![]() ![]() It's similar to a balancing scale - when one goes up, the other goes down. Thus, any profits (losses) made in the futures market are to some extent offset by opposite losses (profits) in the cash market. Then, when the product is actually ready for delivery in the cash market (when they are ready to take the grain to the local elevator, the feeder cattle to auction or their specific cash marketing method), they buy the contracts in the futures market to offset or nullify the previous sale and deliver the product to the local market. Another way to keep this straight is to think of it as pre-selling in the futures market. They sell because this is the opposite of their buying position in the cash market. For instance, when hedgers use the futures market to sell, they sell commodity futures contracts to establish a price. Hedgers using the futures market take an offsetting position from the one they have in the cash market. Hedgers want to protect a price that will make them a profit. Speculators are in the futures market to capitalize on price changes, while hedgers are in the futures market to mitigate the risk associated with price changes. Hedging is exactly the opposite of speculating in the market. The hedger establishes a price for a commodity that is either currently owned or committed for production and that will be delivered at some time in the future (e.g., grains, oilseeds or livestock), or that will be purchased in the future (e.g., feed ingredients bought by livestock producers, or crops by elevators, gins, etc.). The other trader in the market is the hedger. ![]() Sounds easy, doesn't it? Well, before you jump in, be assured that the majority of futures market speculators (in fact, almost 90 percent) lose money at some point. So the key to speculating is buying low and selling high or selling high and buying low. However, they do know (or think they know) that the price of beans or cattle is too low (or high) and hope that by buying (or selling) futures contracts today they can later liquidate the contracts at a profit. They may not even know what a soybean looks like, or the difference between a Holstein and a Hereford. Speculators trade to make a profit from price level changes. They have no intention of either delivering or accepting delivery of the product traded. They establish a price for a commodity that they neither currently own nor have committed to produce. Speculators enter the futures market with the objective to make a profit from changes in futures prices. Two groups are interested in futures trading - speculators and hedgers. This publication explains how livestock producers can use futures markets to manage price risk. One of these price risk management opportunities is available through futures markets contracts. ![]() Livestock producers who are selling products or purchasing inputs can do one of two things when making pricing decisions: accept the market price when they are ready to deliver products or purchase inputs, or reduce input and product price risks by using price risk management tools. ![]() In today's farming environment of extreme price volatility and large debt commitments, most livestock producers need the security of one or more of the advantages offered by price risk management. Griffith, Assistant Professor and Extension Marketing Economist, University of TennesseeĪnd John McKissick, Professor Emeritus of Livestock Economics and Marketing, University of Georgia Introduction Curt Lacy, Associate Professor and Extension Economist, University of GeorgiaĪndrew P. ![]()
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