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Farmers use futures contracts to protect against price risks [0]. As do energy suppliers [1]. [0] https://www.ers.usda.gov/webdocs/publications/99518/eib-219.p

Farmers use futures contracts to protect against price risks [0]. As do energy suppliers [1]. [0] https://www.ers.usda.gov/webdocs/publications/99518/eib-219.pdf https://www.ers.usda.gov/webdocs/publications/99518/eib-219.... [1] https://emp.lbl.gov/publications/primer-electricity-futures-and-other https://emp.lbl.gov/publications/primer-electricity-futures-...

panarchy 3y ago
Why is it that every time someone mentions futures trading someone comes along to drop the farmer's crops example, do y'all really have no other examples? What percentage of futures trading is on farmers crops? What about the crops they destroy because they would be less profitable? Does the protection against monetary risk outweigh starving people to death? How well will it work if we create unsustainable land that the farmers can no longer grow crops on?
- rawgabbit 3y ago
  The website gives the gold mine example. Farmers and gold miners often have to weigh taking on a loan to get them through next season. They want a fixed rate of return to determine if the loan is worthwhile.
- dmbche 3y ago
  Not sure why this person is getting downvoted, these seems like fair questions. Edit: Now get why it is downvoted, but it's fair to note that farmers represent a small (10% from what I gather here) portion of futures, so I don't know how reprensentative they are.
  - pwatsonwailes 3y ago
    They don't have anything to do with hedging. Good questions, just off-topic, which isn't something HN tends to like.
- koolba 3y ago
  It’s not just farmers. It’s useful for anything that involves future delivery of a good that could have a variable price or production. A mining company would sell gold futures under the expectation that they will mine a known quantity of gold. They trade the risk of price fluctuations to match against their known liabilities (e.g. labor or depreciation of equipment costs). Now replace “gold” with lithium (for electric car batteries) and you can create the greenwashed story that you want to hear.
- pwatsonwailes 3y ago
  Because it's an example you can use to explain a forward contract, which is easily understandable as a form of hedging risk. Vast amounts of the value of crops are hedged, either through forwards, futures or derivatives. Crops aren't destroyed because of hedges (in the financial sense). Indeed, the whole point is to ensure you don't need to, because you've hedged the value of your crop. I get where you're coming from, and there's a lot which is not great in farming, but hedging values isn't one of those areas.
- tedunangst 3y ago
  Ask for an example. Get an example. "That's not the example I wanted." Every time.
- MR4D 3y ago
  Because farmers have been using futures contracts (traded on an exchange) since 1859. And technically, futures are a more standardized tool than forwards are, hence the talk about futures all the time. [1] For reference, forwards have been used forever, and used for all sorts of commerce. [2] We take for granted that you can pull out an iPhone and buy your favorite stock in seconds, but for most of history, nobody could even imagine that. That the modern world even exists is because of forwards and futures. The ancient world was able to grow and expand because of forwards. [0] - https://www.cftc.gov/About/HistoryoftheCFTC/history_precftc.html https://www.cftc.gov/About/HistoryoftheCFTC/history_precftc.... [1] - https://www.investopedia.com/ask/answers/06/forwardsandfutures.asp https://www.investopedia.com/ask/answers/06/forwardsandfutur... [2] - https://www.encyclopedia.com/social-sciences/applied-and-social-sciences-magazines/forward-and-futures-markets https://www.encyclopedia.com/social-sciences/applied-and-soc...
  - Quarrel 3y ago
    Or since the 18th Century in Japan (and I'm sure other places before 1859). https://en.wikipedia.org/wiki/D%C5%8Djima_Rice_Exchange https://en.wikipedia.org/wiki/D%C5%8Djima_Rice_Exchange
- marcosdumay 3y ago
  The one goal of future contracts is for producers and consumers to be able to make deals before that production and consumption happens. Those are the primary dealers there, and I don't really remember where I got statistics, but AFAIK, they are about 10% of the volume. On top of those primary deals, a lot of people pile up making bets on secondary deals. Those are the people going for "hey, a lot more farms are growing rice this year, I bet its price will fall". They are very welcome because they not only stabilize the prices on those markets, but they also provide short-term money to make the deals flow more homogeneously. Without them, making deals on those markets would be a profession by itself (as it was). Now, there exist people making bets on the results of the bets of the secondary market. That is a different market. At some point it's clear that this becomes toxic, but nobody seems to agree on what point exactly. > What about the crops they destroy because they would be less profitable? You mean farmers getting bankrupt? You seem to be misunderstand, because the main reason farmers love the futures market is because it lowers their risks. > How well will it work if we create unsustainable land that the farmers can no longer grow crops on? Well, surely if you go and kill everybody, there will be nobody losing money on those markets.
  - droffel 3y ago
    > What about the crops they destroy because they would be less profitable? To clarify this point specifically, food self sufficiency is considered a national security issue. Consider the situation where a hostile country floods your market with cheap food products (below cost) until your country's farms go bankrupt due to an inability to compete. Once you stop producing food of your own, you give significant power to whoever controls your food supply. This is a large part of why agricultural subsidies exist. And yes, sometimes it means paying farmers to let crops rot on the vine in order to not cause market gluts. That is an entirely different situation from futures and hedging, which in any sane market match supply and demand (with the result of minimizing waste).
    - nostrademons 3y ago
      "floods your market with cheap food products (below cost)" The hostile country will eventually go bankrupt because they are producing products below cost.
- NoboruWataya 3y ago
