has been no change in the specification of grades deliverable at Chicago since July 1, 1914. Prior to that, from 1904 on, No. 1 and No. 2 yellow or white (but not mixed) were deliverable at the contract price and No. 3 similarly at 5 cents discount. The 1914 date named coincides with the going into effect of Federal grades for corn. In a circular to the members explanatory of the new grades, the secretary of the Chicago Board says: 1 Corn under the Federal rules will be of a little better quality in each grade than under the present rules. He explains that requirements for No. 2 permit 5 per cent of foreign matter in place of 7, with a further limitation as to dirt included, and the broken corn must not include finely broken, thus being for almost all uses of equal value with unbroken corn; also only 15 instead of 16 per cent moisture is allowed. THE SPECIAL 1918 RULE.-Because of the poor quality of the corn crop harvested in 1917 there was practically no corn of deliverable grade, under the old standards of the Chicago Board, to be had. Under these circumstances Nos. 3 and 4 were made deliverable at the contract price and Nos. 5 and 6 at discounts of 4 and 5 cents, respectively." These new or special deliverable grades were very carefully defined and the moisture test was made more strict than prescribed in the Federal grades for Nos. 4 and 5. No similar case of temporary adjustment of an entire scale of grades is recalled by members of the Board, at least in the last 12 or 15 years. The extremely poor quality. of the crop made some such action desirable for the protection of those using the futures market. It is alleged that the poor corn crop was marketed through the futures being thus made available. The old standards were restored for trading in the 1918 crop. CONTRACT CORN ON OTHER MARKETS.-Grades and varieties of corn deliverable at Kansas City are No. 2 white, yellow, or mixed. The St. Louis rule is the same, but with provision for delivery of No. 3 1 Dated Apr. 16, 1914. The exact grades, premiums and discounts were as follows: At 4 cents over the contract price, Nos. 1 and 2 white corn and Nos. 1 and 2 yellow corn. At 3 cents over the contract price, Nos. 1 and 2 mixed corn. At 1 cent over the contract price, No. 4 white and No. 4 yellow, with a provise that they must not contain more than 15 per cent moisture. At the contract price, No. 3 mixed corn. At the contract price, No. 4 mixed corn of not more than 15 per cent moisture. At 4 cents under contract price, No. 5 white and No. 5 yellow, to contain not more than 15 per cent moisture. At 5 cents under contract price, No. 5 mixed corn, to contain not more than 15 per cent moisture. These rules were adopted on Apr. 6, 1918, for delivery on or after June 1, 1918. at a discount of 2 cents per bushel, except during March, April, and May, when the discount is 4 cents. Minneapolis is more liberal, admitting No. 3 without discount, but in fact has no corn futures market. Milwaukee has the same provisions as Chicago. CONTRACT AND DELIVERABLE GRADES OF OATS AT CHICAGO.—Standard white oats at Chicago is the contract grade, deliverable at the contract price for that grain.' This grade is between No. 2 and No. 3. Other grades of white oats are deliverable at a premium or discount as follows: No. 1 at 1 cent over, No. 2 at cent over, and No. 3 at cent under. Prior to June 1, 1918, there were no premiums and the discount on No. 3 was 3 cents. Prior to July 1, 1914, the discount on No. 3 was 5 cents and prior to 1907 No. 3 was not deliverable. Prior to 1901 no specifications were made in the rules as to the deliverable grade, but No. 2 was the grade for which future prices were quoted in the annual reports. There has evidently been a tendency to a liberalization of the rules for delivery on oats. The difference in grades is mainly a matter of color and has little bearing on availability for manufacturing or other utilization. Weights per measured bushel vary, but the bushel of commerce is a specified number of pounds. CONTRACT OATS ON OTHER MARKETS.-Contract grades on other futures markets are No. 1 and No. 2 white, with No. 3 usually deliverable at a discount, except at Kansas City. But at St. Louis No. 3 is deliverable at the contract price. RYE AND BARLEY CONTRACT GRADES.-Deliverable grades for rye and barley futures markets were established at Chicago in 1917. The contract grade for barley is No. 4, with higher grades deliverable at a premium of 5 cents per bushel.2 Contract grades for rye are No. 1 and No. 2. At Minneapolis and Duluth the contract grade for rye is No. 2. The Minneapolis barley future, like that at Chicago, was only recently established and is based upon the same grade. Winnipeg has a barley future of long standing. Once before (see Ch. I, sec. 4) Chicago had a barley future which was discontinued owing to the development of great differences in quality as the barley-raising area became extended. FEDERAL GRADES.