Have any financial traders gotten a large shipment of a commodity sent to themselves by mistake?

Question

Certain oil futures contracts went negative in April 2020 over the difficulty of storing crude oil. With this came a resurgence of stories of hapless traders receiving the actual commodities that were trading purely as financial instruments.

From Matt Levine's Bloomberg article "There’s Nowhere to Put the Oil" from April 20, 2020:

There are legendary stories on Wall Street about newbie commodities traders who forgot to roll their positions and had to scramble to find somewhere to store 10,000 pork bellies or bushels of wheat or barrels of oil or whatever. These stories are funny because they are rare, perhaps mythical; mostly financial traders just remember to keep their commodities trades in the world of financial abstraction.

As Matt points out, these stories may be myths. A popular example is the 2009 "Special Delivery" from the DailyWTF, where a senior trader receives bargefuls of coal at the pier where his trading company happens to be located. It has the tone of a tall tale with its comical depiction of the arrogant trader yelling from the pier to scruffy workman standing on a barge full of coal, a meeting of two worlds. The company "Æxecor" from the story has no Google hits from before it was posted. It could be a pseudonym to protect the real company's privacy, as it apparently common practice for DailyWTF stories. The story may be embellished from actual events.

I remember seeing mention of a story of a large quantity wheat or grain being stored at a church by a speculator in an age before modern markets, prompting a quote from the incredulous pastor about how God was being mistreated, but I wasn't able to re-find it. I didn't find anything online about a delivery of pork bellies.

Are there credible examples where a trader or firm unexpectedly received a large physical shipment of a commodity that they were trading?

To be clear, the goods must be shipped to the trader's premises, or be stored there by the trader in desperation. This might happen with them trading for commodities directly or holding on to a futures contract that they forget to roll. I don't count where a trader simply incurs unexpectedly high storage costs for commodities stored at a standard location, as likely happened to whoever was left holding the bag on May 2020 West Texas Intermediate oil futures. I'm looking for instances in relatively modern commodities markets rather than historical examples.

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I'd like to see answers that focus on a finance trader getting goods sent to their own premises by mistake, the main source of humor in these stories.

I think my use of "delivery" in the question as originally titled was confusing, since in commodities lingo delivery can mean transfer of legal ownership without the goods actually going anywhere. In general, commodities futures are settled in cash or for goods at a standardized location, such as Cushing, Oklahoma for WTI oil futures. But, are there commodities where getting them shipped to a location of the buyer's choosing can be part of a commodities trade, in a way that a hapless buyer might accidentally specify their address as the destination?

I understand it's hard to prove a negative, but for attempts to debunk this a myth, it would be ideal to demonstrate that such a shipment would be implausible rather than simply unlikely. We already know it's unlikely -- the premise of these stories is that it's a rare and unusual event! The DailyWTF bargefuls-of-coal story in particular gives details that might be falsified, or alternatively matched with actual companies and events on record.

Answer 1

1. There are many exchanges and many different kinds of commodities. Most, but not all commodities require that the physical delivery be made to one of the designated warehouses or depositories. For example, CME document "Precious Metals Delivery Physical Delivery Process - CME Group", page 11, says:

Clearing firms play a central role in the delivery process, because deliveries occur between clearing firms, acting as agents for those who hold accounts with them. Contract deliveries do NOT occur directly between the account holders themselves.

page 8 has a worked out example where the purchaser of the precious metal "requests loads out" and "arranges shipping and satisfies remaining charges with depository".

CME document "What is the Precious Metals Delivery Process?" likewise says:

When futures buyers take delivery of metal warrant, they can choose what to do with it. For example, they can choose to leave it on warrant in the depository, take it off warrant and sell the metal privately or ask for its removal from the depository for use or storage elsewhere, a process known as load out.