  I don't have a percentage for you but agriculture-related futures make up a non-negligible amount of overall trading. It's not just some artificial example. Agricultural futures were also the first futures, and much of today's trading infrastructure was built around agricultural futures. So that's probably part of why it is such a common example. They are far from the only example. Airlines use futures to hedge against fluctuations in fuel prices. Manufacturers use futures to hedge against fluctuations in the price of input materials. International businesses use FX swaps to hedge against currency fluctuations. Borrowers use interest rate swaps to hedge against interest rate rises. Investment funds (including pension funds and sovereign wealth funds) use options to hedge against drastic movements in asset prices. I don't really understand your other questions. The use of derivatives in agriculture does not, on balance, result in fewer crops being produced. On the contrary, by allowing farmers to protect themselves against various risk, derivatives markets allow farmers to safely invest more money in production, and reduces the risk of farmers going bankrupt (bankrupt farmers don't produce many crops). Food would almost certainly be more scarce and more expensive if farmers did not have access to the financial markets.
- pdntspa 3y ago
  Well, pretty much everybody buying commodities at an institutional level are using futures contracts to smooth over price risk. Oil, gas, lithium, corn....
- gabereiser 3y ago
  >Why is it that every time someone mentions futures trading someone comes along to drop the farmer's crops example, do y'all really have no other examples? Because it was created by them, for that very purpose? Futures Contracts. Chicago Mercantile Exchange. Up until 1971 future contracts were ONLY for agricultural goods.
  - Quarrel 3y ago
    Metal futures have been traded on the London Metal Exchange since 1877, and before that at other venues on Threadneedle St. The Dutch (and after the idea had crossed the Channel, the English) were trading debt from the invention of exchanges. The CME might have started with FX futures in 1971, but they're hardly the first non-agricultural use.
    - gabereiser 3y ago
      You’re right but in America we use the agricultural example as it was a big shift in our market thinking. I didn’t know about metal futures but I did know about Dutch and how they created futures and securities. I believe the Dutch East India Co to be ahead of its time and because of world politics (and war) it didn’t survive and was nationalized. A lot of papers about our CME here in the states talks about it. I’m not an expert but I do know we use the agri example because it’s one most would be familiar with since it was a somewhat recent addition.
  - astrange 3y ago
    Although none of them are for onions, because we were so annoyed at two guys cornering the market we banned that and then forgot to ever undo it. https://en.wikipedia.org/wiki/Onion_Futures_Act https://en.wikipedia.org/wiki/Onion_Futures_Act
- OJFord 3y ago
  Because that's the origin story. Other examples are _all_ commodities markets like mining, logging, etc. Of course public company share futures are inherently abstract, but they serve similar purposes, just not to a particularly similar party, depending on your perspective (of ownership, operation).
- opportune 3y ago
  Because that’s what futures are for? Consumers and producers of commodities want to lock in prices to lower the risk of price fluctuations in the future. >what about the crops they destroy This has nothing to do with the discussion
- cscurmudgeon 3y ago
  > Why is it that every time someone mentions futures trading They didn't just mentioned, they had an outsider negative take on it. The best way is to respond with simple examples. > What about the crops they destroy because they would be less profitable? Does the protection against monetary risk outweigh starving people to death? How well will it work if we create unsustainable land that the farmers can no longer grow crops on? How does futures trading cause these negatives? If anything, trading reduces these risks. Countries with markets have large bounties as opposed to those that don't. It is not a zero sum game.
dataflow 3y ago
I get why farmers do it but what's the societal benefit of letting a rando like me buy and sell (i.e. make bets on) such contracts? Do farmers really prefer that random people do this?
- jacobr1 3y ago
  They prefer a liquid market
- choeger 3y ago
  It creates the market and should thus create the best possible price. Think of any speculation as a voting system with proof of stake. Problems always appear when market participants try to affect reality to increase their odds, like shorting a position and then releasing some ugly news.
- HWR_14 3y ago
  Theoretically, the societal benefit of lettings randos buy and sell contracts is that there is (a) better price discovery and (b) better liquidity. There are probably theoretical counterarguments to both of those points, but it's hard to see alternative systems that provide either or both those features. At a basic level, obviously thee needs to be someone assuming the price risk from the farmers, and those people will obviously need to be compensated.
  - dataflow 3y ago
    I buy that there's some benefit, but I don't buy that it's significant. And I don't see any reason why I should believe this provides a net benefit to society. Sure it saves the original parties some money, but then a bunch of unrelated parties come in and siphoning money from the existing parties. Why should I believe this is net-benefiting society?
    - lbotos 3y ago
      Your viewpoint here is kinda weird? The more something trades, the more likely we will have the right price. When things don't trade as much, we don't actually know what that thing is worth. This concept is a benefit to society as many things are interconnected and correlated, so the more accurate we can quickly find the current price (and expected future price) the more we can evaluate value. (Also, they aren't "siphoning money" really it's "value" because the contract isn't actually money)
gmd63 3y ago
There is a societal benefit that comes with individuals internalizing their own costs of risk. Treating society like it's in an economic womb while Mother Finance shields it from the world of worries rewards ignorance and in my opinion accelerates us toward the world depicted in Idiocracy. It is nice as a purchaser of such securities that you can build things more quickly than usual and transfer worry to someone who is willing to be worried for you. However I don't believe the SEC financial highway patrol has enough cruisers or sophistication to pull over enough abusers to deter the disproportionate fraud that increasingly arcane financial instruments create. The costs of a few bad actors building piles of money illegitimately do not show themselves immediately. They pop up slowly, in dark money investments in destabilizing elections, funding of war criminals, market manipulation, etc. The societal cost of a charlatan having several lifetimes worth of an honest person's influence are grave and not to be laughed off.
- yesbut 3y ago
  > accelerates us toward the world depicted in Idiocracy. We're already there, brother.

