6 ms·

This is precisely why futures markets exist- to hedge this risk for farmers. They’re definitely not screwed here though I agree for more elastic, longer lag pro

This is precisely why futures markets exist- to hedge this risk for farmers. They’re definitely not screwed here though I agree for more elastic, longer lag products this could be a problem.

pbhjpbhj 8y ago
Can the farmers actually afford to gamble on the markets. I'd imagine it was third parties up the chain that were able to afford to hedge their profiting from the farmers labour.
- sokoloff 8y ago
  If you have a genuine product and want to secure a steady price for it, that's hedging not gambling. If I want $2/kg for my beans, I can sell futures and "lock in" that price. If it falls to $1/kg, I'm still able to sell at $2/kg. (Conversely, if it rises to $4/kg, I still only get $2/kg.) On the buyer/user side, Starbucks/Dunkin could buy futures so they also locked in a known price for the future. Whether the spot (instant market) price is $1 or $4 per kg, they may have locked in buying at $2/kg, essentially the opposite use case as the farmer/producer. (Southwest famously did this for jet fuel during the prior oil runup.) Similarly, you can hedge weather and natural disasters if so inclined.
  - hinkley 8y ago
    But that was my point. I don't actually have the product until the end of the year.
    - sokoloff 8y ago
      If you will have it and just don't have it now, that's exactly what hedging using futures was originally created for. If you're worried about whether or not you'll have it, that's why I mention hedging weather, disaster, or other things that might affect crop yield.
    - sailfast 8y ago
      Right. You buy a future that says "I will provide 30,000 units of soybeans in St. Louis in September, at 300/unit" or whatever. You were planning on growing 325 or something, and you hedged the majority of your crop. Somebody buys your futures contract. Then, demand for soybeans tanks. Price drops. Doesn't matter. Somebody has already paid you for that opportunity and locked in their price. If soybean demand skyrockets, you miss out on the profits since you already sold, but you locked in your expected profits for the year - congrats! If your crops all die, there's insurance for that but you could also be somewhat creative about call options on September soybeans to make sure you could buy back in at a decent price to still deliver your goods. Anyway, these markets exist specifically to help smooth out price insecurities on commodities for goods producers.
      - pbhjpbhj 8y ago
        >on commodities for goods producers. // Can you demonstrate that's true in general for producers of commodities in the third world? I don't doubt it's true for middlemen, or companies relying on producers. If you can, could you also show what proportion of profits are diverted to hedging vs the proportion lost to reduction of risk exposure for a multinational in, let's say, coffee/chocolate or some other comestible.
  - caf 8y ago
    In fact hedging can be regarded as the polar opposite of gambling.
  - pbhjpbhj 8y ago
    Yes, indeed, I hesitated to use that word. However, unless it's a zero cost perfect hedge is a gamble in one way or another. Suppose our hypothetical farmer can buy a put option to underpin the sale price. He probably needs to borrow, or put up a large portion of his liquid capital -- having no working capital, or being exposed to a large debt makes buying the option risky, and if the price rises/doesn't fall heavily then he took on that risk with no physical gain. Repaying the debt, or handling other contingencies without sufficient capital could then sink the farmer. I'll bet those farmers don't have buildings insurance either. It becomes a gamble if one is subsisting. That's not to say anything about power dynamics, a lone farmer is going to get a put option from an international buyer that heavily favours the buyer -- otherwise the buyer is acting unreasonably. It may not be entirely rational but poor people often have no insurance.
    - sokoloff 8y ago
      > Suppose our hypothetical farmer can buy a put option to underpin the sale price. Futures and options are different. Options are the right but not the obligation to buy or sell at a given price and time (and often at any point up until that time). This optionality comes at a high price. Futures are the right AND the obligation to buy or sell at a given price and time. This construct, because of a better balance between buyers and sellers [of the contract], costs much[, much] less per $1M than options. > It becomes a gamble if one is subsisting. Life is a gamble by that measure. I tend to think that things that reduce overall variance to be hedges and things that increase variance to be gambling. Selling futures against a future crop harvest for me is on the reduce variance/hedge side of the line, by a lot. Buying jet fuel futures as an airline? Same.
      - pbhjpbhj 8y ago
        There's a gamble in selling a future too - if your crop fails and you have to buy yourself out of your obligation. The upstream supplier can afford to do so, especially if they can buy on a different continent if a widespread famine/drought happens. Of course for an airline with ready access to capital then the risk is virtually zero in buying futures; it is always going to be a hedge. Cashflow in that situation will be very different though. Capital is king, as they say.
- reaperducer 8y ago
  >Can the farmers actually afford to gamble on the markets. Crop insurance is a thing. Though I don't know how much it helps.
- mr_toad 8y ago
  Hedging is the opposite of gambling. You reduce risk, but potentially also reduce your payout.

