A farmer is NOT a trader. Farmers are PRODUCERS, they are not speculators of price as you contend. Their business is to produce a crop from the land purchased at the prevailing mkt prices at the time, they are thereby forced to plant a crop regardless of what the mkt is offering. Farmers BUY seed, fuel, machinery, fertilizer, pay tax, etc, etc at retail and SELL their crop at wholesale to what price the mkt is offering to take the crop off the farmers hands. The futures mkt was developed as a "risk transfer" mechanism to enable the movement and production of huge crops. Without a means of transferring the risk of price movement how would a grain elevator and Cargill or Conti be able to gather up crops from thousands of small producers? The list goes on, every step of the movement usually involves hedging of the price to protect the gathering, holding, selling and movement to the final consumer of the commodity. To facilitate all of that, the Chicago Board of Thieves (opp's) Trade was created. That in a nutshell is why we as speculators are given a chance to speculate on the FUTURE price of the "risk" others are willing to lay off to the exchanges. When you open an account, you are accepting the risk from other professional business persons in the world of risk transfer. Be advised: We allow even raw know-nothings to open an account to speculate on price movement. We allow maybe even as low as 5% margin relative to cash value to "LURE" you into this exciting world of fast riches where 90% pay the wages of the 10%...........WELCOME PS: Farmers DO NOT GAMBLE on price, they do at times use the futures mkt to LOCK-IN future prices to protect themselves from adverse price movement in their business of producing food for us all. A farmer looks outside and says to self: The weather is not conducive for planting today, the mkt price is in the dumpster, land prices are down, machinery costs are up, seed and fertilizer had to be bought and paid for in advance, but I am a farmer so I best go to the barn and get ready to plant tomorrow because I have no other option but to plant. Farmers use the exchanges to HEDGE, not to speculate, huge difference. My uncle was a farmer in IOWA, I knew a farmer once and asked him about price of corn.......he said, the price of corn is only relative to my costs of production, I seek a profit and I do not speculate in the futures mkt, my father told me "this farm is your living, if you want to keep it, NEVER speculate on price"
Ultimately, the economy pays you in exchange for the risk you take. For example in CL you may open a position with someone who loses on that leg of the position when you win, but wins on the contango trade. There are many ways financial markets are ultimately connected to the "real" economy.
off topic, but if a farmer hedges his production i.e. sells futures on corn or wheat or whatever, but the price of the contract really shoots up, say it goes parabolic, wouldn't the farmer be wiped out from having to keep sending maintenance margin to his broker?
I have been told that it was around seventh grade. How about you? -------------------------------------------------------------------------------- Quote from jack hershey: c. There are 35 unique End Effects. Lower level significant details include: d. There are three type of turns in markets. e. There are four types of trends in markets. -------------------------------------------------------------------------------- 35 unique end effects, isn't that a bit much?? -- innersky
No, the farmer would be LONG product (the crop) and SHORT futures in the amount to cover the expected amount of bushels produced. A farmer is a bonafied hedger and not considered a speculator by the exchange. The crop probably is covered with crop insurance. There are different margin rules, amounts for a hedger.