Masters Theses

John L. Kyle

Date of Award

6-1968

Degree Type

Thesis

Degree Name

Master of Science

Major

Agricultural Economics

Major Professor

Larry M. Boone

Committee Members

B. D. Raskopf, Charles B. Sappington

Abstract

The soybean has been the object of widespread interest in recent years for its growing importance in the agricultural economy. The farm production of soybeans in the United States has increased over 180 percent in sixteen years, from 299 million bushels in 1950 to 844 million bushels in 1965. Much of this phenomenal expansion is due to the increased demand for fats and oils initially brought about by World War II, the acreage restrictions placed on the production of cotton, corn, and wheat, and the development of soybean varieties that can be grown in virtually all parts of the country. Concurrent with increasing production has been the shift of soybean production as a forage crop and for soil enrichment purposes to its present position as the second most important cash crop of the agricultural economy. The value of the soybean crop has surpassed both cotton and tobacco and is second only to corn in cash income to farmers. The economic importance of the soybean crop is widespread. Not only producers, but merchants, processors, exporters, and ultimately consumers as well, are affected by a market of this magnitude. The profitability of businesses depends upon the size and quality of the soybean crop, while consumers purchase a number of soybean derived products. A large or expanding market includes price risks to all parties arising primarily from the time factor involved. Any commodity, however durable, that is produced and held for later sale or for processing in future months, faces the inevitable risk of unfavorable price change during the time that it is held. Futures trading provides an opportunity to shift or minimize the risk of unfavorable price change. In brief, futures trading evolved gradually between 1850 and 1870 as Chicago became the transportation hub of the rich, productive farmlands comprising the Midwest. Its location on the shore of Lake Michigan, the Illinois-Michigan canal linking the Illinois River and Lake Michigan, and it's being the center for many railroads, made it a ready market for midwestern grain and livestock and a terminal for shipment to the East. Grain production and trade expanded, but the seasonality of production, limited storage and shipping facilities, and reduced transportation during the Winter months were reflected in drastic price movements. Grain merchants undertook to shift or at least minimize the risk of price change by the use of "to arrive" contracts. The "to arrive" contracts provided for immediate transfer of title and establishment of price, and extended the delivery date from a few days to several months. From this practice evolved the concepts of commodity exchanges and futures contracts.

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