panarchy 3y ago

Why is it that every time someone mentions futures trading someone comes along to drop the farmer's crops example, do y'all really have no other examples? What percentage of futures trading is on farmers crops? What about the crops they destroy because they would be less profitable? Does the protection against monetary risk outweigh starving people to death? How well will it work if we create unsustainable land that the farmers can no longer grow crops on?

rawgabbit 3y ago
The website gives the gold mine example. Farmers and gold miners often have to weigh taking on a loan to get them through next season. They want a fixed rate of return to determine if the loan is worthwhile.
dmbche 3y ago
Not sure why this person is getting downvoted, these seems like fair questions. Edit: Now get why it is downvoted, but it's fair to note that farmers represent a small (10% from what I gather here) portion of futures, so I don't know how reprensentative they are.
- pwatsonwailes 3y ago
  They don't have anything to do with hedging. Good questions, just off-topic, which isn't something HN tends to like.
koolba 3y ago
It’s not just farmers. It’s useful for anything that involves future delivery of a good that could have a variable price or production. A mining company would sell gold futures under the expectation that they will mine a known quantity of gold. They trade the risk of price fluctuations to match against their known liabilities (e.g. labor or depreciation of equipment costs). Now replace “gold” with lithium (for electric car batteries) and you can create the greenwashed story that you want to hear.
pwatsonwailes 3y ago
Because it's an example you can use to explain a forward contract, which is easily understandable as a form of hedging risk. Vast amounts of the value of crops are hedged, either through forwards, futures or derivatives. Crops aren't destroyed because of hedges (in the financial sense). Indeed, the whole point is to ensure you don't need to, because you've hedged the value of your crop. I get where you're coming from, and there's a lot which is not great in farming, but hedging values isn't one of those areas.
tedunangst 3y ago
Ask for an example. Get an example. "That's not the example I wanted." Every time.
MR4D 3y ago
Because farmers have been using futures contracts (traded on an exchange) since 1859. And technically, futures are a more standardized tool than forwards are, hence the talk about futures all the time. [1] For reference, forwards have been used forever, and used for all sorts of commerce. [2] We take for granted that you can pull out an iPhone and buy your favorite stock in seconds, but for most of history, nobody could even imagine that. That the modern world even exists is because of forwards and futures. The ancient world was able to grow and expand because of forwards. [0] - https://www.cftc.gov/About/HistoryoftheCFTC/history_precftc.html https://www.cftc.gov/About/HistoryoftheCFTC/history_precftc.... [1] - https://www.investopedia.com/ask/answers/06/forwardsandfutures.asp https://www.investopedia.com/ask/answers/06/forwardsandfutur... [2] - https://www.encyclopedia.com/social-sciences/applied-and-social-sciences-magazines/forward-and-futures-markets https://www.encyclopedia.com/social-sciences/applied-and-soc...
- Quarrel 3y ago
  Or since the 18th Century in Japan (and I'm sure other places before 1859). https://en.wikipedia.org/wiki/D%C5%8Djima_Rice_Exchange https://en.wikipedia.org/wiki/D%C5%8Djima_Rice_Exchange
marcosdumay 3y ago
The one goal of future contracts is for producers and consumers to be able to make deals before that production and consumption happens. Those are the primary dealers there, and I don't really remember where I got statistics, but AFAIK, they are about 10% of the volume. On top of those primary deals, a lot of people pile up making bets on secondary deals. Those are the people going for "hey, a lot more farms are growing rice this year, I bet its price will fall". They are very welcome because they not only stabilize the prices on those markets, but they also provide short-term money to make the deals flow more homogeneously. Without them, making deals on those markets would be a profession by itself (as it was). Now, there exist people making bets on the results of the bets of the secondary market. That is a different market. At some point it's clear that this becomes toxic, but nobody seems to agree on what point exactly. > What about the crops they destroy because they would be less profitable? You mean farmers getting bankrupt? You seem to be misunderstand, because the main reason farmers love the futures market is because it lowers their risks. > How well will it work if we create unsustainable land that the farmers can no longer grow crops on? Well, surely if you go and kill everybody, there will be nobody losing money on those markets.
- droffel 3y ago