The article https://www.thebalance.com/taking-delivery-of-commodities-via-the-futures-market-4118366 by Andrew Hecht gives more details on this procedure:

The purchaser receives a receipt endorsed by the last owner and the buyer then has the right to withdraw the metal from the warehouse; the process is called taking the metal off-warrant which tends to include a fee. The buyer could then arrange for the warehouse to deliver the metal to any location including their home by registered mail or armored carrier. The buyer is responsible for any transportation fees. On the other hand, a purchaser could decide to leave the metal on a warrant and pay a periodic storage fee to the warehouse for holding the metal on the buyer’s behalf.

Clearly, it is practical and common for a trader to have physical gold (or some other PM) sent to his home or office. The process is more complicated for perishable commodities (such as frozen concentrated orange juice) or oil, but eventually the commodity must be taken from the warehouse / depository (perhaps used for something productive, perhaps just moved to another warehouse).

On the other hand, Random Length Lumber Futures is an example of a commodity shipped directly to the buyer, without any warehouses. Page 3 says:

To complete delivery, the seller must deposit with the Clearing House a Delivery Notice, a uniform straight bill of lading... The buyer shall... submit to the Clearing House shipping instructions, to include consignee, point of destination, and routing acceptable to the originating carrier...

Page 6 says:

The shipment or transfer of the cash merchandise should be delivered to a destination normally used by the buyer or one that is common to the cash market.

2. NPR's Planet Money 2013 Episode 471: The Eddie Murphy Rule has a discussion with Bob Lassandrello, the agricultural commodities futures trader, who claims that he unexpectedly received a large physical delivery of some live cattle (scroll to 7:50 in the podcast) because of an error.

(The entire podcast uses the 1983 movie Trading Places to explain how futures trading works - highly recommended.)

From the transcript:

SMITH: ... Remember, that's what Bob Lassandrello traded in, live cattle futures. And he didn't want a cow. He just wanted to make a bet on the future prices of cows. But, once, Bob did screw up.

Did you ever receive an actual cow?

LASSANDRELLO: Oh, boy, did I.

SMITH: Did you really?

LASSANDRELLO: Yeah. Not a cow - 40 of them - more than 40.

SMITH: You made a mistake.

LASSANDRELLO: Yes.

SMITH: You made a mistake, and somebody called you on the phone and just said, we have cattle here for you? What, are they on a truck or something?

LASSANDRELLO: Oh, yeah. Or they're in the pen. They're actually off the truck and in the pen - is what it is. And so when the guys in East St. Louis Stockyards found out that a futures trader took delivery on some cattle, they generally aren't super helpful about - they don't really give you a hand, letting you sell them. They kind of stick you with some extra fees.

Clearly, it is not uncommon for traders to make a mistake and to take physical delivery at a warehouse. In this example, Bob probably did not take his cows off-warrant, but sold them to someone else who did, evenually, send them to a butcher.

3. John Maynard Keynes speculated on what futures and other commodities and pondered taking physical delivery, but it's not clear whether he did.

Keynes: The Return of the Master, the biography of John Maynard Keynes by Robert Skidelsky says (page 73):

[Keynes] never quite renounced the joy of the chase, of gambling on borrowed money. As he wrote in the General Theory, "the game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay this propensity the appropriate toll." Once, in 1936, he even had to take delivery of a month’s supply of wheat from Argentina on a falling market. He planned to store it in the crypt of King’s College Chapel, but found this was too small. Eventually, he worked out a scheme to object to its quality knowing that cleaning would take a month. Fortunately, by then the price had recovered and he was safe.

(This book is in Google books).

The 2010 article "Speculation In Commodities: Keynes’ "Practical Acquaintance" With Futures Markets" By Luca Fantacci, Maria Cristina Marcuzzo, And Eleonora Sanfilippo has more details on his wheat futures speculation (page 411):

Most future contracts did not eventually give rise to actual delivery of the commodity, but to compensation between short and long positions on equal amounts of wheat bought and sold forward at different prices. In the case of compensation, what was paid was only the price difference. Compensations were performed on each maturity and on each market through the clearing system provided by the exchange. If the position of a trader was not closed by an opposite operation within the date of maturity, then settlement was required through the actual purchase or sale of wheat. In fact, actual deliveries normally represented only a very small percentage of futures trading. This makes it all the more surprising to learn that in 1936, Keynes, having purchased forward "about one month’s supply of wheat for the whole country," informed his broker, Ian Macpherson, "that he had measured up King's College Chapel during the weekend and could take half of the wheat" (CWK XII, p. 10).

the citation is

Volume XII of The Collected Writings of John Maynard Keynes (hereafter CWK).

