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Responding to traderguy@xxxxxxx's comments...
I agree on your assessment of farmers and their use of futures. A
farmer SELLS a futures contract to hedge his crop, just as he will
sell the crop at a later time. (However, many farmers DO buy futures
with the expectation that prices will go up, thus doubling their
exposure to price drops!)
The *consumer* in this equation is the end user of the crop -- the
Pillsburys, General Mills, and Quaker Oats of the world. They will
BUY the futures to hedge their costs.
> >Opposite will apply to the consumers
> >(i.e. grain elevators). They will want to protect themselves against rise in
> >prices, so they will buy the real commodity, and sell the future.
> And the 'grain elevators' will do just the opposite of the farmer....
> as explained above!
>
> I'm not too sure that the example of a 'grain elevator' is necessarily
> "opposite" that of a farmer?? I would have considered them as part of
> the production side vs. the consumption side?? I'm not too sure about
> there position??
The elevators are just middlemen -- they are neither production nor
consumption, just consolidation, transport, and storage.
For the consolidation/transport end of things, I wouldn't think they
would have any interest in hedging. I don't know exactly how they
handle their finances but I suspect they "flip" the crop to a
consumer ASAP.
For storage, again I'm not entirely sure (even though my father
farmed corn and soybeans in Iowa all his life) but I suspect the
elevator is storing the crop **for the farmer**. I.e. the farmer
thinks he can do better by selling later, so he stores it for now.
The elevator charges rent for the storage.
Probably the farmer could accomplish a similar goal by selling now
and buying a futures contract, but I think that's probably fairly
uncommon. Small farmers, at least, don't tend to think of being
"long corn" when they're doing their spring planting, nor do they
think of it as "closing out their long position" when they sell to
the elevator. In my experience, small farmers use futures very
rarely, and then usually for speculation rather than hedging.
Gary
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