  > What about the crops they destroy because they would be less profitable? To clarify this point specifically, food self sufficiency is considered a national security issue. Consider the situation where a hostile country floods your market with cheap food products (below cost) until your country's farms go bankrupt due to an inability to compete. Once you stop producing food of your own, you give significant power to whoever controls your food supply. This is a large part of why agricultural subsidies exist. And yes, sometimes it means paying farmers to let crops rot on the vine in order to not cause market gluts. That is an entirely different situation from futures and hedging, which in any sane market match supply and demand (with the result of minimizing waste).
  - nostrademons 3y ago
    "floods your market with cheap food products (below cost)" The hostile country will eventually go bankrupt because they are producing products below cost.
NoboruWataya 3y ago
I don't have a percentage for you but agriculture-related futures make up a non-negligible amount of overall trading. It's not just some artificial example. Agricultural futures were also the first futures, and much of today's trading infrastructure was built around agricultural futures. So that's probably part of why it is such a common example. They are far from the only example. Airlines use futures to hedge against fluctuations in fuel prices. Manufacturers use futures to hedge against fluctuations in the price of input materials. International businesses use FX swaps to hedge against currency fluctuations. Borrowers use interest rate swaps to hedge against interest rate rises. Investment funds (including pension funds and sovereign wealth funds) use options to hedge against drastic movements in asset prices. I don't really understand your other questions. The use of derivatives in agriculture does not, on balance, result in fewer crops being produced. On the contrary, by allowing farmers to protect themselves against various risk, derivatives markets allow farmers to safely invest more money in production, and reduces the risk of farmers going bankrupt (bankrupt farmers don't produce many crops). Food would almost certainly be more scarce and more expensive if farmers did not have access to the financial markets.
pdntspa 3y ago
Well, pretty much everybody buying commodities at an institutional level are using futures contracts to smooth over price risk. Oil, gas, lithium, corn....
gabereiser 3y ago
>Why is it that every time someone mentions futures trading someone comes along to drop the farmer's crops example, do y'all really have no other examples? Because it was created by them, for that very purpose? Futures Contracts. Chicago Mercantile Exchange. Up until 1971 future contracts were ONLY for agricultural goods.
- Quarrel 3y ago
  Metal futures have been traded on the London Metal Exchange since 1877, and before that at other venues on Threadneedle St. The Dutch (and after the idea had crossed the Channel, the English) were trading debt from the invention of exchanges. The CME might have started with FX futures in 1971, but they're hardly the first non-agricultural use.
  - gabereiser 3y ago
    You’re right but in America we use the agricultural example as it was a big shift in our market thinking. I didn’t know about metal futures but I did know about Dutch and how they created futures and securities. I believe the Dutch East India Co to be ahead of its time and because of world politics (and war) it didn’t survive and was nationalized. A lot of papers about our CME here in the states talks about it. I’m not an expert but I do know we use the agri example because it’s one most would be familiar with since it was a somewhat recent addition.
- astrange 3y ago
  Although none of them are for onions, because we were so annoyed at two guys cornering the market we banned that and then forgot to ever undo it. https://en.wikipedia.org/wiki/Onion_Futures_Act https://en.wikipedia.org/wiki/Onion_Futures_Act
OJFord 3y ago
Because that's the origin story. Other examples are _all_ commodities markets like mining, logging, etc. Of course public company share futures are inherently abstract, but they serve similar purposes, just not to a particularly similar party, depending on your perspective (of ownership, operation).
opportune 3y ago
Because that’s what futures are for? Consumers and producers of commodities want to lock in prices to lower the risk of price fluctuations in the future. >what about the crops they destroy This has nothing to do with the discussion
cscurmudgeon 3y ago
> Why is it that every time someone mentions futures trading They didn't just mentioned, they had an outsider negative take on it. The best way is to respond with simple examples. > What about the crops they destroy because they would be less profitable? Does the protection against monetary risk outweigh starving people to death? How well will it work if we create unsustainable land that the farmers can no longer grow crops on? How does futures trading cause these negatives? If anything, trading reduces these risks. Countries with markets have large bounties as opposed to those that don't. It is not a zero sum game.

