Mr. HALLET. Yes, sir. The sampling department is under the supervision of the State of Minnesota.

Mr. HAWLEY. The grades are determined by the State, are they? Mr. HALLET. Yes, sir.

The CHAIRMAN. But if a man buys on an open contract without any specifications on your exchange, he would expect to receive or would receive No. 1 northern or No. 2 northern?

Mr. HALLET. Yes, sir.

Mr. HAUGEN. You state that the Minneapolis mills would grind about 60,000,000 barrels ?

Mr. HALLET. We will grind about 16,000,000 barrels.

Mr. HANNA. Where wheat is shipped in, for instance, where a country elevator wires in and says, "Sell a certain amount of wheat," of course that is wheat of contract grade, No. 1 northern. When they come to make the delivery it may be No. 1 northern or it may be No. 2 northern. Then that wheat is graded by sample?

Mr. HALLET. Yes.

Mr. HANNA. The way you would do would be to buy in the contract grade?

Mr. HALLET. Yes, sir.

Mr. HANNA. You would buy in the amount at the contract rate? Mr. HALLET. Yes, sir.

Mr. HOWELL. In cases where they are running a corner on the Chicago market, and the price of futures runs up, say, from 20 to 50 cents a bushel, does not that really prove a menace instead of a protection to the dealer? Is not that an imposition on the seller that almost overtaxes his ability to pay?

Mr. HALLET. That is not very often conducted in the grain market. Mr. HOWELL. A man who holds these futures has been compelled to advance sums of money to protect his trade beyond any reasonable expectation he might have had to engage in that business? Mr. HALLET. I do not know of any cases of that kind.

Mr. HOWELL. In the case of the Leiter wheat deal in Chicago, the prices ran up to one hundred odd a bushel and over. Instead of being a protection to the dealer, would not this actually be a menace to the dealer in actual wheat in such a case?

Mr. HALLET. I do not know. The Leiter deal was before my time in the grain business. I was not familiar with the details of it.

The CHAIRMAN. Well, take the conditions that prevailed under the Patten deal. That was only a year ago. Following out Judge Howell's question, it will serve as an illustration just the same. If the man who had hedged on May wheat when prices ran up to 150 or so, would they have suffered from it?

Mr. HALLET. I do not think there was any great suffering at that time, Mr. Chairman.

Mr. HANNA. What is the margin that is generally put up?

Mr. HALLET. There is no fixed margin.

Mr. HANNA. It depends on the credit of the man to a great extent? Mr. HALLET. Yes, sir.

The CHAIRMAN. It is usually 5 cents a bushel. Mr. HALLET. There is no fixed amount. entirely on the financial standing of a man.

As you say, it depends

Mr. HOWELL. How much more money can you borrow on wheat that has not been hedged than on hedged wheat, from your bank?

Mr. HALLET. I should say we have always found it very easy to borrow money within 90 per cent of the amount.

Mr. HOWELL. Of hedged wheat?

Mr. HALLET. Yes, sir.

Mr. HOWELL. If wheat was not hedged, how much could you borrow on it?

Mr. HALLET. I do not know. We have never tried to borrow money that way; but I should say 50 per cent.

Mr. HOWELL. When you sell a hedge in the market, about how many cents per bushel do you lay aside in your calculation to protect that hedge until the time of delivery?

Mr. HALLET. I do not know that there is any fixed amount. We do not lay aside any fixed amount.

Mr. HOWELL. Then, if there should be any sudden advance in the price of futures, you would be called upon for vast sums of money that you had not made any calculation on meeting?

Mr. HALLET. We would go to the bank, I suppose, in a case of that kind, if the wheat is hedged. You can always get money on hedged wheat.

Mr. HANNA. You were speaking a moment ago about flax. As a matter of fact, there is not a very large amount of flax raised in the United States, is there?

Mr. HALLET. No. The amount is not very large.

Mr. HANNA. The consequence is that it is much easier to control the flax market than the wheat or any other grain market?

Mr. HALLET. Yes, sir.

Mr. HANNA. In Minneapolis and Duluth there are only two or three houses that make a specialty of flax, are there not?

Mr. HALLET. I suppose there are more than two or three.

Mr. HANNA. I had the idea that there were two or three houses that make a specialty of it.

Mr. HALLET. Yes, there are those that make a specialty of it. I am not familiar with the flax trade. I think Mr. Ames, of Duluth, is familiar with it.

