When commodities became a hot investment, things got wild at the Grain Exchange. Then the bubble burst, and a bartender-turned-trader held on for dear life.
It was just 100,000 bushels. Ben Wolke had been in deeper before and knew what he had to do: Keep his mouth shut, don't panic and wait for the big buyers to come in with their money.
That's what he kept telling himself, over and over, as he watched the price of spring wheat tumble on the giant electronic billboards that overhang the trading pit of the Minneapolis Grain Exchange.
"6.46 ... 6.40 .. 6.38 ..." With each penny drop, Wolke was down another $1,000. At 6.30 a bushel, he panicked and sold, losing $16,700 in less than 20 minutes. "Nothing seems to be working like it used to," he said.
Indeed, 2008 may be remembered as the year when the normally placid world of trading grains, corn and oil went haywire. Images of riots in much of the developing world fueled fears of a global food crisis, which sent prices of staple commodities to record highs this spring. Corn prices doubled. Wheat nearly tripled. Then fear of a global recession hit, and prices fell just as dramatically. Corn and soybeans plunged 50 percent between June and October.
Fueling it all was a massive stream of investor money that had previously been active mostly in stock and bond markets. These private funds were loaded with cash and looking for a place to invest. Many settled on buying the most basic food ingredients.
But when credit turned tight and economies around the world seemed to crumble simultaneously, large investment funds pulled back on food commodities as quickly as they had poured in.
The commodities bubble had officially burst.
"We forgot that food is a thing that we consume," said James Doran, a finance professor at Florida State University who specializes in commodities. "Food had become a financial instrument."
Wolke, a bartender until two years ago when he quit to become a grain trader, has had a front-row seat to one of the most extraordinary years the food industry has ever seen. He's far from a casual observer, with tens of thousands of dollars on the line daily.
The 31-year-old made more than $1 million on the upswing. But with time running out on a career coming to an end -- the Grain Exchange plans to shutter its trading floor on Dec. 19 as it moves to all-electronic trading -- Wolke could lose it all on the way down. That is, if he's not careful.
"I can't think of myself as a millionaire because I'm not," he said. "Not when I can lose $500,000 tomorrow. That's a fact of life."
Defining the Mill City
A year before the commodities boom began, Wolke quit his job bartending at the Monte Carlo Bar & Cafe in downtown Minneapolis to trade grain.
It is a career in an industry that helps define Minnesota, more than a century after the Minneapolis Grain Exchange was founded in 1881. The exchange was born at a time when large grain markets in Minneapolis, Chicago and Kansas City were inundated each autumn with harvests often too big for the city silos to hold. This annual supply glut forced farmers to accept whatever prices the big flour mills would offer.
Exchanges smoothed the grain trade's peaks and valleys by allowing farmers to sell their future crops at pre-determined prices. By the late 1800s, speculators found alluring possibilities to profit from these forward contracts, known as futures.
Today, agricultural futures markets vastly exceed the so-called cash market, in which grain is bought by companies that intend to use it. Virtually every food staple, including sugar, wheat, coffee, pork, beef and cocoa, can now be bought and sold through futures contracts.
For much of the past century, trading floors were the domain of large grain processors and proprietary traders who profited from small movements in the commodities markets. But apart from periodic shocks, like the drought of 1988, prices didn't move much; and the major grain exchanges operated in relative obscurity. As one Minneapolis Grain Exchange official said, "A lot of people didn't even know we existed."
That all changed this spring, when a speculative fever unlike any seen since the 1970s took hold of the food commodities markets. Whipped up by fears of a global food shortage, and eager to diversify out of languishing stocks, hedge funds and other big institutional investors began pouring billions into basic farm products, from corn and beans to rice and wheat.
As of mid-February, speculative investors on the Chicago Board of Trade owned the equivalent of about 2.4 billion bushels of corn -- enough to satisfy the nation's ethanol consumption for an entire year.
Corn prices hit an all-time record of $7.99 a bushel in June, up from $3.60 a year earlier. Dairy farms, pork producers and cattle ranchers, among others, cried foul and warned of price increases for consumers. Ethanol plants began shutting down, at least temporarily, citing corn prices that made it impossible to make money.
On some days in February, the price of wheat soared 60 cents -- the maximum allowed -- and then rose 60 cents again the following day. Traders could make hundreds of thousands of dollars in a few days just by holding onto their positions. On the Grain Exchange floor, traders boasted of buying new cars, boats and lakeside cabins.
"It was almost impossible not to make a lot of money," said Charles Soule, a longtime Minneapolis trader.
However, like the housing market, much of this buying frenzy was financed with borrowed money. Fund managers would borrow up to 10 times their actual capital invested in the futures contracts, said Doran of Florida State. The borrowed money magnified the returns, but also the losses.
"The economic growth was never there to support the high [commodity] prices," Doran said. "When the economy underwent this massive shift, it all collapsed."
