Tobacco Market

Tobacco ranks sixth in the value of U. S. field crops, fifth in U. S. exports and most of it goes up in smoke. Usually the crop is worth $250,000,000 but last year, with prices not far from rock bottom, it brought only $180,000,000. Processed into cigarets, cigars, snuff and quids, it is worth $1,000,000,000 annually, and its taxes provide the U. S. Government with its largest single item of miscellaneous revenue ($400,000,000 per year). The marketing of tobacco products is a triumph of modern salesmanship but the marketing of raw tobacco is about two steps removed from trading with the Indians, who gave the world the weed. When his crop is cured the farmer takes it to a local warehouse for the traditional auction. There he does not have to take the prices offered. But since the farmer is perpetually hard up and the principal tobacco buyers can be numbered on the fingers, he actually has little choice. His neighbor at another warehouse may receive a higher price for the same grade of tobacco at the same time.

In no small measure this haphazard system exists because there is no Tobacco Exchange. A group of Manhattan brokers, however, have decided that there will be a futures market within a week. Highest hurdle they had to jump was to find a satisfactory grade of tobacco to use as the standard trading medium. There are countless grades "of cotton but the base contract is Middling 7/8 in. Upland. All departures from the standard grade are adjusted between buyer & seller. Likewise the New York Tobacco Exchange, instead of dealing in Bright Flue-cured, Dark-fired Kentucky, Burley, One-sucker, Green River, Black Fat and their infinite variations, will trade in "U. S. Standard Flue-cured type 12 grade B4F."

Having elected its Governors last week, the Tobacco Exchange announced that the trading floor at No. 90 Broad will open Sept. 19. Prime movers behind the latest addition to the lengthening list of commodity futures markets are President John Wesley Hanes, senior partner in Chas. D. Barney & Co., and First Vice President John L. Julian of Fenner & Beane. President Hanes may be a stockbroker by trade but he is a tobacco man by birth. His father helped found a big Winston-Salem tobacco company which was merged with R. J. Reynolds (Camels). After Yale (1915) and the War (Navy), "Johnny" Hanes went north to Wall Street. He is largely responsible for the fact that Chas. D. Barney & Co. today is regarded the leading authority on tobacco stocks. A big Reynolds' stockholder, he is reputed to glower terrifyingly at any office caller who dares pull out any other cigaret than Camels.

When President Hanes went north, he left his brothers to run most of that part of Winston-Salem which the Grays and Reynolds do not. Brother James, onetime Mayor of the city, is head of Hanes Hosiery Mills, one of the largest rayon hosiery concerns in the South. Brother Robert is president of Winston-Salem's biggest bank, Wachovia Bank & Trust. Brother Ralph is head of Hanes Dye & Finishing Co. Brother Alex handles Winston-Salem's biggest brokerage accounts as head of the Chas. D. Barney branch. Brother Frederick moved a few miles away to Duke University, where he is head of the medical department.

Blond, horsy and 42, President Hanes has no illusions that his tobacco board will revolutionize the tobacco industry overnight. It will no more replace the auction than the New York and New Orleans cotton exchanges have replaced the South's spot markets. But its quotations will give the farmer a yardstick; its facilities will enable him to sell his crop when he pleases, not simply when the auctions are held. And more important, if the market is active, it will permit growers, dealers, manufacturers, importers, bankers to buy insurance against price changes by hedging.*

*Few serious critics of commodity exchanges deny the economic and social value of hedging. Example: a flour miller buys 10,000 bu. of wheat which will not be sold as flour for several months. To protect himself against a decline in wheat (and flour) prices he simultaneously sells 10,000 bu. for future delivery. While he is milling his wheat, the price drops and with it flour. Thus he makes no money on the flour he sells. But having sold wheat short, he now buys in 10,000 bu. to even up his short position, making a profit on the transaction. If wheat rises, he makes more money on flour but loses on his short sale. In either case he makes his legitimate profit as a miller, no more, no less.

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