Neal Kottke has been in the commodities business since the 1960s. He shares his thoughts on how the markets have changed and, perhaps more important, how they have not.

For those seeking a career in the commodities industry, the first piece of advice Neal Kottke would give them is to think not just about commodities.

"If you're going to come into this business, it's basically futures and options," says the veteran trader and market maker. "Second, you would be well served by working for a proprietary trading firm or an investment bank like Goldman Sachs, where you can get a broad look at the futures and options industry."

Kottke should know. At 71, he has spent his entire professional life around the grain business. The founder and chairman of Kottke Associates LLC, a clearing firm and futures brokerage, and former head of the Board of Trade Clearing Corp., he has seen sweeping changes in the industry, such as the dominance of electronic exchanges over the selling pit in the futures market, which have greatly expanded the marketplace.

"Virtually anybody on the globe now has full access to the exchanges," Kottke notes. "So place utility is displaced by the electron. In fact, the futures component of the industry has basically all migrated to the screen."

Expanded Customer Base

Kottke sees this change as an improvement for the industry.

"Electronic trading has increased the efficiency of capital access to the commodities markets, making them more liquid and responsive," he says.

Another major change Kottke has witnessed over the years is the makeup of the market drivers. When he first joined the industry in the 1960s, as a grain merchandiser for Continental Grain Co., exporters such as Continental drove price and volume. Today, exporters continue to be a major influence, but the markets also are affected by the rising demand for renewable energy and the dramatic growth of managed funds.

Corn, in particular, has been swayed by the significant demand for ethanol. And hedge funds, mutual funds and institutional investors have introduced substantial amounts of speculative cash into the market.

The size and power of such funds have generated considerable press, particularly in times of dramatic price appreciation. But Kottke remains unconvinced they are the dominating factors.

"I would argue that when someone is unhappy with the market, he blames the wrong kind of capital coming in," Kottke observes. "But I think that more is better than less. Very small, less-accessible markets are the ones that are susceptible to false signals and liquidity problems. Also, money by itself doesn't make the market move. The market has its own life that attracts or repels capital. Nowadays, it just happens with greater force."

Scorning the Messenger

Kottke acknowledges, however, that there is no simple solution to altering public perceptions about markets and cash flow.

"That's a question that's as old as man, because the market is simply a messenger, and when the message offends too many and too greatly, the messenger is scorned," he says. "I'm not saying that the industry doesn't have to address it and get out the correct message. But I think we're talking about some real basic natures here, and where those natures intersect is when the political clash becomes involved, and that makes progress extremely difficult."

Looking ahead, Kottke foresees continued price pressure on a number of commodities. Much of this demand is coming from emerging markets - especially in soybeans - a trend that is closely tied to swine and poultry production. Kottke notes China is having the greatest impact on this demand, but he has also seen significant growth in the Middle East, which he attributes to increased sophistication and industrialization of agriculture.

In spite of such price pressure, Kottke does not see bubbles developing in grain markets.

"You have to be careful about which commodities you're addressing when you talk," he points out. "It's true that we have had extremely high prices in grains, but the agricultural markets really reflect on a global basis a continued increase in real demand. The standard of living for a large number of people is increasing at a significant rate, and that's being manifested in greater consumption."

To be sure, there have been production problems, Kottke says, such as the dramatic setbacks for wheat in the Ukraine. But he quickly adds that such shortfalls happen on a yearly basis, and that worldwide numbers show agricultural production to be rising - just not enough to offset increased demand.

For all the changes Kottke has seen over a long, productive career, much has remained the same. Although futures have largely transferred to an electronic platform, his staff continues to operate as market makers from the trading pits, where most of the option trades are transacted.

Also, he owns and occasionally visits the farm on which he grew up in downstate Illinois. Harking back to his earliest roots, Kottke still enjoys seeing in a harvest.