Becoming Familiar Becoming Familiar With the Futures With the Futures

MarketMarket

Unit: SAE/Commodities MarketingUnit: SAE/Commodities Marketing

Job: Becoming Familiar With the Job: Becoming Familiar With the Futures MarketFutures Market

What are cash markets?What are cash markets?

““A cash market refers to A cash market refers to a physical a physical location where a product or location where a product or service is bought or sold for service is bought or sold for cashcash.”.”

Examples of Cash Markets:Examples of Cash Markets:• Grain elevatorsGrain elevators• Clothing storesClothing stores• Wal-MartWal-Mart• Grocery StoresGrocery Stores

What is the futures market?What is the futures market?

The Futures Market is The Futures Market is a centralize a centralize market where buyers and sellers market where buyers and sellers of commodities trade special of commodities trade special contracts called contracts called futuresfutures

Examples of Futures Markets are:Examples of Futures Markets are:• Chicago Board of TradeChicago Board of Trade• Chicago MercantileChicago Mercantile• Kansas City Board of TradeKansas City Board of Trade

““Moisture below normal: supply of Moisture below normal: supply of corn to decreasecorn to decrease.” .”

Limited rainfall out here on the plains could decrease Limited rainfall out here on the plains could decrease the supply of corn, increasing the already high prices. the supply of corn, increasing the already high prices. As a cattle producer, this headline reads disaster for As a cattle producer, this headline reads disaster for you because you’re already paying way more to feed you because you’re already paying way more to feed your cattle than expected, decreasing your profit your cattle than expected, decreasing your profit margin. You’ve looked into alternative feeds, but margin. You’ve looked into alternative feeds, but nothing seems to give you the same feed to gain ratio nothing seems to give you the same feed to gain ratio as corn. Since the farmer’s almanac doesn’t show as corn. Since the farmer’s almanac doesn’t show any moisture coming in the near future, you decide to any moisture coming in the near future, you decide to buy a corn futures contract before the price of corn buy a corn futures contract before the price of corn goes even higher. goes even higher.

Why might a producer turn to the futures market and Why might a producer turn to the futures market and

what are some of the benefits and challenges?what are some of the benefits and challenges?

What are the Functions of the What are the Functions of the Futures Market?Futures Market?

1.1. Provide an efficient and effective Provide an efficient and effective mechanism for the management of mechanism for the management of price riskprice risk..

2.2. Provide an efficient mechanism for Provide an efficient mechanism for price discoveryprice discovery. .

3.3. Provide a Provide a source of information source of information for decision makingfor decision making..

4.4. Provide a means for firms to Provide a means for firms to secure secure additional operating capitaladditional operating capital..

Describe the different futures Describe the different futures market participants.market participants.

TradersTraders• SpeculatorsSpeculators

• Traders who buy or sell futures contracts to Traders who buy or sell futures contracts to make a profitmake a profit

• Has no desire to actually own the physical Has no desire to actually own the physical commoditycommodity

• Assume price risk and add liquidity and Assume price risk and add liquidity and capital to the futures marketscapital to the futures markets

• HedgersHedgers• Use futures market for price protection by Use futures market for price protection by

offsetting price change risk in the cash offsetting price change risk in the cash market by taking an equal, but opposite market by taking an equal, but opposite position in the futures marketposition in the futures market

Who is the third participant?Who is the third participant?

BrokersBrokers• A company or individual that executes A company or individual that executes

futures and options orders on behalf of futures and options orders on behalf of financial and commercial institutions financial and commercial institutions and/or the general public and/or the general public

Any QuestionsAny Questions