J. Paul Getty wrote several magazine articles in the 1960s. I read all of them. They were well written and somewhat inspirational to me in my teen years. In one story he relates this experience.
Getty and the Train
Somewhere in Oklahoma there was a parcel of land that could be leased for the oil rights. Several oil men had passed on it, feeling the prospects for oil on this particular land were very poor. J. Paul decided to drive out and take a quick look.
After some inspection he was close to drawing the same conclusion as the other oil men. He sat in his car, cogitating, looking out over the horizon. A railroad crossed the land, with a steam engine train once a day. J. Paul just happened to be there at that time and casually watched the train move across the expanse. Then he noticed something. As the train moved toward the halfway mark, steam came out of the locomotive’s chimney. That could mean only one thing: the land was domed, and the engineer had to give the train extra power to go uphill. J. Paul knew from previous study that oil was usually found on domed land.
After a little more inspection, he raced back to town and signed the lease. It was one of the biggest oil finds of his early career.
The 1976 Maine Potato Futures Squeeze
In 1976 there was quite the scandal in the Maine Potato futures market. J. Simplot, the world’s largest potato producer, was short a very large number of contracts near the expiration of the important May contract. One small problem: he apparently did not have the potatoes to deliver to the longs.
(In futures, the longs are essentially offering to take delivery of the physical product as the contract expires. The shorts are promising to deliver that physical quantity to the long. In practice, almost all futures contracts are closed out before the famous First Notice Day. The futures market itself simply acts as an excellent pricing mechanism, most of the time.)
On the long side there was a powerful syndicate of buyers who suspected Simplot could not deliver. So they bought and bought and bought the May contract. This, as you might imagine, caused great volatility. I was long at that time. It was a small contract with a low margin, and it offered a nice vehicle for smaller traders, who are typically long a market. Spud prices typically ranged from two to four cents a pound. Charlie was not in the market but was watching and advising me. The struggle between two powerful forces was worthy enough that it made the national television news on several occasions over the last trading days.
Near First Notice Day, potato prices crossed ten cents a pound, a fantastic price and a wonderful profit for the many small traders who were long. Simplot was in deep trouble.
Charlie and the Empty Railcars
Then it happened. Into Chicago slowly rolled a train with many, many cars, all stamped J. SIMPLOT. He had found the potatoes and was prepared to deliver. Price rose and fell sharply but stayed volatile as the big players pushed and pulled. That night it was again on the news. A short clip showed the train moving slowly into the Chicago rail yards.
I was at home watching all of this, despondent that at least most of my profit would evaporate the next day. Just then the telephone rang. It was Charlie. He had been watching, too.
“Dad, don’t sell your spuds, those cars are empty!”
When Charlie first began trading commodities, he drove from Eads, Colorado to the nearest brokerage house, in Garden City, Kansas. Coincidentally, the building where he traded was right next to the rail yards. While watching the markets, Charlie had a lot of time to observe trains coming into and going out of the station. He could tell by the buckling or non-buckling of the cars whether they were empty or full.
When it was realized the railcars held no potatoes, prices began to soar. Before I, and many others, could sell and take big profits, the exchange declared a force majeure and stopped all trading in May Maine Potatoes. They arbitrarily set a settlement price, taking away most of the profits the longs and small traders had expected.
This effectively killed the potato futures market. The exchange tried to reintroduce it a year later, but no one would touch it. Why would they? You lose even when you win. Who wants to play that game?
It was all quite a scandal. Old-timers said it reminded them of the DeAngelis soybean oil scandal of the early 1960s. You can read the potato details in Time’s archive, though they have a few of the facts and the timeline wrong. The DeAngelis scandal is covered here.
The fear and greed beat never stops.
This post is educational commentary. It is not investment advice. Trading futures and FX involves substantial risk of loss.
Good Trading!
Michael Duane Archer
Related Reading
- Driving Mr. Goodman: Why Traders Must Find It Themselves
- Commodity Futures Shoot-Out: Why Reward Without Risk Fails
- Goodmanisms: Charlie Goodman’s Sayings on Trading, Explained
Keep Learning the Goodman Way
If this article was useful, these are the next steps:
- The Method: propagation, intersection and the 3-C Principle, drawn plate by plate.
- The Goodman Library: the books, from Goodman for Grasshoppers to The Goodman 6 & 6.
- The Trader’s Playbook: the Molokai setup in one printed, numbered volume.
- Mentoring: work one-on-one with the authors.