4 The Merry-Go-Around

U.S. senate investigated several large financial institutions and accused them of taking commodities off-warrant in one warehouse and physically moving them to another warehouse. This CNBC article summarizes the accusations:

https://www.cnbc.com/2014/11/19/senate-panel-accuses-goldman-sachs-of-manipulating-metal.html

In a voluminous new report reflecting two years of research, an influential Senate panel accuses Goldman Sachs of manipulating aluminum storage rules in order to line its own pockets, even as manufacturers and customers suffered.

Since 2010, when it acquired the metal storage company Metro International Trade Services, Goldman has engaged in a slew of manipulative “merry-go-round” trades in which aluminum slabs are moved from one warehouse facility to another, says the 396-page report by the Senate Permanent Subcommittee on Investigations...

http://www.nytimes.com/2013/07/21/business/a-shuffle-of-aluminum-but-to-banks-pure-gold.html

The story of how this works begins in 27 industrial warehouses in the Detroit area where a Goldman subsidiary stores customers’ aluminum. Each day, a fleet of trucks shuffles 1,500-pound bars of the metal among the warehouses. Two or three times a day, sometimes more, the drivers make the same circuits. They load in one warehouse. They unload in another. And then they do it again.

5 Conclusions

It appears to be absolutely impossible to have a commodity delivered anywhere but a warehouse / depository if the exchange rules for this commodity have a list of warehouses. Sometimes traders make mistakes, fail to get rid of a contract in time, and end up receiving a warrant (a claim on some amount of the commodity in the warehouse / depository). This is what happened to Bob in example 2.

It is very plausible that some buyer of futures on a commodity that does not use warehouses (such as lumber in example 1 above) specified an inappropriate physical delivery address (home or office) because they had never intended to take physical delivery, but nevertheless received a surprise letter of intent and later physical delivery because someone made an operational error. I can't find any examples in the news articles on the Internet, but I heard this scenario happened at least once to Glencore (a very active participant in commodity futures). (Including the part about ignoring the letter of intent.)

Most commodities in the warehouses / repositories end up being physically removed (taken off-warrant) as in examples 3 and 4. Sometimes even futures traders contemplate indentionally taking physical delivery at a warehouse or another storage facility, such as a college chapel. Without a doubt, sometimes people mess up and misdeliver the commodiy to a wrong address. This isn't strictly part of a futures settlement process, but may have given rise to urban legends about futures traders receiving unexpected physical delivery.

Thanks Xnor!

Answer 2

Probably not in recent times, and almost certainly not perishable goods (pork bellies etc.) There's a pretty long thread on money SE, from which I'll just extract this bit on CME [Chicago Mercantile Exchange] rules:

For some commodities you can't get physical delivery (for instance, Cheese futures won't deliver piles of cheese to your door, for reasons that may be obvious)

6003.A. Final Settlement

There shall be no delivery of cheese in settlement of this contract. All contracts open as of the termination of trading shall be cash settled based upon the USDA monthly weighted average price in the U.S. for cheese. The reported USDA monthly weighted average price for cheese uses both 40 pound cheddar block and 500 pound barrel prices

That seems to be the case for most agri products, e.g.:

Feeder Cattle (GF) futures are cash settled.

Lean Hog (HE) futures are cash settled.

USD Malaysian Crude Palm Oil Calendar Swaps and Malaysian Crude Palm Oil Calendar Futures are cash settled upon expiration.

In contrast however

KC HRW Wheat (KE) futures are physically delivered upon expiration.

