Abstract: Did Grain Futures Markets Benefit Interwar Grain Farmers? A Historical Perspective on the Hedging Justification for Agricultural Futures Markets, 1920-1936
The interwar years witnessed the development of many of the institutional features in agricultural markets often thought to be critical to the phenomenal success of futures exchanges. At the time and right up to the present, one of the key justifications for the existence of such futures markets is to provide risk mitigation for producers, processors and (sometimes) consumers of commodities. ‘Hedging’ by farmers using the futures market to manage crop price risk was the main public justification in 1921 for lightly regulating the grain markets of Chicago. Representative Tincher, in defending the Futures Trading Act of 1921, argued for almost no interference in the free markets of Chicago by stating ‘I do not think any good-thinking man in the United States is in favor of preventing the farmer from selling his wheat for future delivery.’
I show that farmers were unable and, indeed, unwilling to utilize futures as ‘crop price insurance’ between the planting, harvesting and/or, eventually, final sale of their wheat, corn and other grains. Agents of the farmers, country elevators, were equally unlikely to use futures markets to manage grain price risk. Hedging by the larger grain merchants such as terminal elevators was much more common, but it is unclear that farmers could have benefitted from that strategy. It is however abundantly clear that speculation and manipulation had the potential to ruin any farmer who attempted to use futures for grain price insurance during the 1920s and 1930s.