-Grades for all Chicago grain transfers based upon grade are (or were) those of the Illinois State grain inspection department. Under the recently established Federal grades there is an appeal to Federal inspectors. Any changes in the grading standards are effective for deliveries on future contracts pending or 1 Since July, 1919, No. 2 white oats has been the contract grade with No. 1 deliverable at cent over and No. 3 at 11 under the contract price. Since August, 1919, No. 2 has been the contract grade with No 1 deliverable at the contract price and No. 3 at a discount of 5 cents. Illinois State inspection has been required by the Chicago Board of Trade rules since at least as early as 1881. open when the changes are made as well as upon those later entered into.1 State grading naturally pays chief attention to varieties of grain usually received at the terminal market in the State, and may sometimes unduly emphasize local-grown varieties and qualities of grain. It is said that Illinois hard wheat is presumably mixed with soft wheat, and is therefore somewhat less desirable than the hard winter wheat grown elsewhere. The State law, however, compelled its grading as No. 2 hard, even though there was an admixture of 25 per cent of soft red winter wheat, which makes it in fact neither one nor the other. These grades are now superseded by Federal grades, which allow only 4 per cent admixture of all other wheats for No. 2 hard winter.2 Federal grades have recently been established for wheat and corn, and the framing of a system of grades for oats is in process.3 But the Federal grades for wheat were effective for the 1917 crop, and therefore only since future trading in wheat has been suspended. Federal grades for corn have been in effect since July 1, 1914. Grades are still determined by State or grain-exchange authorities in the first instance, but according to Federal standards, and appeals may be made to Federal inspectors. The Federal system brings about greater uniformity and comparability between the various exchanges as regards futures, though there remain differences attributable to the grain-growing regions drawn upon some of which differences affect the rules on the subject of contract or deliverable grades. Section 10.-The relation of grades to future trading. COMMERCIAL IMPORTANCE OF GRADING.—While the grading of grain is designed to facilitate commerce generally and relates to bulk handling in store and transit without the preservation of the identity of specific lots, the system is more essential or more nearly indispensable for future trading than for cash-grain trades. Dealings in futures are "by grade alone," while cash-grain transactions are mainly "by sample," or by grade and sample. At some terminal markets little cash grain is sold by grade, even when it comes from the terminal elevators. At others, notably at Duluth, Nos. 1 and 2 graded wheat are sold without reference to samples, but this is an 1" Contracts covering any of the commodities dealt in under the provisions of the rules of this Board for future delivery in store, or for shipment, or to arrive, shall be deemed to be for the quality or standard of grade as defined in the rules of the Illinois State grain inspection department defining them, shall be held as not affecting in any way whatsoever the validity of any such contracts pending at time such change is made, and commodities officially graded under the provision of rules in force at time of delivery shall be deemed to be a valid tender on any such contract." 2 Sce the respective official grade. Federal oats grades became effective on June 16, 1919. exceptional condition. At Chicago cash-grain transactions are so nearly altogether by sample that cash-grain prices are referred to as sample" prices. 66 Grading, however, is important in the determination of the price paid to the farmer and important at the country end of the cashgrain market in general. The country elevator man purchases the grain nominally by grade, but he has before him the actual grain and there is no official or other expert and impartial determination of what the grade is at this stage. The farmer who ships his grain directly to a terminal market on consignment (or the country elevator) gets prices based in part upon official grading. To-arrive sales are by grade. The commission merchant, however, at least in Chicago, sells the grain by grade and sample. Buyers for the industries, especially millers, buy almost wholly by sample, even when dealing in grade markets and those nearest the producing centers. Distributors in consuming sections of this country purchase according to brand in the case of oats, but also to a great extent by grade. Exporters, or importers in foreign countries, buy according to grade, their distance from the point of storage being probably the chief reason for this. Corn is more largely sold by grade than other grains. All yellow corn is said to be a good deal alike. In general, in the transportation and sale of the cash grain, grading is a standard or measure to which it is convenient to refer the quality or value of the grain, rather than the basis upon which the sales are actually made. ANALOGY BETWEEN FUTURITY AND DISTANCE.