Neal Kottke has been involved in futures markets, particularly in the grain sector, since the 1960s. He has worked on the physical and futures side, traded, ran a clearing member firm (Kottke Associates), ran the Board of Trade Clearing Corporation (BOTCC) and operated as a commodity trading advisor (CTA). He even owns a working farm in downstate Ill., so he has a view of the grain sector from every perspective. We sat down with Neal to talk and the industry and the grain markets.
Futures Magazine: You have been involved in trading agricultural markets — both cash and futures — for more than 35 years. Tell us how you got involved in the business.
Neal Kottke: I got out of the Army in the 1960s and joined Continental Grain Company as a grain merchandiser and worked in the grain export markets. I worked in Minneapolis, New York, Chicago and Paris, so I had a broad learning experience in the export markets. I had worked in Chicago and became familiar with the futures markets and the interface with delivery, so that was my transition between the cash grain market and the futures market. I resigned from Continental, bought my own membership and formed a small clearing firm called Agri Trading in 1976. It was a clearing firm. but I was trading. We cleared our own trading and I was the principal trader.
FM: You have had a long eclectic career in the business that encompasses cash and physical trading, futures brokerage and exchange management. What are you spending most of your time on now?
NK: Basically it hasn’t changed, we are still a trading firm. Our principle business is option market making in grains, meats and energies. They are proprietary traders of Kottke. They trade on the floor and they make markets in options. Kottke is now a customer of ADM.
FM: You recently changed Kottke’s status from clearing member to introducing broker, why?
NK: Capital considerations. We could be a member firm and I didn’t need to be a clearing member. We have enough memberships (shares in CME Group) to be a member firm.
FM: There has always been a creative tension between the commercial and speculative side of trading, particularly in grain markets, how has that evolved over the years? How has the emergence of the long-only commodity funds affected that balance? How?
NK: When the grain markets went through their explosion in the 1970s, they were led by an export demand. At that time, the commercials were the predominant influence and drivers in the grain markets. Today’s grain markets are different because you have the added impact of, particularly in corn, ethanol as a demand factor and [most recently] that has been where the expansion of demand has come from. Along with that, you have had an increase in the capital that can be employed in a speculative nature in the form of managed futures. So those two features are great influences, and therefore the commercial side is diminished to some extent.
FM: Aren‘t the long-only commodity funds a larger factor that traditional CTAs?
NK: I am not sure I agree with that. They both have impacted the markets. I think that the long-only feature has been over emphasized and overstated. I say that because it is not dynamic. It comes, it is absorbed by the markets and then it is there. And then it is rolled. Now it has an impact on spreads, but that is not really the flat price driver that managed capital and that goes both ways in the market. [Long only funds] once they are in, its impact is lost, it has been absorbed.