It’s like an auction on steroids.

Men and women stand around in a circle wearing brightly colored shirts and jackets that look like they came from the sale rack of a second-hand store.

And they yell at each other. Phrases like “Quarter July, Quarter July” or “August Half, August Half.” They yell a lot, especially considering that most of the time they’re standing less than five feet apart from each other.

And then there are their hands. They are always moving. Either thrusting their palms outward or pulling them inward. Sometimes they are pointing to various body parts and other times they’re flashing numbers with their fingers.

Welcome to the Kansas City Board of Trade, the largest marketplace in the world for hard red winter wheat, the main ingredient in loaves of bread served all over the world.

Members of the Douglas County Farm Bureau visited the exchange last week in hopes of finding out how the futures market may help them compete in an increasingly competitive agriculture industry.

Part of the learning process is observing what appears to be the world’s most chaotic auction. The people standing around in circles are traders, and all the yelling, touching, gesturing, and even the hideous jackets are part of the buying and selling process that takes place every weekday at the exchange.

For example, when traders are thrusting their palm outward, that’s a signal to other traders that they’re looking to sell a contract. When they are pulling their palm inward, it is a sign they are looking to buy a contract. The touching of body parts, mainly different parts of the face, are signals identifying which month of contract the trader is either buying or selling. The brightly colored jackets are worn so that traders can identify each other, and the company they work for, at a glance.

As for the yelling, it is partly for the other traders but partly for the benefit of a trading floor employee who is called the “pit reporter.” That person sits just outside the circle, which is called a pit, and does nothing but listen for numbers all day. Whenever he hears a bid, which is usually 20 to 30 times a minute, he relays the information via microphone to a data entry operator who types the price into a computer that sends the information out onto the exchange’s big board, and eventually to financial markets around the world.

The whole process has been described as something similar to watching a third base coach all day long.

Traders use a series of hand signals to buy and sell wheat contracts at the Kansas City Board of Trade. Douglas County agriculture producers toured the facility Tuesday to learn more about trading.

“It is a helluva way to make a living, don’t you think?” Robert Petersen, president and chief executive of the board of trade, told the tour group last week.

Finding futures

Many agriculture experts are hoping that all the signs point farmers toward a more profitable existence. That’s because the futures market, in its simplest form, is a way for farmers to lock in a future price for their crops.

For example, a farmer who plants his wheat crop in the fall may take out a contract in October to sell his wheat in July for $3.75 a bushel. He would do that because he thinks the price of wheat come harvest time will be less than $3.75 a bushel. The farmer may guess wrong, but at the least, he has protected himself against a major decline in prices, which is common during a harvest.

The extra form of protection, technically called a hedge, is becoming a more appealing idea to many farmers during this time when world events and erratic weather patterns create wild swings in crop prices.

Ron Rice, president of the Douglas County Farm Bureau, said that was a major reason the group decided to sponsor its first visit to the Board of Trade.

“There’s always been volatility in this business because we’re dealing with the weather, but now you have even more things to consider with the war and all the other crazy things going on in the world,” Rice said. “You’ve got to protect yourself a little more.”

The futures market is nothing new. The Kansas City Board of Trade, located near the Country Club Plaza in Kansas City, Mo., has been around since 1876. Large agriculture companies, like flour millers and grain elevators, use the futures market all the time. But the average farmer hasn’t flocked to the idea. Partial proof of that is only a half dozen farmers took the Farm Bureau tour to learn more about the system.

From left, Rich Wakeman, Bobby Gabriel, Curtis Wakeman and Ron Rice, president of the Douglas County Farm Bureau, watch traders at the Kansas City Board of Trade. Farm Bureau members toured the building Tuesday.

Matthew Vajnar, a grain merchandiser with the Ottawa Co-op, uses the futures markets on a regular basis. He said very large farm operations already are using the markets, but he thinks economic factors will force smaller farms to turn to the system.

“I think it is more necessary than ever because input costs are rising all the time,” Vajnar said. “Implement costs are going up, they’re not going down. In these tough times, it is more important than ever that you don’t leave money on the table.

“In this environment, we don’t have high prices come along very often. When we do, you’ve got to know how to lock them in.”

Worth the risk?

Futures, though, are by no means a cure-all. In fact, if a farmer isn’t careful they can hurt more than they can help.

“They can be about as much of a risk as they can be a tool,” said Bobby Gabriel, a Eudora farmer who cautiously uses futures as part of his 5,000-acre operation.

That’s because futures requires a farmer to take on an additional obligation. With wheat, for example, every futures contract that a farmer sells is an obligation to deliver 5,000 bushels of wheat by a specified date.

Since the farmer is generally making that commitment months in advance of harvest, he has no real way of knowing whether his crop will produce that many bushels. If it doesn’t, he’s obligated to actually buy wheat from another source to make up the difference.

“You end up going to the elevator asking how much they’ll sell you some wheat for, and usually you’ll be paying a premium price,” Rice said. “It can be a real bad situation.”

But that may not be the biggest danger with futures. That title likely would belong to greed.

Not unlike the stock market, there is plenty of potential to make large sums of money by basically becoming a short term trader on the market. The way the system is set up, it allows people to purchase contracts when they have no intention of ever selling or buying actual wheat. Instead, they buy contracts at a certain price and then hope to quickly turn around and sell them as the price changes, sometimes in a matter of days or sometimes in a matter of mere minutes.

“When you do it that way, it is basically just another form of gambling,” said Brad Bird, an operator of Lawrence-based Ag Source Inc., a grain merchandising company. “It is very risky. The rule of thumb is you don’t ever want to risk more than you can afford to lose, because you can lose it in a hurry.

“That’s a problem, because a lot of times a guy will get on the market and maybe have a little bit of success one day, and then he’ll get greedy and really lose a lot.”