Maxing out his credit cards
When Wolke started trading, he had just $4,500, a sum that could be wiped out in a single morning. He had spent two years at the exchange as a floor clerk, making $48 a session marking down buy and sell orders. But he was good at games, particularly chess and poker, considered litmus tests at the hyper-competitive exchange.
His goals were modest: To make at least as much money as he did serving drinks, and to gradually earn enough to move into a nicer apartment. His Uptown rental had leaky pipes, mold growing in the kitchen, and a hole in the ceiling "as big as two watermelons," he said. "I remember thinking, if I lose $250, then get out, because that's what I'd make bartending a night or two."
His new career almost came to an abrupt halt about nine months after he started. One morning, convinced that the market would rally, Wolke bought 10 wheat contracts -- equivalent to 50,000 bushels. It was a huge position for a novice trader. As the market fell, he refused to accept that he made a bad trade, and then panicked and sold when it bottomed. He faced a $8,000 margin call.
Suddenly, trading no longer seemed like a game. If he didn't pay, a collections guy would be calling, and his new career over. For three hours, Wolke stared at his apartment wall, unable to move. "Trading was one of the few things I ever truly loved doing, and I felt like I had failed."
Wolke maxed out two credit cards and the next morning, he was back on the floor, in an octagon-shaped area known as "the pit," yelling buy and sell orders with the whole force of his lungs. If he missed again, he would probably have to file for bankruptcy.
He heeded the lesson of his loss, refusing to hold firm opinions about where the market was headed. Within three weeks, Wolke recovered the money. Two months after that, he was up $20,000. And within a year, he had pocketed $1 million, largely by riding the upswing in commodities prices. He made about one-third of that sum in February, when many commodities were setting record highs.
"Opinions are dangerous," he said, after a Monday session in which he lost more than $10,000. "A lot of people think they know what the wheat market looks like if they look at a crop report. But if some big hedge fund is coming in and buying a billion dollars worth of wheat, wheat is going to go up."
A pit bull
Wolke typically arrives at the pit at 9:15 a.m. He mills about, often ignoring the flurry of reports on weekly crop conditions that might give a window into harvest yields -- the reports that help define the moves of more veteran traders.
At the 9:30 opening bell, he charges to the center of the pit. A former hockey player at Ohio State, Wolke isn't afraid to get physical, sometimes tugging at shirts to make sure brokers hear his trades.
Within his first six months, he was hit with a $500 fine for elbowing a floor broker in the stomach. Wolke claims the broker refused to acknowledge his order. Soon after, Wolke was fined again for swearing at the same broker. (The exchange allows foul language, except when directed at someone.)
"My general attitude was, 'I don't have any idea what's going on and I shouldn't pretend that I do,'" he said. "That may have helped me see things more clearly."
Indeed, Wolke's lack of trading experience may have been an asset. It freed him from preconceived notions about how commodities markets should work -- at a time when they were being turned upside down by the flow of new money.
Instead, he followed the money. He watches electronic trading markets and news wires closely from a handheld computer that he wears around his neck -- the first trader to do so. When he sees a fund buying or selling a large block of futures, he often assumes others will follow. In the buying orgy of earlier this year, he was usually right.
On a day in late February, he made more than $100,000 in a single four-hour session. He spent $2,000 of it that night, buying food and drinks at downtown Minneapolis restaurants for fellow traders.
"When the market was first getting hot, there was a lot of celebrating," he said. "You'd double your net worth in a day and say, 'OK, let's go out and have a good tine.'"
But since the commodities bubble burst, there's little to celebrate. He recently lost money on four consecutive sessions, prompting him to take a day off to relax and think things over. "If you're in a hole, stop digging," he said. On the day of his $16,000, 20-minute loss, he pondered why he was so quick to sell.
"There are some days I'm just bulletproof, and I'll stand in there and take $30,000, $40,000 and $60,000 hits because I'm so convinced that I'm right," he said, scarfing down a plateful of spaghetti at a restaurant in the skyway. "But the confidence just wasn't there today. I sweat a lot when I've got a bad position on, and today I sweated like a pig."
Overall, Wolke, a native of St. Cloud, has survived the downturn better than he had expected. He finally moved out of his dingy apartment and bought a modern $350,000 condo in downtown Minneapolis with a balcony overlooking the Mississippi. Another splurge: new front teeth. (His old ones were chipped and had been knocked out six times in hockey games.)
Most of his trading profits he's socked away in municipal bonds, giving him a cushion as the Grain Exchange goes all electronic in a few weeks. While he plans to try electronic trading, there's always bartending, he said.
These days, he's an active short seller, betting that prices will fall. He's still up more than $1 million for the year, but his $100,000-plus days appear over.
"People think it's easy being a speculator," said Wolke. "But if it's easy, then by all means, come right on in. It's not easy. It just isn't."
Chris Serres • 612-673-4308