In the early 1980’s, I was a commodity broker with Heinold Commodities and Securities. The year of 1980 started with a bang on January 4th when President Jimmy Carter embargoed grain exports to the Soviet Union, the largest buyer of US corn in 1979. The US exported a bit more than 2400 million bushels in 1979, which was a record that stood for 26 years. The year ended with another bang when the prime interest rate hit 21.5% on December 17 th , 1980. In between those events, Mt. St. Helen’s in Washington erupted on May 18th , which spewed enough ash over the Western US to cause a drought from the Rocky Mountains to the Indiana-Ohio line.
The Vietnam War ended in April 1975 with thousands and thousands of Vietnamese refugees re-settled in the USA. They never complained, they were very hard working and thankful to be alive and, more than anything, thankful to be in the USA. Being in the USA was more important than being alive. In their home country, their life was strictly for the government to do whatever it wanted to do to its people, including work them to death and killing them for saying something unpleasant about their government. Those refugees in Ohio were truly an asset to American Society.
In April 1983, a Vietnamese man with his wife and two children came to our Grove City, Ohio office with a bank draft for $100,000 payable to Heinold Commodities. He said he wanted to open a futures trading account. In those days, if a commodity broker had a sum of a million dollars of customer equity in all his client’s accounts, he was a “heavy hitter” in the futures brokerage business. A $100,000 deposit to open a futures account is similar to tipping your waiter at Texas Roadhouse a thousand dollars. I really tried my best to act like this happened every day.
I gave him the account forms and background forms to provide his personal and professional information so Heinold could perform their “due diligence” work to make sure he was who he said he was. He handed the forms to his two elementary school age children who worked together to fill-out the forms as they asked their dad questions. His 8-year old daughter wrote his answers in perfect printed English. It was surreal to see an eight-year old filling out the forms to open a $100,000 futures account. I am telling you, $100,000 would buy 40 acres with a very nice home and a 36 x 48 pole barn with horse stalls in 1982.
Their dad signed the forms the places the children told him to do so and then gave me the papers. They waited patiently as I looked them over.
He was 36 years old, married, an American citizen, he owned a reasonably valued home with a typical mortgage, his income was above average and his occupation was Chicken Sexer. That was something I had never seen before nor since. I controlled my urge to ask how one determines the sex of chicken.
I checked every entry. It was one of the few times in my life where I looked over a completed form and did not even have a question, much less a correction. I told the 8 year-old that if all goes well, the account would be approved and ready to trade in three or four days, but if Dad wanted to do a trade the next day, we could expedite the process. She told Dad and he shook his no and said, “Thank you.” The 8-year old said to call the phone number on the application when the account is ready.
A few days later, I called after the market closed to notify my new client the account was ready. The eight-year old said they would come to the office yet that afternoon. I did not ask how soon. I would wait all night if I had to.
About 30 minutes later, the family arrived. After the pleasantries were exchanged the daughter said, “Dad wants to sell 50,000 bushels of soybeans.” The chicken sexer was betting his life savings on soybeans going down... Holy cow!
It was the middle of April 1983; 1980 was the third Corn Belt wide drought of the Twentieth Century; 1981 was so wet most farmers in the Eastern Corn Belt could not get into the fields until the middle of July and many planted buckwheat because it would mature in 45 days; 1982 was the first 8 billion bushel corn crop… just perfect weather for most of the Corn Belt.
I asked what month of soybeans, the girl asked Dad and then she said “November at the market”. I repeated the order three times to make sure I had it right. In those days, CBOT opened at 9:30 AM Chicago time and closed at 1:15 PM.
The next morning, November opening range was $6.83 to $6.85½. My client’s order was filled at $6.83½. November beans settled that day at $6.70. Open trade equity was $6,750. Not a bad day for a chicken sexer… or anyone else for that matter. The family came to the office every Friday afternoon to make sure what they thought was happening was really happening.
On June 19 th , November beans settled at $5.98¼, just a quarter cent off the low for the day; 85 cents profit on 50,000 bushel… well, you do the math. Unfortunately, that was the low for the rest of the year.
On July 19 th , that 85 cents was gone plus a few more cents. The next day, November beans gapped 7 cents higher and never looked back. The family’s $100,000 was gone on Friday, August 12 th . The family was there when I liquidated the positon with a loss $100,324. The 8-year old daughter counted out the $324 cash and handed it to me. Her father and mother bowed their heads slightly and said, “Thank you very much” in perfect English. They turned and walked out the door.
As sad as that story is, I am sure if the initial deposit had been $30,000, and they were making margins calls of $5,000 most days in late July and August, they would have concluded, before their $100,00 was gone, that soybeans were in an uptrend and sticking with a short position was not a good investment.
And so it is with farmers who sell their corn and beans in the cash market and re-own those bushels in the futures market. After most farmers make four or five $8,000 margin calls, they come to the conclusion they were wrong about the price direction and liquidate the losing position to stop the bleeding. But if a farmer leaves the corn and beans in the bin, just like the chicken sexer with $100,000 in his futures account, there is nothing kicking the farmer in the head to get him to realize he is losing money.
For a farmer losing $100,000 in a futures account is about as ugly as anything can get and will be repeated for generations to come, but losing $100,000 in the grain bin… well, that is just farming.
More times than not, margin calls are the market telling you what you cannot tell yourself and that is you are wrong.