> Yea, most people dont get what a "future" is, and why corn and lumber have them (but not onions... thats a lesson too)... The farm has the support of a lot of high finance and hedging exists not just as an instrument but has a purpose.
Not many farmers I know (in an ag community) understand what a future is either, or would even know how to trade them. That's the domain of hedge funds, not farmers. (And, if they tried, they'd probably lose. It's not much different from me trying out day trading.)
The fruit of a farmer's work is not futures trading. It's trying to keep things alive long enough to make a small profit.
From a farmer's point of view, futures can allow for relatively cheap insurance against the agricultural product's price moving against you. You're basically negotiating the price of the product before it's ready to sell, with a standardized product on a global marketplace.
Payment date can be decoupled from delivery date... So it can be a "loan" as well.
As a producer you're betting on yield. If you expected 140 bushels an acre and got 130 your on the hook for the rest. Regardless of price on thee market ... even if its 10x what you were paid. SO your negotiating VOLUME on a product you haven't made yet, and could have a shortfall of.
There is a whole set of quality issues with the product as well... Too wet, to dry, wrong type, misses the mark on grading...
You can sell options on futures... some smaller amount of money today and agree to sell at a price at a later date, maybe... if the actual price is lower than your offer price then you get the money and the crop.
There is more to the futures market than HN learned from the Duke Brothers.
They should, it's basic insurance. You don't have to be a speculator, just understand that you're long the thing you're producing in the future so it makes sense to be short some future contracts to lock in your price in that future.
(Just make sure your futures broker accepts delivery, otherwise there's funny stuff happening)
> Ryssdal: Yes. What about prices? When you take it to market — or when you’re going to take it to market — are you selling futures?
> Hemmes: Well, a lot of people do that. I forward cash grain, or forward contract. Right now, I could sell delivery in March and set my cash price, or set the basis. A lot of people do options to set that bottom. But I’m telling you, Kai, I need some kind of collar because of the whiplash I’ve been getting from these markets — they’re up one day 50, down 40 the next, and everything adds to it.
> Ryssdal: Have you sold your futures yet? Have you sold any of this stuff that just got in the ground?
> Hemmes: I have. I’ve sold about 30%. Our co-op gave me a heck of a bid. But it’s kinda like wait and see because this market just keeps going. Like soybeans are down 18 cents today and then they could go up 50 tomorrow. Who knows?
Having home/car/health insurance protects you against it being destroyed.
Buying fuel futures protects you against the price of gas spiking.
Having crop insurance protects you against your crops being destroyed.
Selling crop futures protect you against the price of your crops falling.
It's all protecting you from events that would seriously hurt your finances, aka hedging/insurance.
> Selling crop futures protect you against the price of your crops falling.
Price contracts are a thing. You can do this in new england with fuel oil for heating. It is fairly common.
But futures pay today for a product at some later date. It's a loan as well.
And as a producer it's not just a hedge on price. What happens if your expect to yield 140 bushels of corn an acre, and only get 130? Your crop came in, so no insurance, how do you make up the missing bushels? You're buying those futures back or delivering the contract even at 10x the price.
That isn't an outcome one expects from a hedge or insurance.
There is a reason that there are specialists in marketing and delivery of products with futures markets that help them plan.
> Price contracts are a thing. You can do this in new england with fuel oil for heating. It is fairly common.
> But futures pay today for a product at some later date. It's a loan as well.
This does not compute. You say forward contracts are common but futures give you money today? Futures are standardised forward contracts, you don't get any money when you open them unless your futures are different than mine?
> And as a producer it's not just a hedge on price. What happens if your expect to yield 140 bushels of corn an acre, and only get 130? Your crop came in, so no insurance, how do you make up the missing bushels? You're buying those futures back or delivering the contract even at 10x the price.
Exactly right hence why I said 'some'? You hedge when you can to lock in e.g. aforementioned 30%.
> There is a reason that there are specialists in marketing and delivery of products with futures markets that help them plan.
Completely agree - but it isn't that complicated with futures. Now options...
Thank you for the detailed explanation, that makes sense. I don't doubt that you want someone with financial expertise to handle futures trades. Since your example shows you're trading one risk for another.
I guess a better way to put it is: In the right package, selling futures can be a part of an effective insurance strategy for farmers.
Yeah I mean if hail destroys your corn it's a different kind of insurance you should buy, I agree I guess? I mean there's always a risk of getting LME-nickeled if I may, but just hoping that corn has a reasonable price next year is also a risky bet?
> Not many farmers I know (in an ag community) understand what a future is either
I can see that, but they do know about how pricing might be fixed. Obviously subsidies make a huge difference, so some crops might have a fixed price (ie things that are used to grow biofuels) vs stuff that has a free market vs single large buyer.
Not many farmers I know (in an ag community) understand what a future is either, or would even know how to trade them. That's the domain of hedge funds, not farmers. (And, if they tried, they'd probably lose. It's not much different from me trying out day trading.)
The fruit of a farmer's work is not futures trading. It's trying to keep things alive long enough to make a small profit.