FINANCIAL futures markets have risen far beyond their humble, pork-belly beginnings to offer hedging in cheddar cheese in New York, white shrimp in Minneapolis, and broiler chickens in Chicago. Now, the Chicago Board of Trade (CBOT) plans to throw another commodity into its trading pits. On Sept. 23, it will launch edible-oil futures, tied to soybean, palm, rapeseed, and sunflower oils, which make up 85 percent of world trade in edible oils.
While giving speculators one more way to make a killing (or take a financial beating), the contracts will offer the users, exporters, refiners, crushers, and producers of edible oil a cushion against violent swings in the price of the oil-bearing crops. Under a futures contract, a buyer and seller agree on the price for a commodity to be delivered at a later date.
The offering of edible-oil contracts illustrates that whether a commodity is a run-of-the-mill grain or quirky enough to be found in a deli, an exchange must make painstaking efforts to ensure that the underlying market shows promise.
Exchanges occasionally launch duds. Indeed, trading floors nationwide are littered with contracts in exotic or odd commodities that have fizzled. For example:
* The Chicago Mercantile Exchange began trading in broiler-chicken futures in February 1991. Today, because of a ho-hum reaction from industry, the futures are still listed but not traded.
* The New York Mercantile Exchange launched futures for residual fuel in October 1989 but withdrew the contracts in April 1991 because of paltry turnover.
* The Minneapolis Grain Exchange listed contracts in Western Hemisphere white shrimp in June 1993, but the futures have logged a daily volume of just a couple dozen contracts. When new contracts take off, they bolster the overall volume at an exchange and offer traders new profit opportunities. Successful new contracts also help inflate the value of membership at an exchange. (Full membership at the Chicago Mercantile Exchange is valued at $925,000). When new contracts fail, they cost an exchange hundreds of thousands of dollars in research, development, and promotion costs. The CBOT is confident about its edible-oil contracts for many of the same reasons a new future contract succeeds, says Gene Mueller, a senior marketing manager at the CBOT.
First, the board can count on the interest of much of the edible-oil industry involved in foreign trade; the Federation of Oils, Seeds, and Fats Associations International (FOSFA) asked the board to develop the future contracts two years ago.
Second, the annual trade in edible oils has steadily swelled to 20 million metric tons. Such commerce is likely to expand further, especially along the Pacific Rim. There, Indonesia and Malaysia have invested heavily in the palm-oil industry, and the appetite of East Asians for edible oil has risen with their expanding incomes.
China, the world's fastest-growing major economy, shows great promise as an importer. The world's most populous nation will buy as much as 2.8 million metric tons of overseas oil this year, a jump from just 750,000 metric tons in 1992, says Gene Bryant, a senior vice president at the Chicago Corporation.
Third, the price of edible oils on the international market slips up and down with a volatility ranging from 15 percent to 20 percent. In a trading pit, all other things being equal, the greater the volatility of the underlying price, the more frenzied the trading of a futures contract.
``We're convinced the price volatility in the cash market is sufficient to guarantee the contract's success,'' says Brian Chapman, former president of FOSFA, the London-based trade group.
Fourth, exporters, refiners, and crushers of oil-bearing plants can readily substitute the different varieties of oil, making the market highly homogeneous. Consequently, the contracts will be settled according to a weighted index of the price of the four oils, to be determined near the expiration of each contract month. The contracts will be the first agricultural futures at the CBOT settled in cash rather than through delivery of the commodity.
Right timing for edible oils
While developing the contract in edible oil, the board consulted closely with executives in the industry. ``We work with the industry concerned; the days of just launching something and shoving it down someone's throat are long gone,'' Mr. Mueller says. The edible-oil contracts should slide easily and abundantly across trading pits, market pundits say. ``All new contracts are prone to their naysayers and people who have apprehensions,'' Mr. Bryant says. ``But the edible-oil contracts should be reasonably good as far as new contracts go.'' Now is a good time to launch the contracts because of a downturn in palm-oil production and growing demand for edible oils worldwide, he says.
Dealing in the new contracts might not explode like oil in a flame but will probably require many months before traders take hold. Such is a common pattern, Mueller says. In its first four months at the CBOT in 1977, only about 32,000 contracts of Treasury Bond futures traded hands. Last year, the board's trading pits were flooded with 79.4 million T-bond contracts, making them the most actively traded futures in the country.