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In theory... In practice, if you think harvests will fail, futures contracts make the whole warehousing thing moot. Arbitrage and clever tradable (or even non

In theory... In practice, if you think harvests will fail, futures contracts make the whole warehousing thing moot. Arbitrage and clever tradable (or even non tradable) contracts (eg contract for difference) give you an opportunity to speculate on the price of grain without you (or anyone) actually holding any wheat. In practice, you just bet someone else that the price will go up, and they pay you the difference if you're right. No wheat has to be stored. There is very little relationship between derivative markets and the quantity of commodities siloed. If you want an emergency "buffer stock," you need to buy and hold actual commodities.

mrfredward 7y ago
If enough people bet on wheat prices to rise, futures contracts get expensive compared to the current price of wheat. This opens the opportunity for someone to rent a warehouse, fill it with wheat, and then take the opposite side of the futures contract (i.e. lock in a high future selling price for your wheat), yielding a guaranteed profit. So if futures prices ever show a price increase greater than the cost of storage, people will start filling warehouses with wheat everywhere. It's just that normally commodities don't increase in price at a rate that exceeds the cost of storage.
- dalbasal 7y ago
  The warehouse is a theoretical construct, in practice. Whatever the market does and whatever investors want their position to be (long, short..), they can take that position without any physical wheat actually entering or leaving a silo.
  - dragontamer 7y ago
    But the arbitrage is settled physically. When oil-storage was filling up, oil-futures drop in response (because the market knows that physical space was running out). That's the thing about the world: people exist in it, and can change the world. Increasing the number of warehouses (to make more money) is a good strategy, and the futures contracts provide a means for allocating these investments more efficiently.
bryanlarsen 7y ago
The futures market is what farmers use to decide what to plant and when to deliver their harvest. Farmers have granaries to expedite harvest, the futures market allows them to get cash by promising to deliver in the future, allowing them to store the grain on the farm.

mrfredward 7y ago

If enough people bet on wheat prices to rise, futures contracts get expensive compared to the current price of wheat. This opens the opportunity for someone to rent a warehouse, fill it with wheat, and then take the opposite side of the futures contract (i.e. lock in a high future selling price for your wheat), yielding a guaranteed profit. So if futures prices ever show a price increase greater than the cost of storage, people will start filling warehouses with wheat everywhere. It's just that normally commodities don't increase in price at a rate that exceeds the cost of storage.

dalbasal 7y ago
The warehouse is a theoretical construct, in practice. Whatever the market does and whatever investors want their position to be (long, short..), they can take that position without any physical wheat actually entering or leaving a silo.
- dragontamer 7y ago
  But the arbitrage is settled physically. When oil-storage was filling up, oil-futures drop in response (because the market knows that physical space was running out). That's the thing about the world: people exist in it, and can change the world. Increasing the number of warehouses (to make more money) is a good strategy, and the futures contracts provide a means for allocating these investments more efficiently.

bryanlarsen 7y ago

The futures market is what farmers use to decide what to plant and when to deliver their harvest. Farmers have granaries to expedite harvest, the futures market allows them to get cash by promising to deliver in the future, allowing them to store the grain on the farm.