Financial Overhaul Hits Farmers

I thought the same thing.

This is about maximizing profits more rather than debt. Getting insurance based upon the potential high value of a potential crop.

The crazy thing about derivatives is that the folks selling you the derivative might turn around and get insurance on it from another company. THeir insurance will be based upon the risk they have in selling you the derivatives.

So you have layers and layers of people talking risks and hedging thier bets and if someone is dealing crooked then the whole thing falls apart. That is what happened with the bad mortgages.

deb
in wi.

Insurance is gambling.

Futures contracts are simply a way of locking in a price for a commodity in advance. Many of us in the Midwest who use propane for heat, will "pre-buy" it at a certain price, in advance. The price of propane may drop and we could have gotten it cheaper, however the price of propane may double and we will get it at the "pre-pay" price. This works for the distributor who has can cover part of his cost for buying a huge amount of product, that he can only sell over time, and it also helps the purchaser budget his costs. Is this gambling?... sure....but it is not in the same vein as the "slots". (It also could be considered gambling to wait and buy at the time you need it. One may save a ton, or one might have to pay a lot more... or in some cases it may be all sold and none would be available)

On the other hand, people can also stick their neck out on a long-shot in futures and lose their butt, and the rest of the farm with it. Every choice (except for God) is a gamble, but there is a vast difference between life insurance, or car insurance, and $50 on the ponies.

Choose wisely.

I don't think insurance is gambling though. Technically not getting insurance would be gambling. I suppose the insurance company would be gambling because they are hoping you pay for years and never suffer a loss. But realistically almost all of us will have a car accident or damage to our home or whatever. And we are all guaranteed to die. And we are required by law to have at least the auto insurance.

I wouldn't have a problem if a corn farmer wants to lock in a price for his corn with someone and how many bushels they want to buy, nothing wrong with a contract like that. It's all the other buying and selling and peripheral activities that bother me.

This bill is not about regulation, but about power grabs... FOO (friends of Obama) are getting windfalls... mandatory seats on boards for FOO, mandatory hiring practics for FOO, mandatory this, mandatory that...

A better name for the bill should be the Permanent Bail Out Protection for Goldman Sachs and other FOO.

Guess farmers and other people that actually produce something in this world should choose the 'right' side and be a FOO.

Hopefully, prices will rise, unemployment will go up, and other evil things 'seemingly unintended' will occur... so that everyone will realize that govt. is not always the answer... and putting foxes in charge of the hen house is never a good idea'r.

__________________
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Very little in the way of commodities physicaly change hands in the use of contracts. Then there are hedges, puts, and calls.

That is where the real money is made. Every transaction makes someone some money. The more volatile the market, the more money is made.

I guess that it is what I am not understanding. I read the article and I read the explanations here and I still don't understand how it works. It says:

I am lost......

I wish we had the same kind of law protecting my business. The government mandating that you paint your house every 3 years. Talk about high cotton.

Think of it as insurance. Insure his cost of production and a profit, then turning around and purchasing another insurance to cover an unexpected drop in price. The two cancel each other out, except for the fees he pays to the broker.

But nobody actually ever buys the corn right? At least nobody in that whole scheme? So it's all just people making bets on the price in reality, is that right?

I guess it would make sense to me if either A. he was taking out an insurance policy and he gets paid the difference if corn sells low and he doesn't get anything if it comes in ok or higher (and didn't y'all say that is how one of the government subsidies actually works?) or if B. he was signing a contract with someone who is actually buying his corn for a set amount.

There are hundreds of traders in the trading pits who have every intention of taking delivery of the underlying commodity. You can bet Folgers has its' brokers in the coffee trading pits and Jimmy Dean Sausage has one in the hog pit. People are not just standing there flipping a coin to make a bet, they have done research ( which is costly ) to best determine how much of a crop will come to market. Using grains as an example, factors such as how much was planted, weather conditions during the growing season, disease, political news such as tariffs, etc help to determine the supply, which will in turn set the price. As far as traders who are known as speculators, those who have no intention of taking delivery of the product. They are key to the process. They help in price discovery. Prices go up and down because conditions are always changing which can influence supply. Car insurance helps you manage your risk or exposure to an event. That is what the farmer is doing, managing his risk. The article was vague, I have no idea how the new legislation may affect a farmer.

What the farmer is doing is locking in a price that he can live with. Required by most financial institutions now, so they know they have a reasonable expectation of the loan being paid. One ins. policy is for what he wants for his crop. The other is ins. for if the market goes the other way. When delivery time arrives, those 2 cancel each other out. The farmer is out the basis (premium) that it cost him to buy those policies.

As to the subsidies, think of them as a carrot on a stick being dangled in front of the ag producer.

Futures are definitely used to buy physical goods in bulk. I.E. If I want more than a few ounces of gold, I would buy a futures contract on the COMEX and then request delivery. Some thing for ag products in Chicago.

This has been going on since the beginning here in the US.The expense of growing corn here in iowa this year is $350 to $400 per acre.This is the total cost.That equals $350,000 or more for a thousand acres.Who has that amount of money on hand?A big farmer friend of mine told me years ago that if he wasn't $1,000,000 in debt that he wasn't operating to his potential and he is a success.

I am afraid I find that insane.....

"The information contained, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. The opinions and recommendations contained are based on our judgment and do not guarantee that profits will be achieved or that losses will not be incurred. Recommendations should not be construed as an offer to buy or sell commodities. There is substantial risk of loss in trading futures and options on futures" From Agriculture Online, afticle: http://www.agriculture.com/ag/story....9227611680.xml

Maybe if I were a very large farmer with very large acreage of commidity crops, I would get into the game, too. Maybe they even study that stuff in ag college, but............... it seems like day trading to me, or like the old schoolyard game of playing marbles for "keeps" (I would probably make a very good Norwegian bachelor farmer, huh?)

I guess the old days where you waited in line in July at the elevator with your wagon load of wheat is long gone, eh?

As far as the new bill and its passage, no comment. But I also remember the days when the banks had to keep enough percentage of cash in the vault to cover the loaned out amounts, and the bankers were very, very, careful of who got loans..... Our banker was not very reckless

geo

For most of the commodities traded on futures exchanges delivery on the contracts is the exception rather than the rule. All of the contracts specify delivery of the underlying commodity at a (single) specific location when the contract expires.

As contracts reach maturity the pricing in the futures markets generally (there are exceptions such as a short squeeze) converge with cash prices. Companies don't want to pay for shipping the commodity twice (once to the exchange point and then again to the purchasers location).

Mike