The detailed rules for the latter however establish only a small number of delivery points:

Regular elevators or warehouses shall be located in the switching limits of:

1.) Kansas City, Missouri/Kansas, 2.) Hutchinson, Kansas, 3.) Salina/Abilene, Kansas, or 4.) Wichita, Kansas.

[...] the cost of delivery will be debited or credited to a clearing firm’s settlement account. Buyers obligated to accept delivery must take delivery [hours specified].

(But note that it's a little misleading what "take delivery" actually means in practical terms; see details from the USDA at the end of my answer.)

Given the 1980s NYT article from Brian's answer, it may be interesting to investigate when e.g. CME rules were changed to categorically exclude physical delivery as the settlement method for some (perishable) items. Any of the fancier stories of such deliveries (involving pork bellies etc.) would have had to happen before such rules were changed.

That NYT article says that the exchanges were strongly in favor of cash-only settlements back then, but apparently it wasn't a strict rule in the 1980s:

In fact, delivery problems rank second to the collection of debts each year. ''No one has put a dollar cost on these problems, but we all know they are enormous and growing,'' said Leo Melamed, special counsel to the Chicago Mercantile Exchange, its former chairman and a major architect of financial futures. ''This is why the trend in the industry is toward contracts featuring cash settlement rather than the physical delivery of goods. It is the most equitable system, the main reason the Commodity Futures Trading Commission favors it.''

But note that even "physical delivery" can be misleading as to what it usually meant (just warehouse receipts):

Those who stand for delivery can make money when the cash price of the commodity is above the futures price. They do this by having their brokers exchange the futures for the goods in the form of warehouse receipts and then selling the receipts in the cash market.

Others who normally take delivery are those who use futures as ''paper warehouses.'' Rather than finance inventory, commodity users, exporters and manufacturers buy futures with deliveries calculated to match their needs.

But the prospect of having to take delivery usually drives many small traders out of a market weeks before a contract expires, thus often denying them potential profits, Mr. Melamed pointed out, and this breeds many disputes as well.

It's notable however that option of actual physical deliver existed so that "commodity users" (presumably companies trading the actual commodity) could actually enter this futures market. It's unclear how/if the exchanges could distinguish between the various classes of traders.

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Regarding the commodities that still allow/require physical delivery, e.g. wheat futures, the USDA has a (ton of) information on the settlement process (mainly because of a "scandal" in which futures prices didn't converge with the delivery market cash prices):

For many agricultural commodities, such as corn, soybeans, and wheat, terms of futures contracts are satisfied through a process that is closely related to physical delivery but does not require the movement of any grain. As the contract nears expiration, the short side of a futures contract initiates the delivery sequence by choosing to make delivery rather than offset its position and notifies the exchange accordingly. [...] The exchange then informs the oldest outstanding long position holder of the responsibility to take delivery from the short. The futures contract is terminated when the short provides the long with delivery instruments in return for payment. Delivery instruments for KCBT wheat are warehouse receipts, which give the holder title to actual grain in storage at a storage facility. Shipping certificates are used in CBOT markets; these represent for the holder the right, but not the obligation, to demand load-out of the commodity from a particular shipping station. Shipping certificates also give the short more flexibility in the delivery process because they do not represent physical grain in a regular warehouse, which takes up storage space that they might otherwise use. Instead, shipping certificates represent a commitment to provide grain when the certificate is canceled.

Delivery instruments provide the holder with access to grain, are transferrable, and do not require load-out within a specified timeframe, so long as the holder pays a storage fee. Importantly, the maximum fee for holding a delivery instrument is set by the exchange. This fee, which is assessed daily, is paid to the regular-for-delivery warehouse, or “regular firm,” that originated the delivery instrument. In return, the regular firm is responsible for presenting the grain to the holder, once loadout is requested. Regular firms regulate the delivery process: only they are able to create original delivery instruments. Before initiating delivery, other short position holders must acquire either new instruments from regular firms or existing instruments from other parties.