Mr. BURLESON. You will pardon me if I ask a question that can not be answered, because I have no familiarity with this business. Suppose you buy 10,000 bushels of wheat and want to hedge it, and you want to hedge it on the Chicago Board of Trade. How much do you have to put up to hedge that 10,000 bushels of wheat?

Mr. HALLET. Well, as I said before, there is no fixed margin on a transaction of that kind.

Mr. BURLESON. Well, have you ever had a transaction of that kind,. Mr. Hallet?

Mr. HALLET. Yes; we have.

Mr. BURLESON. How much did you have to put up?

Mr. HALLET. It depends entirely upon the fluctuations of the market sometimes.

Mr. MERRILL. To help Mr. Burleson out, does it not depend largely on the financial standing of the party?

Mr. HALLET. Yes.

Mr. BURLESON. Suppose he has no financial standing at all, but just has money.

Mr. MERRILL. Theoretically, it is 5 cents a bushel.

Mr. BURLESON. That is what I am trying to get at.

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The CHAIRMAN. I understand Mr. Merrill will answer questions as to the details of these exchanges.

Mr. BROOKS. Is it customary usually for the miller to sell his flour before he gets the wheat from which to make it, and hedge in the open market, and the merchant from whom he gets his flour also hedges that same wheat?

Mr. HALLET. I think that is done to a great extent.

Mr. BROOKS. You could not say to what extent?

Mr. MERRILL. Mr. Hallet, you have a grade in your market known as No. 1 hard, and that is higher than No. 1 northern?

Mr. HALLET. Yes.

Mr. MERRILL. And that is deliverable on a No. 1 northern contract if the holder elects to do it?

Mr. HALLET. Yes.

Mr. MERRILL. Also, as to 3 cents difference between No. 1 and No. 2, that is in favor of the buyer, is it not? It would be against the seller. So that if the buyer had to take it, it is not more than the actual market, but rather under, so that he would suffer no loss? Mr. HALLET. Yes.

Mr. MERRILL. Thank you.

The CHAIRMAN. I believe that is all.

Mr. MERRILL. I will now present Mr. George H. Davis, of the Kansas City Exchange.

TESTIMONY OF MR. GEORGE H. DAVIS, OF KANSAS CITY, MO., VICE-PRESIDENT OF THE KANSAS CITY BOARD OF TRADE.

(The witness was duly sworn by the chairman.)

The CHAIRMAN. Mr. Davis, give your name and business connection. Mr. DAVIS. My name is George H. Davis, and I am vice-president of the Kansas City Board of Trade.

Gentlemen, it is not my intention to take up much of your time. I am simply here to represent the Kansas City Board of Trade and give you our ideas as to the effect that the passage of this bill would have.

We receive in Kansas City about 50,000,000 bushels of wheat and from 30,000,000 to 50,000,000 bushels of corn. Our future trading has been in existence for about ten years. We tried for a good many years to bring grain to Kansas City without a future market, but we were unsuccessful.

The CHAIRMAN. Do you know why you were unsuccessful?

Mr. DAVIS. We had no place in which to place hedges, and it was dangerous to place them in New York or Chicago or St. Louis or in any other market.

The CHAIRMAN. How was it dangerous?

Mr. DAVIS. It was dangerous because one of our largest buyers of corn is the State of Texas, and every year they buy corn from February on. The markets in the South will pay more for corn in Kansas City oftentimes than they would pay if the corn was in Chicago. Having your hedging sale in Chicago would do you no good, because it would cost you 6 cents freight to deliver, alone. The corn is hedged practically as much in Kansas City as in Chicago, but it is necessary to have your elevators in Kansas City to get it out promptly. For instance, the corn this year is largely No. 4 corn, on account of

dampness and moisture, and it is necessary to put that corn through a drier before shipping or before the southern buyer would take the corn. Pending the shipment it would heat and become sour in a short time, and for that reason it is necessary to dry it, and that is very expensive, and it would cause delay. You can readily see that with 10 or 15 firms doing business it would take them practically a month or twenty days to dry a thousand bushels. They have to begin doing that in January in order to be ready for the trade in February and March and April as it comes along.

The CHAIRMAN. So that the difficulty of getting corn to Kansas City prior to the inauguration of your future market was wholly a question of financing?

Mr. DAVIS. Not wholly a question of financing, but largely a question of bringing the corn in there, and no one being willing to put away anywhere from 400 to 1,000 bushels of corn without a legitimate place to hedge it. The banks were not willing to loan money on that corn unless at two-thirds of the value. Now, under the present system, the banks are willing to loan to recognized firms as high as 95 per cent of the value of the corn or wheat, as the case may be.

