farming’s futures
By David K. Sauder
Commodity Broker
Trade Tech, Lancaster
The real value to farmers of
futures markets is that they are
open and highly competitive
markets where the price-setting
process is visible to all. Every
segment of the marketing chain is
represented, along with
knowledgeable speculators who
can second-guess the big com
mercial operators.
In this day of diffused marketing
patterns and “thin” cash markets,
competitively-determined prices
are hard to come by elsewhere.
Upshot; futures markets have
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taken over much of the reference
pricing role that the stockyards,
auction markets, and cash trading
exchanges used to fill. In that
sense, futures markets are ter
minal markets.
Most fanners need more in
formation about futures trading—
but not necessarily so that they can
do it themselves.
Rather, they need it so they can
take greater advantage of the
information that futures markets
offer. And certainly farmers may
benefit from a clearer un-
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derstanding of how futures
markets permit a wider range of
farm marketing options.
Hedging to protect profits
Futures markets offer the
hedger an opportunity that’s rare
in the economic world: future sale
or purchase of goods at a price that
can be pretty well locked in.
Hedgers take positions in the
futures market that are opposite to
their risks in the cash market.
Since prices in cash and futures
markets for a commodity tend to
move together, any losses in one
market are generally offset by
gains in other—and vice versa.
For example,, say you’re a
Lancaster com farmer who, last
July, was looking at a local cash
price of around $2.25 a bushel.
Suppose you decided to try to lock
in the July price for part of your
crop, figuring that such a price
would guarantee a good profit and
that prices might be much lower
by harvest time.
To do this, you sold a December
futures contract for com at the
July 24 price of $3.08 a bushel at
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Lancaster Farming, Saturday, July 3,1982—D19
Chicago. By early December,
when you actually sold your com to
a local elevator, the cash price had
dropped 35 cents to $2.20.
However, at the same time, you
liquidated your futures position by
buying back the contract at $2.74,
earning 34 cents a bushel—the
difference between the $3.08 per
bushel at which you had contracted
to sell corn and the $2.74 per bushel
it cost to buy back the contract.
Thus, you grossed $2.54 per
bushel ($2.20 cash price + $0.34 on
futures) for the portion of your
crop that you hedged. By hedging,
you came within 1 cent of your
price objective of $2.55. Your gams
in the futures market about offset
the decline in cash prices between
July and December.
Or say you’re a Chester County
feedlot operator who want 200
feeders for your next feeding cycle
in 2 months. If the futures market
offers an attractive price now, you
may be able to lock it in by buying
a futures contract for feeder cattle.
If you choose, you can also fix the
price of your feed ingredients,
buying corn and soybean futures.
Alsdorf receives
dairy scholarship
UNIVERSITY PARK - Melanie
Alsdorf of Spartansburg, one of 15
dairy students, nationwide, has
been named a winner in the Scott
Paper Company “Sani-Prep”
Dairy Science Scholarship
program.
The western Pennsylvania
woman received the $l,OOO honor,
Tuesday, during the annual
meeting of the American Dairy
Science Association.
Scott Paper Co., in cooperation
with the American Dairy Science
Association, developed the $15,000
"Sam-Prep” scholarship program
"as an encouragement to original
and creative thinking in the
solution of problems in the field of
dairy science.”
Alsdorf’s topic, "Where are all
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With hedging, the producer is
still exposed to basis risk—the risk
that local cash prices and futures
prices will not track together for a
time. But a producer can generally
eliminate about 90 percent of the
price uncertainty.
The Commodity Futures
Trading Commission defines
hedging as a futures market
position which is temporary
substitute for a transaction
planned later in the cash market.
The Lancaster com farmer was
planning to sell his com in the cash
market, but sold a portion of his
crop in futures in the meantime.
Later, he bought back the futures
contract when he actually sold his
com on the cash market. Likewise,
the Chester County livestock
feeder is going to buy feeder steers
when the feedlot is empty, but
through futures he can price them
now.
Send your questions about
futures trading to Farming’s
Futures, Lancaster Farming
Newspaper, Box 366, Lititz, PA
17543.
the dairymen the real story,”
suggested solutions to various
economic problems facing the
industry today. Her paper was
judged by a panel of ADS A ex
perts.
According to the ADSA, winners
of the scholarships were deter
mined on the basis of three
catenas. The first counting for
85 percent was the quality and
originality of the thinking in at
tempting to solve a current dairy
science problem. Academic
standing counted for 10 percent
and leadership five percent.
The daughter of Mr. and Mrs.
Marion Alsdorf, Melanie is a dairy
production major at Penn State,
Class of 1983 and the president of
the Dairy Science Club.
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