Typically, few deliveries are executed because trading the commodity through the delivery process is more expensive than offsetting the futures position and transacting directly with a trading partner. Grain and soybean futures markets are better suited to facilitate risk management and price discovery than to serve as a vehicle for exchange of physical title. In fact, extensive deliveries are a sign that a contract is out of balance, meaning that the delivery terms favor one side of the market or the other; contract design problems that encourage substantial deliveries cause futures markets to fail (Hieronymus, 1977). In the extreme case, favored traders may attempt to use market power during the delivery period to artificially alter the price of the futures contract and make sizable profits (Pirrong, 1993; Pirrong, 2001). When the contract is in balance and the market works properly, short and long position holders usually prefer to offset their futures positions. In doing so, both sides avoid the costs associated with the delivery process (e.g., placing grain in and out of storage, weights and grading fees, storage fees, interest costs, and the opportunity cost of backing the delivery instruments).

[...]

Under the delivery market design theory, non-convergence is caused by a positive wedge between the price of storage and the cost of holding delivery instruments.

(The USDA paper has many more details on this latter issue, including econometric models, but those are besides the point here.)

But from there, in the modern physical settlement process, there doesn't seem to be any time limit or actual obligation to take possession of actual items, as long the storage fee is paid. I don't know what happens if some firm/trader stops paying that storage fee, litigation or some kind or forfeit, I suspect.

In that regard, the Intercontinental Exchange has these general rules for agri product futures with physical delivery:

The delivery process commences during a defined delivery notice period, with the submission of notices by the holders of short positions. The clearing organization then assigns delivery and receipt obligations to holders of open positions. Each contract has its own notice period, which typically commences prior to the last trading day. To settle an agricultural futures contract, the seller will have to deliver the specified quantity and quality of the agricultural commodity and the buyer will have to take delivery and make payment, in accordance with the contract specifications. It will be your responsibility to make any necessary arrangements to be able to make or take physical delivery under the contract. If you wish to avoid making or taking delivery, you must close out your position prior to the notice period. Contracts remaining open after the contract expires must be settled by delivery. [...]

If you have a position that is not closed by the commencement of the notice period, you may be required to make or take delivery under the contract. In that case, you will be matched with another market participant to complete delivery. You will be required to make all necessary arrangements to make or take delivery, and assume all related costs and expenses, including arrangements for warehouse facilities and required certifications, and paying all storage charges, handling charges and inspection, weighing, grading and certification fees. [...]

Agricultural futures contracts traded on ICE Futures U.S. are centrally cleared by ICE Clear US, Inc. However, ICE Clear US is not responsible for making or accepting delivery under a contract, and is not liable for any failure of a clearing member or other person to make or accept delivery. [...]

Moreover, in the event that a party with whom you are matched for delivery fails to make or accept delivery under the contract, you will have to pursue remedies for such failure against such party in accordance with IFUS rules and applicable law, and you will be exposed to a risk of financial loss from such failure.

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In response to a comment below about the [non-]relevance of CBOT/CME rules, it's true that e.g. by 2003 the commodities futures market for agricultural products was only about 46% done (by volume) on US exchanges, according to Futures Industry Association data. So yeah, if some Wall Street guy bought commodities futures on some non-US exchange, who knows what might have happened in terms of delivery. (According that source, the Dalian Commodity Exchange China was the largest agri product futures market even then [2003]; a quick check shows that the DCE futures contracts, e.g. for rice are with physical delivery but in English at least there are no other details on that besides "the delivery warehouses of polished round-grained rice designated by DCE".)

