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AGRICULTURE REPORT - Chicago Board of Trade Moves Into the FutureBy Mario Ritter
Broadcast: Tuesday, May 16, 2006
I'm Steve Ember with the VOA Special English Agriculture Report.
The Chicago Board of Trade is one of the largest exchanges for futures trading, and one of the oldest. It opened in eighteen forty-eight.
Chicago Board of Trade
A futures contract is an agreement on a price and a date to buy or sell goods in the future. Agricultural futures have long been a way to limit risk with crop prices. Futures trading can help protect against losses. Companies also buy futures to guarantee costs for materials.
At the Chicago Board of Trade, or CBOT, futures have always been traded using the open outcry system. Floor brokers bring together buy orders with sell orders in an area called the pit.
Brokers shout and wave their hands. The system looks disorganized. But in fact it is part of an orderly market. Hand signals identify buyers and sellers and show how many contracts will be traded.
The open outcry system will continue. But starting August first, the Chicago Board of Trade will begin using a new electronic system at the same time. This system is called ecbot.
Now traders will be able to trade futures in corn, wheat, soybeans, soybean oil, soybean meal and rough rice by computer. The use of two systems is similar to the hybrid market at the New York Stock Exchange. Trading takes place both on a physical trading floor and electronically.
CBOT says its new electronic trading system will help it expand internationally. Last year, the Board of Trade began to offer contracts for Brazilian soybeans. This meant that contracts to receive a shipment of soybeans could be traded among buyers both inside and outside the United States.
Futures trading can get highly complex. But farmers commonly use futures as a way to protect against low crop prices. The crop is still sold at harvest time. Market forces still set prices. But, before the crop is ever harvested, a farmer can buy a contract giving the right to sell an amount of the crop at a set price.
Futures guarantee prices for goods. Yet, in futures trading, real shipments of goods rarely take place. In fact, CBOT says only about four percent of contracts result in any products being sent to a buyer.
A futures market could not operate without speculators. Speculators are investors who purposely take risks trying to guess which direction prices will go.
This VOA Special English Agriculture Report was written by Mario Ritter. Read and listen to our reports at www.unsv.com. I'm Steve Ember.
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