Originally Posted by Licensed to kill
Yes you got that backwards but you have a good grasp of how the markets work and how they can be used to your advantage. Not enough farmers understand this IMO.
I know that farmers who hold grain to sell should sell futures contracts to hedge the price, but aren't buyers doing the opposite? I'll have to think that through a little bit. Time for a refresher course. Even though we don't sell and buy futures on our farm, knowing how it works helps us make marketing decisions and analyze where the market seems to be moving. EDIT: End users, such as millers buy futures. Producers and intermediaries would sell futures because their ultimate goal is to sell the grain in their hands. At least I think that's the logic.
100 years ago a futures contract was settled with physical delivery of the commodity. These days 90 to 95% of contracts are cash settlements. So it is a casino. I don't see how one can claim "price discovery" when $Millions of paper contracts are traded daily by people in offices with absolutely no intention or ability to take delivery.
Yet we are told this is all OK. Perfectly normal and a true representation of value of a commodity.
Sure. But many players speculating in the market create trading volume, which we as farmers depend on for placing hedges (or grain buyer hedges that back our delivery contracts). Without them, who would buy the futures contracts we offer? And although that leads to more price volatility, it also provides for people willing to buy and sell contracts, which makes the whole thing work. In many respects it weakens the ability of big grain companies to manipulate the market because there are lots of other players who don't actually care about the commodity in question. This is a good thing, in my opinion. Plus it's a zero sum game. If you dislike speculators, if you can cash in on a gain in the market you're taking those speculators' money. Worst case you've given them a bit of money, but the result for us is the same: we've locked in a price that we felt was fair. In short you can pretty much ignore the folks who aren't actually buying grain on the futures market.
Secondly, how else would you propose to determine pricing for a commodity to be delivered in the future? What other mechanism would both help us as producers and those who depend on a steady supply of product (the millers)? There are lots of specialty crops that don't trade on an open market like wheat. And you know what, making marketing decisions is so much harder with those crops. For example, pulses.
A few years ago I heard that Canola trading volume on the ICE was actually quite low, leading some to wonder if it would go away. If we lost futures trading for Canola, probably prices would track soybean futures.