Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, January 20, 1992 TAG: 9201180066
SECTION: BUSINESS PAGE: A-7 EDITION: METRO
SOURCE: MAG POFF BUSINESS WRITER
DATELINE: LENGTH: Medium
COMMODITIES CAN BE RISKY
With rates on bank savings certificates tumbling to 4 percent and lower, the radio commercials sound especially enticing.Some risk is involved, the announcer says in a dismissive tone. But the rewards of the commodities market are great.
If you are an average investor, the commercials say, you can call an 800 number and expect to make a killing by trading in futures in metals or in corn or in hog bellies.
"The average person should not call those phone numbers," said Stephen J. Williams, vice president and Roanoke branch manager for PaineWebber. "It's a good way to lose money in a hurry."
Investing in futures and most commodities is `only for very sophisticated people who understand the markets, work at it and are willing to take great risk," according to Dean Penley, vice president and Roanoke branch manager for J.C. Bradford & Co.
"I don't think it's for everyone," agreed Tyler Pugh, vice president at the Roanoke office of Wheat First Securities. "It's for people who understand the risk and can afford the risk."
Users fall into two categories, Pugh said.
One is those people who use a commodity and want to hedge prices. That might be a farmer trying to establish his market for soybean feed or a manufacturer trying to assure the cost of materials.
The second category is composed of people who like to speculate in high-risk ventures, Pugh said. An old adage is the greatest rewards come from ventures with the greatest risks.
Williams of PaineWebber said the commodities market was developed for manufacturers such as the Kellogg Co.
Kellogg, he explained, must establish what corn will cost in the future so that it "knows what to sell corn flakes for" in the supermarket.
So Kellogg buys a contract to purchase corn at a specific price six months in advance of when it will need it. The corn price is guaranteed.
If the price of corn goes up, Kellogg has itself a good deal. So would a speculator who has a favorable contract to sell.
But if the price of corn drops six months from now, Williams said, Kellogg simply "takes delivery and turns it into corn flakes."
"The average investor is grist for that mill," Williams said, because he cannot take delivery of an entire trainload of corn. Such an investor has a worthless contract.
"Eighty percent of people who trade in commodities lose money," Williams said. "It's not a market for the average investor."
Oil is another actively traded commodity, and many people were burned last year when they speculated that the Persian Gulf War would cause oil prices to rise.
The commodities market originally dealt in futures prices for agricultural products and metals, according to Penley of J.C. Bradford. Now people speculate in bond and stock futures and even in interest rates.
Farmers often use the market to guarantee a price for delivery of their crop or, more probably, a portion of their crop. It's a hedge against volatility in prices and uncertainties of the growing season.
In addition to the farmers who produce corn, pork and eggs, Penley said, the system helps those who use the products such as millers and egg dealers.
The commodities market is especially treacherous for people who don't deal in the products, Penley said. They can lose more than their original investment.
Anyone who invests $5,000 in the shares of a company in the stock market could conceivably lose all of the money if the company should fail and go out of business, Penley said.
Anyone who speculates in commodities stands to lose even more, Penley said. Someone who guesses wrong about the future price, he said, could be called on to pay $7,000 or $8,000 rather than the $5,000.
Most reputable brokerage houses ask questions of clients to determine whether they can accept and cover that type of loss, he said.
Like Williams, Penley said speculators lose money on four out of every five commodities trades.
Professional speculators know how to cut their losses while letting their good guesses run, he said, but that takes full-time concentration. "Most individual investors are not suited for that. In just about every case they lose money."