Ok, so let's say you have three nuns and a farmer/ Don't worry about the nuns too much, they are all working on their candlesticks.
Or forty acres and a nun. Maybe a horse and a mule. If you are lucky. Could be Sally Fields, the flying nun. Or even Gidget, Three chickens and a pot for everyone. I guess that includes the pot.
Well, talkin' about the fields.
But let's say the farmer. Farmer Joe, from out in the boondocks owns enough land to raise one, or two, or three futures contracts worth of cotton, wheat, hay, or cattle.
Farmer Joe, would already know his costs to raise his crops. Farmer Joe, as ignorant as he is, is more than likely is just going to take his crop to the local farm co-op to sell his crop. And sell it at the spot price at harvest? Correct me if I am wrong. I don't know how sophisticated a level the local farm co-op would work at.
Just what trade, farmer Joe, actually owning the land, and being a smart farmer Joe watching out for his own butt and the futures contract for delivery, just what trade, would a smart farmer Joe, already knowing his costs to be a smart farmer Joe for feed, pesticides, plowing, tractor repair, etc...and all the government programs already in place, following the market price for his particular commodity make a trade to lock in a market price for himself. What trade is this?? Not a speculator trade.
And does farmer Joe, actually owning the commodity to be brought to marketplace for delivery, actually have any trading advantage with owning the commodity?
To cut to the chase here, Farmer Joe actually has the contract to sell for delivery. During the course of the growing season, how does farmer Joe, actually lock in a higher market price for himself? Simply sell short at the higher market price?? What is the trade here>
And does Farmer Joe Have any trading advantage actually owning the commodity/ If I have a Gold watch worth ten bucks and I know I can sell it for 14 bucks and make a killing, wouldn't this be similar to Farmer Joe owning the commodity outright?
I just finished up working 5 days in Childress in the Texas Panhandle for a guy that owns 206 acres in Childress on the Texas Panhandle just 40 mile South of Oklahoma. Lot of government programs paid to the farmers not to raise your crop or raise your beef cattle. You actually have to pay the government to get out of the program so that you can raise a crop.
But, just an actual question thrown out there. With what kind of actual trade, perhaps months in advance, how does or would farmer Joe lock in his price?
Last edited by e4williams; April 1st, 2015 at 04:42 PM.
It's called a hedge. Many people do that, everyday. That's actually what the futures markets are made for, and not for speculation
The farmer can short sell the future and lock in a price. Ff the cash prices is lower at the point of delivery, he has won some money; if it is higher, he will not be paid as much as he would if he didn't trade at all.
I think you knew that all already, however