-Distance in time naturally has an effect upon the need of depending upon grading similar to that of distance in place, but the effect in the former case is of more decisive importance. The interchangeability of grain in store and represented by warehouse receipts is a necessary presupposition to fair future trading. Thus it can be said, with reference to present conditions, that the establishment of the grade of grain, and its public storage as of contract grade, is of most importance in relation to future trading. One important reason for this situation, however, is the necessary imperfection of grading systems. Grain from public elevators is said always to come out at the bottom of the grade. The person who takes delivery has to assume that he will get the poorest quality of grain that can legally be delivered to him. In the case of purchases from farmers or country elevators, the situation is somewhat different, since there is little or no opportunity for mixing and there is a possibility of averaging undergrade and overgrade grains. It is said that the farmer, if he sells to an elevator, gets no benefit from grain of especially good quality or at the top of the grade. It would be safer to say that he does not get the full benefit. The point is that his grain gets about the price of the average of similar grain from his neighborhood, and that fact will not be affected by any general tendency to overgrading in purchases by country elevators. WHY BROAD DELIVERABLE GRADES DESIRABLE.-So long as the buyer of a future knows what he is going to get on delivery and so long as what he gets is merchantable or commercially available, the choice of contract grades is not a question of maintaining high standards of quality but rather of keeping the channel of connection between future and cash transactions open and in good working order, and especially of preventing the technical exploitation of the market through corners. No one should expect to obtain "quality" wheat by way of delivery on future contracts. The policy of broad deliverable grades has no necessary connection with the lowering or laxness of grading standards. But, of course, the future contracts are affected by any lowering of standards on grades made deliverable, though any such practical lowering of standards is likely to be due to pressure from sellers and shippers of cash grain rather than from future operators or with any direct reference to deliveries on futures. Under a system of Federal grades there is less likely to be a gradual lowering of standards and probably less of a tendency to grade according to the quality of the crop-a practice which may be excusable under special conditions, but which tends to a permanent lowering of standards. Permitting the delivery of grain not of good merchantable quality tends to undermine any future-trading system. Exchanges have built up important markets and have lost their position in this respect, at least partly, because of laxness in grading, though it is scarcely possible to separate this from other factors. Some of the formerly active future exchanges now merely trade on Chicago quotations. The old system of grades on the New York Cotton Exchange was faulty in this respect and tended to foster manipulation and keep the futures at a discount. "Honest contracts" require the maintenance of definite standards. This, however, is not a reason for not broadening the market and safeguarding it against corners by having different varieties and grades deliverable, so long as only varieties and grades that are commercially desirable are included. TWO ALTERNATIVE POLICIES.-In establishing what grades of grain shall be good delivery on contracts, an exchange has a choice between two alternative policies. Deliverable grades may be defined broadly so as to insure a large available volume of grain for deliveries. Or they may be defined narrowly with a view to attempting to secure the delivery of a definite quality and kind of grain, so that the purchaser of a future contract will know as well what he is going to get, if delivery is made, as he would if he purchased an |