dataflow 3y ago

I get why farmers do it but what's the societal benefit of letting a rando like me buy and sell (i.e. make bets on) such contracts? Do farmers really prefer that random people do this?

jacobr1 3y ago
They prefer a liquid market
choeger 3y ago
It creates the market and should thus create the best possible price. Think of any speculation as a voting system with proof of stake. Problems always appear when market participants try to affect reality to increase their odds, like shorting a position and then releasing some ugly news.
HWR_14 3y ago
Theoretically, the societal benefit of lettings randos buy and sell contracts is that there is (a) better price discovery and (b) better liquidity. There are probably theoretical counterarguments to both of those points, but it's hard to see alternative systems that provide either or both those features. At a basic level, obviously thee needs to be someone assuming the price risk from the farmers, and those people will obviously need to be compensated.
- dataflow 3y ago
  I buy that there's some benefit, but I don't buy that it's significant. And I don't see any reason why I should believe this provides a net benefit to society. Sure it saves the original parties some money, but then a bunch of unrelated parties come in and siphoning money from the existing parties. Why should I believe this is net-benefiting society?
  - lbotos 3y ago
    Your viewpoint here is kinda weird? The more something trades, the more likely we will have the right price. When things don't trade as much, we don't actually know what that thing is worth. This concept is a benefit to society as many things are interconnected and correlated, so the more accurate we can quickly find the current price (and expected future price) the more we can evaluate value. (Also, they aren't "siphoning money" really it's "value" because the contract isn't actually money)

gmd63 3y ago

There is a societal benefit that comes with individuals internalizing their own costs of risk. Treating society like it's in an economic womb while Mother Finance shields it from the world of worries rewards ignorance and in my opinion accelerates us toward the world depicted in Idiocracy. It is nice as a purchaser of such securities that you can build things more quickly than usual and transfer worry to someone who is willing to be worried for you. However I don't believe the SEC financial highway patrol has enough cruisers or sophistication to pull over enough abusers to deter the disproportionate fraud that increasingly arcane financial instruments create. The costs of a few bad actors building piles of money illegitimately do not show themselves immediately. They pop up slowly, in dark money investments in destabilizing elections, funding of war criminals, market manipulation, etc. The societal cost of a charlatan having several lifetimes worth of an honest person's influence are grave and not to be laughed off.

yesbut 3y ago
> accelerates us toward the world depicted in Idiocracy. We're already there, brother.