1972
The Soviet Union starts to buy American wheat in huge quantities, and local prices triple. Consequently, Richard Dennis establishes a ground-breaking career in commodity trading.
“If you live among wolves you have to act like a wolf.”
—Nikita Khrushchev
In the history of capital markets, 1972 is known as the year of “The Great Russian Grain Robbery.” Because of harvest shortages, Soviet commissioners were traveling all over the United States, buying as much wheat as they could. Their actions affected not only the grain market but also the career of a young commodity trader named Richard Dennis.
At the beginning of the 1970s, the United States was beginning to abolish the gold standard, and as a result the US currency subsequently weakened. At the same time, wheat was trading close to 1 USD—historically low levels. That was not a surprise, since wheat production was massively subsidized by the government. But the weakening dollar gradually made American products, including many agricultural goods, more competitive. As a result, exports rose, and hand in hand with export volume, prices began to rise as well: That included grain prices, which were slowly awakening from their slumber.
In the history of capital markets, 1972 is known as the year of “The Great Russian Grain Robbery.”
Weather is always a key factor for agricultural prices, and after years of good harvests, the world’s grain production started to decline in 1972. Poor weather conditions were responsible for lower yields in important producer nations like the United States, Canada, Australia, and the Soviet Union. In comparison to 1970–1971, wheat stocks in 1973–1974 fell by 93 percent in Australia, 64 percent in Canada, and 59 percent in the United States. Inventories approached critically low levels.
Figure 4. Wheat prices, 1970–1977, in US cents/bushel, Chicago Board of Trade. Data: Bloomberg, 2019.
In July and August 1972, the Soviets bought nearly 12 million metric tons of US wheat—approximately 30 percent of the country’s production—amounting to a net value of about 700 million USD. Because farmers were already facing problems meeting demand, prices increased sharply, from below 2 USD at the beginning of the decade to more than 6 USD in February 1974. Corn spiked at the same time, from less than 1.5 USD to nearly 4 USD, while soybean prices more than tripled, reaching their highest level of more than 12 USD in June 1973.
Weather Woes
The harvest of Kansas wheat (Hard Red Winter Wheat), which is mainly exported, can be threatened by climatic fluctuations three times during the year: in late autumn, when it is too hot and dry or too cold and humid for germination; during winter, when sudden temperature changes threaten growth; and finally, in spring, when rain prevents pollination. For these reasons crop quality, quantity, and price are all subject to huge fluctuations.
The rapid price spike favored young Richard Dennis, who had studied in Chicago and at Tulane University in Louisiana and had worked as a student at the Chicago Mercantile Exchange (CME) in 1966 at the age of 17. He began speculating with 2,000 USD in initial capital from his family, first with small contracts on the MidAmerica Exchange, and later on the CME.
In 1972 the 23-year-old Dennis recognized the new agricultural market trend. He bet on rising wheat prices and won. A year later, in 1973, his initial capital increased to 100,000 USD as he took advantage of a trend-following system, aggressively increased his positions, and remained invested. In 1974 he made a profit of 500,000 USD on soybeans alone, and by the end of the year, he’d become a millionaire at the age of 25.
The Soviet shopping spree of 1972 was repeated in 1977 after another bad harvest in Eastern Europe.
Three years later history repeated itself. In 1977 Soviet president Brezhnev announced a national wheat harvest of less than 200 million tons, which took the markets by surprise as the US Department of Agriculture and US intelligence both were forecasting a good harvest.
By this time Soviets had already bought 18 to 20 million tons of wheat from the United States, Canada, Australia, and India. Although worldwide production of wheat was around 600 million metric tons, according to data from the Food and Agriculture Organization (FAO), only a small fraction of that quantity was globally traded. Because large amounts are consumed by the producer countries themselves, world market prices can fluctuate dramatically based on relatively small changes in global trading.
Meanwhile, Dennis’s career continued to soar. At the beginning of the 1980s, his capital rose to around 200 million USD. At 35 he was known as the “Prince of the Pit” and was one of the most recognized commodity traders in the world.
In 1983 and 1984 Dennis recruited and trained 21 men and two women in commodity trading. The group later became known as “Turtle Traders,” thanks to an often-quoted comment by Dennis, who said, “You can breed traders like turtles in a laboratory.” Five years later the group had earned him a profit of 175 million USD.
Key Takeaways
•After a bad harvest, agents of the Soviet Union quickly and secretly purchased 30 percent of the total US wheat crop. Therefore, 1972 became famous as the year of the “Great Russian Grain Robbery.”
•Grain shortages and the Soviet actions caused a spike in prices: Wheat prices that traded at 2 USD in 1970 shot up above 6 USD in February 1974, a threefold increase within 24 months. Corn also rose from 1.50 USD to nearly 4 USD, while soybean prices surpassed 12 USD during the summer of 1973.
•Richard Dennis, age 23, recognized the new trend in agricultural markets and bet on rising wheat prices. He became a millionaire two years later, After a decade he was making a profit of 200 million USD, earning the nickname “Prince of the Pit.”