Short crops, as the old saying goes, have long tails. In the case of the 1988-89 drought-shortened soybean crop, the other kind of tale also was told with Italians, a squeeze, lawsuits and a stuffed envelope.

Twenty-five years ago today, July 11, 1989, the Chicago Board of Trade issued an emergency liquidation order for its soon-to-expire July soybean contract. That order was tied to a large accumulation of July beans by Italian processor Ferruzzi Finanziaria, S.p.A. And that CBOT move led to a two-day freefall in prices at the front end of the soy complex.

And that was just the beginning. The event first played out in the media and then in the courtroom. Some of those lawsuits lasted longer than Ferruzzi, which filed for bankruptcy in 1993 after a spectacular fall from grace. Defendants in these suits included CBOT president Tom Donovan, CBOT chairman Karsten “Cash” Mahlmann and vice-chairman Pat Arbor along with members of Cargill’s executive team.

The central question was: did Ferruzzi try to corner the market, or was the firm just trying to secure adequate supplies to keep its processors running at the end of a turbulent crop year? The answer depends on whom you ask, and is not necessarily whether one was long or short going into that day. The fact is, when the CBOT issued the order requiring all holders of July beans to liquidate to below 3 million bushels by July 18 and then to 1 million bushels two days later, it was specifically targeting Ferruzzi and its large holdings. It was also well known that other commercial firms, specifically Cargill, held sizable short positions and urged CBOT officials to address the issue for several weeks.

After the emergency order, Ferruzzi immediately cried “foul” and suggested politics were at play and that, as a commercial end user, Ferruzzi was not required to limit its positions in the spot, or any contract month.

Meanwhile, the CFTC was also involved, pushing Ferruzzi to sell down its futures position and buy beans in the cash market. The CFTC argued that Ferruzzi could have bought cash beans more cheaply than the futures, and at delivery points closer to its facility than the Chicago warehouses. The CBOT board used this “uneconomic trade” argument as evidence that Ferruzzi was attempting to corner the market.

To gain a little perspective, let’s flash back one year from the 1989 liquidation to the early summer of 1988, as the Midwest was first becoming parched with drought. While many focus on the new crop year that ran from the November 1988 contract to September 1989, the wild markets actually began with the end of the 1987 crop year. Not only were owners of the old crop starting to hoard what was left, the river basis – the difference between the futures price and cash prices along the Mississippi – also began fluctuating during this time. As the drought sent river levels below the point at which barges could travel freely, prices were all over the place.

I was a college student working as a summer clerk at the CBOT, the year prior to the historic events, in 1988 and quickly became accustomed to the year’s wild weather market. But what I was unprepared for was the day that I, along with our clearing firm’s assistant balancer, were sent on a “special errand” to deliver a package to Ferruzzi’s posh Chicago office on Michigan Avenue. I think I was chosen because I was the new guy, a greenhorn from downstate Illinois who would likely not blab about it afterward. I didn’t. But that’s mainly because I did not put two-and-two together until the following year’s emergency liquidation.

It turns out, about 12 months before the alleged squeeze, I was tasked with delivering a stack of warehouse receipts to Ferruzzi because they had just taken delivery of a sizable amount of soybeans following the expiry of the July soybean contract. Handing me the envelope, the balancer said “Careful with that envelope, kid. That’s over $10 million in your pocket.” I thought he was kidding. They looked like those novelty award certificates you get from Publisher’s Clearing House. But he assured me otherwise.

The point is, Ferruzzi had begun taking large bean deliveries long before the July 1989 contract. We were a much smaller Ferruzzi customer than, say Central Soya, which Ferruzzi purchased that same year, so it is certainly plausible that Ferruzzi was being delivered much more than the 1-2 million bushels in my pocket.

Perhaps taking delivery of futures was, as the firm maintained, a form of insurance on the ability to feed its processors. Alternatively, maybe Ferruzzi had been trying to corner the market for more than a year before they were finally stopped in the act.

In the end — Ferruzzi eventually crashed and burned into bankruptcy, most suits were dismissed, some traders got a nice prize years later in a class action suit, and Cargill and the CBOT executives moved on.

While we will never know for sure, there are still those in the CBOT building who know more than they are letting on. More than one old-timer simply I asked about Ferruzzi nodded, smiled and said, “yep; that was a crazy year.”

Happy 25th to the short crop and the long, tall tale.

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