B—Lancaster Farming, Saturday. November 27, 1971
I
A Look
What is the futures market?
The futures market is the
organized and regulated buying
and selling of contracts for farm
commodities to be delivered and
paid for on some future date.
The uniqueness of the activity
is that most traders don’t ac
tually want the commodity so
they sell the contract before
delivery, sometimes at a profit,
other times not.
What farm commodities are
most actively traded?
Wheat, corn, oats, soybeans,
cotton, wool, shell eggs, potatoes,
soybean oil, soybean meal, live
beef cattle, live hogs, frozen pork
bellies (bacon), and frozen
concentrated orange juice. Corn
led the trading volume in 1970-71
with over 2.7 million tran
sactions.
Ass this trading was under
Federal supervision.
Where are the major markets?
The two largest are in Chicago,
with others in Kansas City,
Minneapolis, New York, and one
just underway in Los Angeles.
These markets handled over
$ll5 billion worth of trading last
year compared with $92 billion in
1969-70 and $B3 billion 5 years
earlier.
How does futures trading
work?
It’s based on a difference of
opinion Here’s an oversimplified
explanation.
Those buying futures contracts
usually expect prices to increase
for the commodity as the delivery
date nears Sellers, on the other
hand, usually feel prices will
glide lower near delivery time.
Let’s look at an example for
wheat A futures contract for a
bushel of wheat to be delivered in
March of 1972 sold for $1.54 on
September 8, 1971, in Chicago.
The price for that contract had
varied in previous trading from
about $1 75 to $1.46
That $1.54 contract might start
rising toward $1.75 again before
March and be sold, perhaps to
someone who thinks it would go
even higher On the other hand, if
the price begins to slip and the
contract owner doesn’t want the
wheat, he could sell before March
1
What is the value of futures
trading to farmers?
Futures trading brings prices
into the open; it increases the
range of information and
judgments brought to bear on the
price.
Second, futures make it easier
for farmers and other
businessmen to choose a
preferred course of action
For example, a grain grower
can sell his crop on the futures
market and earn a storage fee for
holding the grain Then, as
delivery time nears he can buy
his contract back and sell the
grain for cash
Exporters can accept overseas
orders for grain they do not have
on inventory because futures give
them a temporary ownership
position until they find the grain.
Third, futures trading facilities
financing for farmers and others
Grain inventories that are
properly stored and hedged in
futures can serve as collateral for
up to 90 per cent of the value of a
low-interest loan These loans
free up the operator’s capital for
such things as more modern
machinery
How do futures contracts help
stabilize returns for farm
commodities?
It is important to realize that
those who use the futures market
make it possible for processors,
distributors, and farmers to
reduce some of their price risks.
If a wheat miller, for example,
takes orders from bakers for
flour to be shipped in six months,
at the Futures Market
Editor’s note; Futures markets have long been understood
as an arena for speculators, those who don’t need or want to
own commodities such as eggs, various vegetables, live
animals and others, but who are willing to risk their money
and judgment on the future prices of these products.
But as farming becomes more complex and requires larger
inputs of captial, the futures markets are also becoming
recognized as a proper concern of farmers.
While speculators use the markets to maximize risks and
potential profits, farmers often use them to minimize risks and
to assure that good prices which are available now will still be
available when the crop or animals are ready for market.
For instance, farmers who early this year had the wisdom to
anticipate the good corn harvest which caused corn prices to
drop sharply could have “locked in” the high prices with
futures contracts
Futures markets are highly complex. If used unwisely, they
can be very costly.
But the indications are growing that many successful far
mers and agribusinessmen consider futures markets to have a
place in a well-run enterprise.
In the accompanying article, Dr. Allen Paul, head of the
USDA’s Competition and Pricing Branch, Marketing
Economics Division, Economic Research Service, answers
some basic questions about futures.
he can buy wheat futures now and
thereby fix his wheat cost by
taking delivery at the contracted
price.
What price best reflects the
prospective supply and demand
at a given time—cash or futures?
There usually is little dif
ference, except in the case of
nonstorables like eggs, potatoes,
and livestock. In these cases,
futures traders buy a contract
due 8 to 12 months in the future.
Cash prices for products can
reflect supply and demand
prospects for only about a month
or two. Thus, prices for distant
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delivery extend the evaluation of
the market situation.
What about storables?
Well, for storables, such as
grain, cash prices for immediate
delivery reflect distant prospects
just as much as futures prices do.
To illustrate, in mid-April, No.
2 yellow corn at Chicago was
.54 and December futures were
>l.47—both high prices for recent
years—reflecting fears of ex
tensive blight damage to the 1971
crop.
But by mid-August such fears
had subsided and both price
barometers had declined $0.24.
Thus, cash and futures were
similarly affected by the marked
change in thinking.
What is your viewpoint of the
future of futures?
The future of futures looks
healthy. The major source of
growth in futures trading since
World War II has been the ex
pansion and increased
specialization of the feed
livestock economy.
Four times more corn and 12
times more soybeans are being
sold from farms than in 1939-41
70-71 Futures Volume Is Up
During fiscal 1970-71, a record 11.8 million futures contracts
were made. Last year’s record represented a sharp increase
of over 14 per cent compared with the 10.3 billion total tran
sactions traded during 1969-70. Here’s a rundown of trading
volume among the most active regulated commodities;
Commodity
Corn
Soybeans
Frozen pork bellies
Soybean oil
Wheat
Soybean meal
Live beef cattle
Shell eggs
Potatoes
Live hogs
Cotton
Frozen concentrated orange juice
Oats
and the increased volume of corn
and soybean futures trading
reflects this expansion.
Recent introduction of futures
trading in live cattle and hogs
also is a manifestation of growth
and specialization of the feed
livestock economy.
On the other hand, the old
standbys of futures trading
cotton and wheat—have not
shown as much vigor for related
reasons. In the past two decades,
low prices for grain often meant
that prices were at or near
Government support levels,
whereas high prices meant the
opposite. Yet in recent years with
the changes in farm programs,
future volume has been coming
back.
Thousands of
transactions
2,748
2,686
1,526
1,464
847
634
€O6
524
238
191
166
117
77