This is precisely why futures markets exist- to hedge this risk for farmers. They’re definitely not screwed here though I agree for more elastic, longer lag products this could be a problem.

pbhjpbhj 8y ago

Can the farmers actually afford to gamble on the markets. I'd imagine it was third parties up the chain that were able to afford to hedge their profiting from the farmers labour.

sokoloff 8y ago
If you have a genuine product and want to secure a steady price for it, that's hedging not gambling. If I want $2/kg for my beans, I can sell futures and "lock in" that price. If it falls to $1/kg, I'm still able to sell at $2/kg. (Conversely, if it rises to $4/kg, I still only get $2/kg.) On the buyer/user side, Starbucks/Dunkin could buy futures so they also locked in a known price for the future. Whether the spot (instant market) price is $1 or $4 per kg, they may have locked in buying at $2/kg, essentially the opposite use case as the farmer/producer. (Southwest famously did this for jet fuel during the prior oil runup.) Similarly, you can hedge weather and natural disasters if so inclined.
- hinkley 8y ago
  But that was my point. I don't actually have the product until the end of the year.
  - sokoloff 8y ago
    If you will have it and just don't have it now, that's exactly what hedging using futures was originally created for. If you're worried about whether or not you'll have it, that's why I mention hedging weather, disaster, or other things that might affect crop yield.
  - sailfast 8y ago
    Right. You buy a future that says "I will provide 30,000 units of soybeans in St. Louis in September, at 300/unit" or whatever. You were planning on growing 325 or something, and you hedged the majority of your crop. Somebody buys your futures contract. Then, demand for soybeans tanks. Price drops. Doesn't matter. Somebody has already paid you for that opportunity and locked in their price. If soybean demand skyrockets, you miss out on the profits since you already sold, but you locked in your expected profits for the year - congrats! If your crops all die, there's insurance for that but you could also be somewhat creative about call options on September soybeans to make sure you could buy back in at a decent price to still deliver your goods. Anyway, these markets exist specifically to help smooth out price insecurities on commodities for goods producers.
    - pbhjpbhj 8y ago
      >on commodities for goods producers. // Can you demonstrate that's true in general for producers of commodities in the third world? I don't doubt it's true for middlemen, or companies relying on producers. If you can, could you also show what proportion of profits are diverted to hedging vs the proportion lost to reduction of risk exposure for a multinational in, let's say, coffee/chocolate or some other comestible.
- caf 8y ago
  In fact hedging can be regarded as the polar opposite of gambling.
- pbhjpbhj 8y ago
  Yes, indeed, I hesitated to use that word. However, unless it's a zero cost perfect hedge is a gamble in one way or another. Suppose our hypothetical farmer can buy a put option to underpin the sale price. He probably needs to borrow, or put up a large portion of his liquid capital -- having no working capital, or being exposed to a large debt makes buying the option risky, and if the price rises/doesn't fall heavily then he took on that risk with no physical gain. Repaying the debt, or handling other contingencies without sufficient capital could then sink the farmer. I'll bet those farmers don't have buildings insurance either. It becomes a gamble if one is subsisting. That's not to say anything about power dynamics, a lone farmer is going to get a put option from an international buyer that heavily favours the buyer -- otherwise the buyer is acting unreasonably. It may not be entirely rational but poor people often have no insurance.
  - sokoloff 8y ago
    > Suppose our hypothetical farmer can buy a put option to underpin the sale price. Futures and options are different. Options are the right but not the obligation to buy or sell at a given price and time (and often at any point up until that time). This optionality comes at a high price. Futures are the right AND the obligation to buy or sell at a given price and time. This construct, because of a better balance between buyers and sellers [of the contract], costs much[, much] less per $1M than options. > It becomes a gamble if one is subsisting. Life is a gamble by that measure. I tend to think that things that reduce overall variance to be hedges and things that increase variance to be gambling. Selling futures against a future crop harvest for me is on the reduce variance/hedge side of the line, by a lot. Buying jet fuel futures as an airline? Same.
    - pbhjpbhj 8y ago
      There's a gamble in selling a future too - if your crop fails and you have to buy yourself out of your obligation. The upstream supplier can afford to do so, especially if they can buy on a different continent if a widespread famine/drought happens. Of course for an airline with ready access to capital then the risk is virtually zero in buying futures; it is always going to be a hedge. Cashflow in that situation will be very different though. Capital is king, as they say.
reaperducer 8y ago
>Can the farmers actually afford to gamble on the markets. Crop insurance is a thing. Though I don't know how much it helps.
mr_toad 8y ago
Hedging is the opposite of gambling. You reduce risk, but potentially also reduce your payout.