Interestingly enough, since some comments below the question mentioned Glencore as the trader suspected... there's news that they had operated transaction on the DCE... in 2018 for iron ore. The same story says however that futures investing was usually restricted in China, to Chinese investors. Glencore is an actual mining company so them getting physical delivery of an [ore] transport would probably not be an issue. But the same 2018 story I found says that Glencore operated on the DCE through a Singaporean (financial) firm, Straits Financial, which has offices in other countries, including the US. Indeed, if the latter (financial) firm e.g. was sent an ore shipment (or some other commodity) intended for Glencore that might have been a problem for a financial firm. (The Wikipedia article on Glenconre isn't terribly clear, but Glenconre appears to also trade on the commodities markets directly; it's possible that the DailyWTF story thus involved a trading office of Glencore, mistaken for some mining/storage facility also of Glencore. MarketWatch confirms that Glencore also has a trading division of its own. The DailyWTF has this additional bit that apparently made that confusion possible:

You can’t just call up FedEx and request delivery of thousands upon thousands of tons of raw material to some office complex downtown. Commodities can only be delivered to a fixed number of delivery points, such as warehouses adjacent to train yards or ports. Of course, since Æxecor’s offices were in located on Pier 53, a recently redeveloped warehouse district off the river, it would have seemed like the logical place to accept delivery of a whole bunch of coal, especially to a rules engine. Whoops. [...]

As it turned out, it was more difficult than Brad could have ever imagined to sell real coal. The commodities market really only deals in futures, and everyone who actually needs 28,000 tons of coal has bought it long in advance. And besides, who wants to buy coal from some guy named Brad? Eventually, after paying exorbitant wharfing, shipping, environmental, docking, unloading, loading, and multiple-fee fees, Brad was finally able to unload it for twenty cents on the dollar.

That last bit suggests it was a separate trading firm that "Brad" was at (something like the Singaporean firm that [more recently] did futures transactions on Glencore's behalf on the DCE) rather than at Glencore itself (or the giant corporation might have been able to sort it out internally by sending the shipment elsewhere.)

And although it's a dead link now; archive.org has this 2009 story (mentioned in comments on the DailyWTF one):

I checked in with Minyanville's Ryan Krueger -- my go-to guy on all things commodities -- and asked if he knew of any futures contracts that had ever slipped through the cracks without being settled.

"Ideally, the broker will make sure everything goes according to plan," the Prince of Peanut Oil told me. "But I once knew a guy who was trading for himself. He bought six egg contracts, with each contract worth 18,000 cartons of one dozen eggs. That's 1,296,000 total. The guy somehow made the mistake of taking delivery."

And?

"Well, there were 28 or so delivery points throughout the United States and it was (and still is, generally) the seller's option as to where to deliver the eggs," he told me. "The seller will always pick the weakest of the cash markets for delivery, so my friend got his eggs delivered to him somewhere in Georgia, where prices were way below anywhere else. He had to unload almost 1.3 million eggs through a local wholesaler at a 20% loss."

So if that's true, that (futures') trader took delivery of those eggs, but not quite in the sense that the physical delivery was forced on him at his office/premises. (Even in this [more plausible] eggs story, some details are missing like on which exchange the trade might have happened, or in what year.) This story is also fairly similar to the NPR story (from Dimitri Vulis' answer) with 40 cattle getting delivered to some pen at the East St. Louis Stockyards. (Those particular stockyards were probably closed before the year 2000.)

Answer 3

The more I look into this question, the more reasons I find to think it is unlikely. I cannot find any evidence that any futures contract has ever obligated the buyer to take physical ownership of the product on their own premises.

Here is a summary of how "delivery" on futures contracts actually works.

When delivery takes place, a warrant or bearer receipt that represents a certain quantity and quality of a commodity in a specific location changes hands from the seller to the buyer upon which time full value payment occurs. The buyer has the right to remove the commodity from the warehouse at their option. Often, a purchaser will leave the raw material product at the storage location and pay a periodic storage fee.

In other words, there is no physical "delivery" in the more conventional sense unless the buyer chooses to take that initiative. Already by the early 1980s, less than 5% of futures contracts ended in a physical movement of goods. I haven't found a current number but imagine it is even lower with the rise of hedge funds and so on (speculators with no interest in receiving physical commodities).

Depending on the details of the contract they might have the option to settle in cash (never taking ownership of the physical commodity, just paying the spot price) or to retender (sell the delivery notice to someone who actually wants the physical commodity).