Along that line I may say that I mentioned the fact of this bill's coming up to a banker the other day. I conversed with the vicepresident of a bank on the subject, and asked him to write me a letter the day I left; and with your permission, Mr. Chairman, I would like to read that letter. This is from the First National Bank of Kansas City, and, as the chairman knows, it is one of the largest banks in the West. (Reads:)

Mr. GEORGE H. DAVIS,

City.

FIRST NATIONAL BANK OF KANSAS CITY, Mo.,
February 16, 1910.

MY DEAR SIR: Referring to our conversation regarding the Scott option bill, it is our opinion that this would seriously interfere with the grain business in this city. This has grown to very large proportions under the present method and we believe has increased the business of the banks to a very large extent.

If this bill were passed, it is our opinion that it would destroy three-fourths of the grain business in this city, leaving the business to be handled by a few interests who would, it seems to us, have a monopoly in handling the grain which came through Kansas City. This being the case, we would regret the passing of the bill, and we hope that there will be no difficulty in defeating it.

Yours, truly,

H. T. ABERNATHY, Vice-President.

Now, in regard to the trade in futures, personally, I may say that my partner and I, forming a corporation, are engaged in both branches of the business. We handle carloads on consignment, on commission from the farmer, which we sell there in the market. On the other hand, we are members of the Kansas City Board of Trade and the Chicago Board of Trade, and we handle trades in futures. We handle the hedges for some of our elevator people. We handle hedges for some people in the country, and for the large owners of mills in the city, both ways. One particular mill that I have in mind is on both sides of the market. We took in December 250,000 bushels of wheat in December contracts, and have been carrying that wheat along, largely financed by this particular bank that I have referred to, on account of that mill having made flour sales which they will not ship until February and March and April.

Now, they also at times are large purchasers of the futures, just as they were in that case. They sold last July, when we were having floods out our way, and cash wheat was selling in the neighborhood of $1.30 and September wheat was selling at $1.10. The foreigners were very much excited over the situation here, and they bought flour largely for September, October, November, and December, and January, clear up into March shipments. This mill could not sell those people flour unless they had some place to protect themselves. But the grain grower in the West and the speculator were willing to sell wheat for September delivery, when the new crop would be in, for $1.05 or $1.10 a bushel, enabling that mill to buy through us for the future. This particular mill sold about 100,000 barrels of flour, and of course the other mills in the city were doing the same thing. Now, in August and September, when we get in at Kansas City on Monday in the neighborhood of 1,000 carloads of wheat, that wheat is rushed in there, and the reason the price did not break was on account of these mills having made these sales, and they were willing on near-by shipments to sell out the futures that they had bought, and take on the cash article from the farmer, thereby making a market that they would not otherwise have had. The foreigner will only buy flour when he is in the notion of buying it, and he will buy large quantities; and it is necessary for these mills, if they are going to do an export business, to sell it to him when he wants it and to protect themselves in the future market. They could not go out and say, "I want to buy 5,000 bushels of wheat from you," so as to sell this flour. It would take weeks to do that. They could not answer these cables making them offers of so much and so much. They must accept them within a few hours. The only way they can do that is to have their commission men step into the pit, where they can buy from 5,000 to 100,000 bushels of wheat in a few minutes.

While these mills are buying, there are also elevators. There is a limit to what the railroads can handle. The larger mills would not be able in all probability to handle more than 150 to 200 cars of wheat. They have not the necessary storing capacity. After these mills have filled up, there comes a demand for this wheat. The elevator man buys it and sells the future against it. Oftentimes, when we have a thousand cars of wheat in there, our future market and our cash market is advanced 2 or 3 cents a bushel. Why? Because speculators have been told of a famine somewhere, or a trouble somewhere, or a damaging rain in the Northwest, and they take hold of the future market and put it up, and the elevator man is enabled to buy the No. 2 or No. 3 or No. 4 wheat and put it in the elevator and sell the future against it, regardless of how many cars there are, because we have 7,000,000 bushels of elevator capacity in Kansas City. That prevents the market from being demoralized.

Those are legitimate hedging transactions. But if this bill becomes a law and you eliminate the speculator, whom will you sell that wheat to? It is the speculator who believes that next spring wheat is going to be $1.25 a bushel. It is not the elevator man. If he can buy this cash wheat when everybody wants to sell it, and sell it over here in December futures at a cent a bushel higher, and then dispose of it in May, that is all he wants. He does not care whether wheat goes up or down, but it takes the speculator to take those cases, and that is why we need the speculator in Kansas City.